<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NUMBER 333-49963
PROSPECTUS
DATED MAY 11, 1998
[LOGO OF ITC DELTACOM APPEARS HERE]
$160,000,000
OFFER TO EXCHANGE ALL OUTSTANDING 8 7/8% SENIOR NOTES DUE
MARCH 1, 2008
FOR
8 7/8% SENIOR NOTES DUE MARCH 1, 2008
OF
ITC/\DELTACOM, INC.
----------------
INTEREST PAYABLE MARCH 1 AND SEPTEMBER 1,
COMMENCING SEPTEMBER 1, 1998
----------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JUNE 17, 1998, UNLESS EXTENDED.
ITC/\DeltaCom, Inc. (the "Company") hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus (as the same may be amended or
supplemented from time to time) and in the accompanying Letter of Transmittal
(the "Letter of Transmittal") (which together constitute the "Exchange
Offer"), to exchange $1,000 principal amount of its 8 7/8% Senior Notes due
March 1, 2008 (the "Exchange Notes") which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for each $1,000
principal amount of its outstanding unregistered 8 7/8% Senior Notes due March
1, 2008, of which $160.0 million in aggregate principal amount is outstanding
as of the date hereof (the "Senior Notes" and, together with the Exchange
Notes, the "Notes").
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Senior Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and
therefore will not be subject to certain restrictions on transfer applicable
to the Senior Notes and (ii) holders of the Exchange Notes will not be
entitled to certain rights of holders of the Senior Notes under the
Registration Rights Agreement dated March 3, 1998 (the "Registration Rights
Agreement") among the Company and Morgan Stanley & Co. Incorporated, Salomon
Brothers Inc and NationsBanc Montgomery Securities LLC (collectively, the
"Placement Agents"). The Exchange Notes will evidence the same indebtedness as
the Senior Notes (which they will replace) and will be issued pursuant to, and
entitled to the benefits of, an indenture dated as of March 3, 1998 between
the Company and United States Trust Company of New York, as trustee (the
"Trustee"), governing the Senior Notes and the Exchange Notes (the
"Indenture").
(Continued on next page.)
----------------
SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is May 11, 1998
<PAGE>
The Exchange Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after March 1, 2003, initially at 104.4375% of
their principal amount, plus accrued interest, declining ratably to 100% of
their principal amount, plus accrued interest, on or after March 1, 2006. In
addition, at any time prior to March 1, 2001, the Company may redeem up to 35%
of the aggregate principal amount of the Notes from the proceeds of one or
more Public Equity Offerings (as defined herein) at 108.875% of their
principal amount, plus accrued interest; provided that after any such
redemption at least $104.0 million aggregate principal amount of the Notes
remains outstanding. See "Description of the Exchange Notes--Certain
Definitions."
The Exchange Notes will be unsubordinated indebtedness of the Company,
ranking pari passu in right of payment with the Senior Notes and all other
existing and future unsubordinated indebtedness of the Company and senior in
right of payment to all subordinated indebtedness of the Company. After giving
pro forma effect to the Senior Notes Offering (as defined herein) and the
Redemption (as defined herein) as of December 31, 1997, the Company would have
had approximately $133.9 million of indebtedness other than the Notes. Under
the Indenture, the Company is permitted to incur additional indebtedness to
finance the acquisition of equipment, inventory and other assets and up to
$100.0 million of other indebtedness (which may be increased to $250.0 million
under certain conditions) and is permitted to secure any such indebtedness.
The Notes will be effectively subordinated to such security interests to the
extent of such security interests.
The Company is a holding company which conducts substantially all of its
business through subsidiaries. The Company's subsidiaries will have no direct
obligation to pay amounts due on the Notes and will not guarantee the Notes.
As a result, the Notes will be effectively subordinated to all existing and
future indebtedness and other liabilities (including trade payables) of the
Company's subsidiaries. As of December 31, 1997, the Company's subsidiaries
had approximately $34.0 million of liabilities (excluding intercompany
payables), including approximately $3.9 million of indebtedness (including
capital leases). The Company will be dependent upon access to the cash flow or
assets of its subsidiaries to make payments on the Notes and the Company's
ability to obtain such access may be limited by law. See "Risk Factors--
Holding Company Structure; Priority of Secured Debt."
The Senior Notes were originally issued and sold on March 3, 1998 in a
transaction not registered under the Securities Act (the "Senior Notes
Offering"). Accordingly, the Senior Notes may not be offered for resale,
resold or otherwise transferred unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is
available. Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action letters
issued to third parties unrelated to the Company, the Company believes that
the Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold or otherwise transferred by holders thereof (other than any
holder that is (i) a broker-dealer that acquired Senior Notes as a result of
market-making activities or other trading activities or (ii) an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration or prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. Any holder who tenders
Senior Notes in the Exchange Offer with the intention to participate, or for
the purpose of participating, in a distribution of the Exchange Notes or who
is an affiliate of the Company may not rely upon such interpretations by the
staff of the Commission and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Failure to
comply with such requirements in such instance may result in such holder
incurring liabilities under the Securities Act for which the holder is not
indemnified by the Company. The staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter, and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company, among other things, that: (i) any Exchange Notes to
be received by such holder will be acquired in the ordinary
2
<PAGE>
course of such holder's business; (ii) such holder has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of the Exchange Notes; and (iii) such holder is
not an "affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act), or if such holder is an affiliate, that such holder will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Senior Notes, where such
Senior Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Senior Notes where
such Senior Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has agreed that,
for a period not to exceed 180 days after the Expiration Date (as defined
herein), it will furnish additional copies of this Prospectus, as amended or
supplemented, to any broker-dealer that reasonably requests such documents for
use in connection with any such resale. See "Plan of Distribution."
The Company does not intend to apply for listing of the Exchange Notes for
trading on any securities exchange or for inclusion of the Exchange Notes in
any automated quotation system. The Senior Notes, however, have been
designated for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("PORTAL") Market of the National Association of Securities
Dealers, Inc. Any Senior Notes not tendered and accepted in the Exchange Offer
will remain outstanding. To the extent that Senior Notes are not tendered and
accepted in the Exchange Offer, a holder's ability to sell such Senior Notes
could be adversely affected. Following consummation of the Exchange Offer, the
holders of Senior Notes will continue to be subject to the existing
restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Senior Notes. See "Description of the Exchange Notes--
Exchange Offer; Registration Rights." No assurance can be given as to the
liquidity of either the Senior Notes or the Exchange Notes.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SENIOR NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER.
Senior Notes may be tendered for exchange prior to 5:00 p.m., New York City
time, on June 17, 1998 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). Tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum aggregate principal amount of Senior Notes being
tendered for exchange. The Exchange Offer is, however, subject to certain
events and conditions and to the terms of the Registration Rights Agreement.
Senior Notes may be tendered only in integral multiples of aggregate principal
amount of $1,000. The Company has agreed to pay all expenses of the Exchange
Offer. This Prospectus, together with the Letter of Transmittal, is being sent
to all registered holders of Senior Notes as of May 13, 1998.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 5
Pro Forma Financial Data.................................................. 17
Risk Factors.............................................................. 20
The Exchange Offer........................................................ 32
History of the Company.................................................... 40
Use of Proceeds........................................................... 42
Capitalization............................................................ 43
Selected Financial and Operating Data..................................... 44
Recent Developments....................................................... 46
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 48
Business.................................................................. 59
Management................................................................ 74
Certain Transactions...................................................... 79
Principal Stockholders.................................................... 81
Description of Certain Indebtedness....................................... 83
Description of the Exchange Notes......................................... 86
Plan of Distribution...................................................... 113
Certain United States Federal Tax Considerations.......................... 114
Legal Matters............................................................. 118
Experts................................................................... 118
Available Information..................................................... 118
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
</TABLE>
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, the notes thereto and the other financial
data contained elsewhere in this Prospectus. Potential participants in the
Exchange Offer should carefully consider the factors set forth herein under the
caption "Risk Factors" and are urged to read this Prospectus and the related
Letter of Transmittal in its entirety. Unless otherwise indicated, (i) the
information in this Prospectus, other than the historical financial
information, gives effect to the Senior Notes Offering and the Redemption, (ii)
references herein to the "Company" or "ITC/\DeltaCom" refer to ITC/\DeltaCom,
Inc. and its subsidiaries and predecessor, and (iii) dollar amounts over $1
million have been rounded to one decimal place and dollar amounts less than $1
million have been rounded to the nearest thousand. Certain terms used in this
Prospectus are defined in the "Glossary" appearing elsewhere herein.
THE COMPANY
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. The
Company had revenues of approximately $66.5 million for the year ended December
31, 1996 and revenues of approximately $114.6 million for the year ended
December 31, 1997.
The Company provides Carriers' Carrier Services to other telecommunications
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, LCI,
Frontier and IXC. The Company's fiber optic network reaches over 60 points of
presence ("POPs") in ten southern states (Alabama, Arkansas, Florida, Georgia,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Texas)
and extends approximately 6,300 route miles, of which approximately 3,300 miles
are Company-owned and approximately 3,000 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. For the year ended December 31, 1997, revenue for the Company's
Carriers' Carrier Services was $31.0 million and EBITDA as a percentage of
revenue ("EBITDA Margin") for the Company's Carriers' Carrier Services was 60%.
As of December 31, 1997, the Company had remaining future long-term contract
commitments for Carriers' Carrier Services totaling approximately $77.9
million. These contracts expire on various dates through 2006 and are expected
to generate approximately $58.2 million in revenues to the Company through
2001, of which approximately $18.0 million are expected to be realized in 1998.
The Company currently provides a variety of Retail Services, including retail
long distance services such as traditional switched and dedicated long
distance, 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 installation and repair. The Company
also offers local exchange services as part of its Retail Services in a
majority of its markets. As of December 31, 1997, the Company provided Retail
Services to over 7,700 business customers. The Company currently offers Retail
Services in 15 metropolitan areas (including local exchange services in 11
markets) in Alabama, Florida, Georgia, Louisiana, North Carolina and South
Carolina. The Company intends to provide a full range of Retail Services in a
total of approximately 35 metropolitan areas throughout the southern United
States over the next five years. For the year ended December 31, 1997, revenue
for the Company's Retail Services was $83.6 million and EBITDA Margin for the
Company's Retail Services was 4%.
5
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In connection with offering local exchange services, the Company has entered
into an Interconnection Agreement (the "Interconnection Agreement") with
BellSouth Telecommunications, Inc. ("BellSouth") to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of immediately gaining access to all of
BellSouth's unbundled network elements. This agreement allows the Company to
enter new markets with minimal capital expenditures and to offer local exchange
services to its current customer base. The Interconnection Agreement currently
allows the Company to provide local service on a resale basis or by purchasing
all unbundled network elements required to provide local service on a
facilities basis, without using Company-owned facilities. The terms of the
Interconnection Agreement, including interim pricing terms agreed to by the
Company and BellSouth, have been approved by state regulatory authorities in
all states in which BellSouth operates, although they remain subject to review
and modification by such authorities. In addition, the Interconnection
Agreement does not resolve all operational issues, which issues the Company and
BellSouth are continuing to negotiate to resolve. The Company believes that the
Interconnection Agreement provides a foundation for it to provide local
services on a reasonable commercial basis, but there can be no assurance in
this regard and important issues remain unsettled as a result of legal and
regulatory developments and related matters. The Interconnection Agreement
expires in July 1999, and there can be no assurance that the Company will be
able to renew it under favorable terms, or at all.
BUSINESS STRATEGY
The Company's objectives are to maintain its leadership position in the
provision of Carriers' Carrier Services and to become a leading provider of
Retail Services in the southern United States. The Company intends to increase
its market share in existing markets and expand into new markets. The principal
elements of the Company's business strategy include the following:
Providing Integrated Telecommunications Services to Its Existing Base of Mid-
sized and Major Regional Business Customers. By providing additional
telecommunications services such as local telephone service to its existing,
well-established base of long distance customers, the Company expects to be
able to increase revenues at relatively low incremental cost. The Company
believes that bundling a variety of telecommunications services and presenting
customers with one fully integrated monthly billing statement for all of those
services will allow it to penetrate its target markets rapidly and build
customer loyalty. The Company believes that there is substantial demand in its
target markets among mid-sized and major regional business customers for an
integrated package of telecommunications services that meets all of their
telecommunications needs.
Leveraging Its Extensive Fiber Optic Network. The Company intends to leverage
its extensive fiber optic network, which currently reaches over 60 POPs, by (i)
continuing to provide switched and transport services to other communications
carriers throughout its region to enable such carriers to diversify their
routes and expand their networks; (ii) targeting customers that need to
transmit large amounts of data within the Company's service region, such as
banks and local and state governments; and (iii) offering local exchange
services to its business customers as part of its integrated package of
telecommunications services. The Company intends initially to provide local
exchange services by reselling the services of incumbent local exchange
carriers and, in some established markets, using its own local switching
facilities. Over time, the Company expects to provide local services primarily
using the Company's own switching facilities and existing regional fiber optic
network, supplemented by unbundled facilities of incumbent local exchange
carriers or other competitive local exchange carriers. The configuration of the
Company's network enables the Company to expand its network by installing
additional remote local switches, which operate in conjunction with the
Company's Nortel DMS-500 switches to provide facilities-based local services.
Because remote local switches are less expensive to purchase and install than
Nortel DMS-500 switches, and can be installed more quickly than Nortel DMS-500
switches, the Company believes that it will be able to enter new markets at
less expense than many of its competitors. At present, the Company does not
plan to construct intra-city local loop facilities.
6
<PAGE>
Focusing on the Southern United States. The Company intends to continue to
focus on the southern United States in order to leverage its extensive
telecommunications network in the region. The Company believes that its
regional focus will enable it to take advantage of economies of scale in
management, network operations and sales and marketing. The regional
concentration of the Company's network also provides an opportunity for
improved margins because a high portion of the Company's customers'
telecommunications traffic originates and terminates within the region. The
Company also believes that its regional focus will enable it to build on its
long-standing customer and business relationships in the region.
Building Market Share Through Personalized Customer Service. The Company
believes that the key to revenue growth in its target markets is capturing and
retaining customers by emphasizing marketing, sales and customer service.
Management believes that customers prefer one company to be accountable for
their telecommunications services, and that a consultative, face-to-face sales
and service strategy is the most effective method of acquiring and maintaining
a high quality customer base. The Company seeks to obtain long-term commitments
from its business customers by responding rapidly and creatively to their
telecommunications needs. The Company currently operates 16 branch offices in
15 markets in Alabama, Florida, Georgia, Louisiana, North Carolina and South
Carolina. Each branch office is staffed by personnel capable of marketing all
of the Company's products and providing comprehensive support to the Company's
customers. In the future, the Company expects to expand significantly its
direct sales force and open branch offices in additional major and secondary
population centers in the southern United States.
Expanding Its Fiber Optic Network and Switching Facilities. The Company
expects to expand its fiber optic telecommunications network and switching
facilities to include additional markets within the southern United States. The
Company currently owns and operates approximately 3,300 route miles of fiber
optic network extending from Georgia to Texas. The Company also markets and
manages capacity on 3,000 additional network route miles through its strategic
relationships principally with public utilities. In addition, the Company has a
buy-sell agreement with Carolinas Fibernet, LLC, which manages fiber optic
facilities in North Carolina and South Carolina. This agreement enables the
parties to buy and sell capacity on each other's networks and allows the
Company to provide customers with access to POPs throughout those states. The
Company believes that, by continuing to combine its owned network with the
networks of public utilities and by adding switching facilities throughout its
network, it will be able to achieve capital efficiencies and rapidly expand its
network in a cost-effective manner.
Leveraging Proven Management Team. The Company's management team consists of
experienced telecommunications managers who in the past have successfully
implemented a customer-focused long distance telecommunications strategy in the
southern United States. Members of the team include Andrew Walker, Chief
Executive Officer of the Company, Foster McDonald, President of the Company,
and Douglas Shumate, Chief Financial Officer of the Company.
HISTORY OF THE COMPANY
ITC/\DeltaCom was incorporated in March 1997 as a wholly owned subsidiary of
ITC Holding Company, Inc. ("ITC Holding"), to acquire and operate ITC Holding's
Retail Services and Carriers' Carrier Services businesses. The Company acquired
such businesses on July 25, 1997 in the Reorganization described below.
Background. ITC Holding began providing operator and directory assistance
services in March 1992 through its subsidiary, Eastern Telecom, Inc., which did
business as InterQuest ("InterQuest"). Carriers' Carrier Services have been
offered since April 1992 through Interstate FiberNet, a partnership originally
formed by ITC Holding (with a 49% interest) and SCANA Communications, Inc.
("SCANA") (with a 51% interest). In August 1994, ITC Holding acquired SCANA's
interest in Interstate FiberNet through ITC Transmission Systems II, Inc., a
wholly owned subsidiary of ITC Holding ("Transmission II"). Also in August
1994, ITC Holding and SCANA formed a second partnership, Gulf States FiberNet,
to construct and operate a fiber optic route primarily
7
<PAGE>
between Atlanta, Georgia and Shreveport, Louisiana with several supplemental
spur routes. In a transaction consummated in March 1997 (the "Gulf States
Acquisition"), ITC Holding acquired SCANA's 64% partnership interest in Gulf
States FiberNet and certain fiber and fiber-related assets, including a
significant customer contract for network services in Georgia (the "Georgia
Fiber Assets"). Following the Gulf States Acquisition, ITC Holding contributed
the remaining 64% interest in Gulf States FiberNet to Gulf States Transmission
Systems, Inc., a wholly owned subsidiary of ITC Holding ("Gulf States
Transmission"), and the Georgia Fiber Assets to ITC Transmission Systems, Inc.,
a wholly owned subsidiary of ITC Holding ("Transmission"). Members of the
Company's management have been managing the businesses of both Interstate
FiberNet and Gulf States FiberNet since their inception.
In January 1996, through its acquisition (the "DeltaCom Acquisition") of
DeltaCom, Inc., which has been renamed ITC/\DeltaCom Communications, Inc.
("DeltaCom"), ITC Holding entered the retail long distance business and
acquired several fiber optic routes within the state of Alabama that
complemented the existing networks operated by Interstate FiberNet (including a
fiber optic route from Atlanta, Georgia to Columbus, Georgia) and Gulf States
FiberNet. DeltaCom, a provider of telecommunications services since its
inception in 1982, provides long distance services to mid-sized businesses
primarily in Alabama. In July 1996, DeltaCom purchased substantially all of the
assets of Viper Computer Systems, Inc. ("ViperNet"), which provides Internet
access, Web-hosting and Web page development services to business customers.
To finance the DeltaCom Acquisition and to refinance existing DeltaCom debt,
ITC Holding incurred approximately $74.0 million of indebtedness, which was
pushed down to the Company (the "DeltaCom Indebtedness"). The aggregate
consideration paid by ITC Holding in the Gulf States Acquisition was
approximately $27.9 million, of which $10.0 million consisted of an unsecured
note (the "SCANA Note") which was repaid in November 1997, and $17.9 million
consisted of ITC Holding preferred stock. In connection with the Gulf States
Acquisition, Gulf States Transmission borrowed $41.6 million under a credit
facility (the "Bridge Facility") with NationsBank, N.A., to refinance a project
loan incurred by Gulf States FiberNet.
1997 SENIOR NOTES OFFERING; REDEMPTION. On June 3, 1997, the Company
completed the sale (the "1997 Senior Notes Offering") of $200.0 million
principal amount of its 11% Senior Notes due 2007 (the "1997 Senior Notes").
The net proceeds from the sale of the 1997 Senior Notes, other than the portion
of such proceeds invested in U.S. government securities pledged to secure and
fund the first six scheduled interest payments on the 1997 Senior Notes, were
released to the Company in July 1997 in connection with the Reorganization
described below. On April 2, 1998, the Company redeemed $70.0 million principal
amount of the 1997 Senior Notes (the "Redemption") with proceeds remaining from
the Equity Offering described below, at an aggregate redemption price of 111%
of such principal amount, plus accrued and unpaid interest of approximately
$2.6 million.
REORGANIZATION. On July 25, 1997, ITC Holding contributed to the Company in a
series of transactions the businesses of Interstate FiberNet, Gulf States
FiberNet, DeltaCom and InterQuest. In connection with such transactions,
approximately $31.0 million of the $74.0 million of the DeltaCom Indebtedness
was forgiven by ITC Holding and contributed to the Company as additional
equity. Following the Reorganization, the Company repaid the remaining $43.0
million of the DeltaCom Indebtedness, accrued interest on all $74.0 million of
such indebtedness and the $41.6 million of indebtedness outstanding under the
Bridge Facility and accrued interest thereon with a portion of the net proceeds
from the 1997 Senior Notes Offering. On October 20, 1997, as part of a
reorganization of the ITC Holding group of companies, ITC Holding transferred
all of its assets (other than its stock in the Company) and all of its
liabilities to another entity (which is now called ITC Holding Company, Inc.)
and then merged with and into the Company (the "Merger"), which was the
surviving corporation in the merger. On December 31, 1997, Gulf States
Transmission merged with and into Interstate FiberNet, Inc., a wholly owned
subsidiary of the Company. The foregoing transactions are collectively referred
to herein as the "Reorganization."
8
<PAGE>
INITIAL PUBLIC OFFERING. On October 29, 1997, the Company completed an
initial public offering of common stock, par value $.01 per share (the "Common
Stock"), in which it issued 5,750,000 shares at a price of $16.50 per share
(the "Equity Offering"). The Company used $77.7 million of the net proceeds of
the Equity Offering to fund the Redemption. See "--1997 Senior Notes Offering;
Redemption."
SENIOR NOTES OFFERING; MODIFICATION OF CREDIT FACILITY. On March 3, 1998, the
Company completed the sale at a price of 99.9% of $160.0 million principal
amount of its 8 7/8% Senior Notes due 2008. Additionally, the Company has
modified its secured revolving credit facility (the "Credit Facility") to,
among other things, reduce available borrowings from $100.0 million to $50.0
million. See "Description of Certain Indebtedness."
9
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer..........
Up to $160.0 million aggregate principal amount
of Exchange Notes are being offered in exchange
for a like aggregate principal amount of Senior
Notes. Senior Notes may be tendered for exchange
in whole or in part in integral multiples of
$1,000 principal amount. The Company is making
the Exchange Offer in order to satisfy its
obligations under the Registration Rights
Agreement relating to the Senior Notes. For a
description of the procedures for tendering
Senior Notes, see "The Exchange Offer--Procedures
for Tendering Senior Notes."
Expiration Date............. 5:00 p.m., New York City time, on June 17, 1998
unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended). See "The Exchange
Offer--Expiration Date; Extensions, Amendments."
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain
conditions which may be waived by the Company in
its sole discretion. The Exchange Offer is not
conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered. See "The
Exchange Offer--Conditions to the Exchange
Offer."
The Company reserves the right in its sole and
absolute discretion, subject to applicable law,
at any time and from time to time, (i) to delay
the acceptance of the Senior Notes, (ii) to
terminate the Exchange Offer if certain specified
conditions have not been satisfied, (iii) to
extend the Expiration Date of the Exchange Offer
and retain all Senior Notes tendered pursuant to
the Exchange Offer, subject, however, to the
right of holders of Senior Notes to withdraw
their tendered Senior Notes, and (iv) to waive
any condition or otherwise amend the terms of the
Exchange Offer in any respect. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Withdrawal Rights........... Tenders of Senior Notes may be withdrawn at any
time prior to the Expiration Date by delivering a
written notice of such withdrawal to the Exchange
Agent (as defined herein) in conformity with
certain procedures as set forth below under "The
Exchange Offer--Withdrawal Rights."
Procedures for Tendering
Senior Notes............... Tendering holders of Senior Notes must complete
and sign a Letter of Transmittal in accordance
with the instructions contained therein and
forward the same by mail, facsimile transmission
or hand delivery, together with any other
required documents, to the Exchange Agent, either
with the Senior Notes to be tendered or in
compliance with the specified procedures for
guaranteed delivery of Senior Notes. Certain
brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Senior
Notes registered in the name of a
10
<PAGE>
broker, dealer, commercial bank, trust company or
other nominee are urged to contact such person
promptly if they wish to tender Senior Notes
pursuant to the Exchange Offer. See "The Exchange
Offer--Procedures for Tendering Senior Notes."
Letters of Transmittal and certificates
representing Senior Notes should not be sent to
the Company. Such documents should only be sent
to the Exchange Agent. Questions regarding how to
tender and requests for information should be
directed to the Exchange Agent. See "The Exchange
Offer--Exchange Agent."
Resales of Exchange Notes... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, the Company believes
that holders of Senior Notes (other than any
holder that is (i) a broker-dealer that acquired
Senior Notes as a result of market-making
activities or other trading activities or (ii) an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchange
their Senior Notes for Exchange Notes pursuant to
the Exchange Offer may offer for resale, resell
and otherwise transfer such Exchange Notes
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are
acquired in the ordinary course of such holders'
business and such holders have no arrangement or
understanding with any person to participate in a
distribution (within the meaning of the
Securities Act) of such Exchange Notes. Any
holder who tenders Senior Notes in the Exchange
Offer with the intention to participate, or for
the purpose of participating, in a distribution
of the Exchange Notes or who is an affiliate of
the Company may not rely upon such
interpretations by the staff of the Commission
and, in the absence of an exemption therefrom,
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any secondary resale transaction.
Failure to comply with such requirements in such
instance may result in such holder incurring
liabilities under the Securities Act for which
the holder is not indemnified by the Company. The
staff of the Commission has not considered the
Exchange Offer in the context of a no-action
letter, and there can be no assurance that the
staff of the Commission would make a similar
determination with respect to the Exchange Offer.
Each broker-dealer that receives Exchange Notes
for its own account in exchange for Senior Notes,
where such Senior Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. The Company has agreed that, for
a period not to exceed 180 days after the
Expiration Date, it will furnish additional
copies of this Prospectus, as amended or
supplemented, to any
11
<PAGE>
broker-dealer that reasonably requests such
documents for use in connection with any such
resale. See "Plan of Distribution."
Exchange Agent.............. The exchange agent with respect to the Exchange
Offer is United States Trust Company of New York
(the "Exchange Agent"). The address, telephone
number and facsimile number of the Exchange Agent
are set forth in "The Exchange Offer--Exchange
Agent" and in the Letter of Transmittal.
Use of Proceeds............. The Company will not receive any cash proceeds
from the issuance of the Exchange Notes offered
hereby. The Company intends to use the net
proceeds from the Senior Notes Offering, together
with cash on hand and borrowings expected to be
available under the Credit Facility, as follows:
(i) to fund market expansion activities of the
Company's telecommunications business, including
development and construction costs of the
Company's fiber optic network and its regional
branch offices; and (ii) for additional working
capital and other general corporate purposes. See
"Management's Discussion and Analysis of
Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company
currently intends to allocate substantial
proceeds to each of the foregoing uses. The
precise allocation of funds among these uses,
however, will depend on future technological,
regulatory and other developments in or affecting
the Company's business, the competitive climate
in which it operates and the emergence of future
opportunities. See "Use of Proceeds."
Certain United States
Federal Income Tax The exchange of the Senior Notes for the Exchange
Consequences............... Notes will not be a taxable exchange for federal
income tax purposes, and holders of Senior Notes
should not recognize any taxable gain or loss or
any interest income as a result of such exchange.
See "The Exchange Offer--Certain United States
Federal Income Tax Consequences."
THE EXCHANGE NOTES
Securities Offered.......... $160.0 million aggregate principal amount of 8
7/8% Senior Notes due March 1, 2008. The terms of
the Exchange Notes will be identical in all
material respects to the terms of the Senior
Notes, except that (i) the Exchange Notes will
have been registered under the Securities Act and
therefore will not be subject to certain
restrictions on transfer applicable to the Senior
Notes and (ii) holders of the Exchange Notes will
not be entitled to certain rights of holders of
the Senior Notes under the Registration Rights
Agreement. The Exchange Notes will evidence the
same debt as the Senior Notes and will be issued
pursuant to and entitled to the benefits of the
Indenture.
Maturity.................... March 1, 2008.
12
<PAGE>
Interest on the Exchange Notes is payable
Interest.................... semiannually in cash, on each March 1 and
September 1, commencing September 1, 1998.
Optional Redemption......... The Exchange Notes may be redeemed at any time on
or after March 1, 2003, at the option of the
Company, in whole or in part, at 104.4375% of
their principal amount, plus accrued interest,
declining ratably to 100% of their principal
amount, plus accrued interest, on and after March
1, 2006. In addition, at any time prior to March
1, 2001, up to 35% of the aggregate principal
amount of the Notes may be redeemed from the
proceeds of one or more Public Equity Offerings
at 108.875% of their principal amount plus
accrued interest; provided, that after any such
redemption at least $104.0 million aggregate
principal amount of the Notes remains
outstanding.
Change of Control........... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
purchase the Exchange Notes at a purchase price
equal to 101% of their principal amount, plus
accrued interest. There can be no assurance that
the Company will have sufficient funds available
at the time of any Change of Control to make any
required debt repayment (including repurchases of
the Exchange Notes). See "Description of the
Exchange Notes--Repurchases of Exchange Notes
upon a Change of Control," and "Description of
the Exchange Notes--Certain Definitions."
Ranking..................... The Exchange Notes will be unsubordinated
indebtedness of the Company, ranking pari passu
in right of payment with the Senior Notes, the
1997 Senior Notes and all other existing and
future unsubordinated indebtedness of the Company
and senior in right of payment to all
subordinated indebtedness of the Company. After
giving pro forma effect to the Senior Notes
Offering and the Redemption, at December 31,
1997, the Company would have had approximately
$133.9 million of indebtedness other than the
Senior Notes. In addition, under the Indenture,
the Company is permitted to incur additional
indebtedness to finance the acquisition of
equipment, inventory and other assets and up to
$100.0 million of other indebtedness (which may
be increased to $250.0 million under certain
conditions) and is permitted to secure any such
indebtedness. The Notes will be effectively
subordinated to such security interests to the
extent of such security interests.
The Company is a holding company which conducts
substantially all of its business through
subsidiaries. The Company's subsidiaries will
have no direct obligation to pay amounts due on
the Notes and will not guarantee the Notes. As a
result, the Notes will be effectively
subordinated to all existing and future
indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries. As
of December 31, 1997, the Company's subsidiaries
had approximately $34.0 million of liabilities
(excluding intercompany payables), including
approximately $3.9 million of indebtedness
(including capital leases). The Company will be
13
<PAGE>
dependent upon access to the cash flow or assets
of its subsidiaries to make payments on the Notes
and the Company's ability to obtain such access
may be limited by law. See "Risk Factors--Holding
Company Structure; Priority of Secured Debt." In
addition, a subsidiary of the Company has $50.0
million of borrowings available under the Credit
Facility. The Credit Facility is secured by
substantially all of the assets of the Company's
subsidiaries. The Company and its other
subsidiaries have guaranteed all obligations
under the Credit Facility. Indebtedness under the
Credit Facility will be effectively senior to the
Notes to the extent of such security interests.
See "Risk Factors--Holding Company Structure;
Priority of Secured Debt."
Certain Covenants...........
The Indenture contains certain covenants that,
among other things, limit the ability of the
Company to incur indebtedness, pay dividends,
prepay subordinated indebtedness, repurchase
capital stock, make investments, engage in
transactions with stockholders and affiliates,
create liens, sell assets and engage in mergers
and consolidations. However, these limitations
are subject to a number of important
qualifications and exceptions. See "Description
of the Exchange Notes--Covenants."
RISK FACTORS
Potential participants in the Exchange Offer should consider carefully
certain factors relating to the Company, its business and an investment in the
Exchange Notes before tendering their Senior Notes for Exchange Notes. See
"Risk Factors."
14
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The summary historical and pro forma financial and operating data set forth
below should be read in conjunction with "History of the Company," "Use of
Proceeds," "Selected Financial and Operating Data," "Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and notes thereto, and other financial
and operating data contained elsewhere in this Registration Statement. The pro
forma statement of operations data for 1997 give effect to the following
transactions as if each had occurred on January 1, 1997: (i) the
Reorganization; (ii) the 1997 Senior Notes Offering and the application of the
net proceeds therefrom; (iii) the Redemption; and (iv) the Senior Notes
Offering. The pro forma balance sheet data at December 31, 1997 reflect the
following transactions as if each had occurred on December 31, 1997: (i) the
Redemption; and (ii) the Senior Notes Offering. The pro forma financial and
operating information does not purport to represent what the Company's
consolidated results of operations would have been if these transactions had in
fact occurred on these dates, nor does it purport to indicate the future
consolidated financial position or consolidated results of future operations of
the Company. The pro forma adjustments are based on currently available
information and certain assumptions that management believes to be reasonable.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------- ---
CONSOLIDATED PRO FORMA
------------------------------------- CONSOLIDATED
1995 1996(A) 1997(B)(C) 1997(B)(C)(D)(E)(F)
---------- ----------- ------------ -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenues...... $5,750,587 $66,518,585 $114,589,998 $114,589,998
Operating expenses:
Cost of service....... 3,149,231 38,756,287 54,550,348 54,550,348
Selling, operations
and administration
expense.............. 1,626,678 18,876,572 38,254,893 38,254,893
Depreciation and amor-
tization............. 1,267,882 6,438,074 18,332,451 18,332,451
---------- ----------- ------------ ------------
Total operating ex-
penses............. 6,043,791 64,070,933 111,137,692 111,137,692
Operating income (loss). (293,204) 2,447,652 3,452,306 3,452,306
Equity in losses of un-
consolidated subsidiar-
ies.................... (258,242) (1,589,812) -- --
Interest expense........ (297,228) (6,172,421) (21,367,351) (29,579,795)
Interest and other in-
come................... 41,734 171,514 4,251,088 3,836,938
---------- ----------- ------------ ------------
Loss before income tax-
es, preacquisition
losses and extraordi-
nary item.............. (806,940) (5,143,067) (13,663,957) (22,290,551)
Income tax benefit...... (302,567) (1,233,318) (3,324,466) (6,602,572)
Preacquisition losses... -- -- 74,132 74,132
---------- ----------- ------------ ------------
Loss from continuing op-
erations............... (504,373) (3,909,749) (10,265,359) (15,613,847)
Extraordinary item (net
of tax benefit)........ -- -- (507,515) (8,943,685)
---------- ----------- ------------ ------------
Net Loss................ $ (504,373) $(3,909,749) $(10,772,874) $(24,557,532)
========== =========== ============ ============
Basic and Diluted net
loss per common share:
Before extraordinary
loss................. $ (0.03) $ (0.20) $ (0.51) $ (0.78)
Extraordinary loss.... -- -- (0.03) (0.44)
---------- ----------- ------------ ------------
Net loss.............. $ (0.03) $ (0.20) (0.54) $ (1.22)
========== =========== ============ ============
Basic weighted average
common shares
outstanding (g)........ 19,053,675 19,053,675 20,124,908 20,124,908
Diluted weighted average
common shares
outstanding (g)........ 19,101,926 19,101,926 20,124,908 20,124,908
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------- ---
CONSOLIDATED PRO FORMA
---------------------------------- CONSOLIDATED
1995 1996(A) 1997(B)(C) 1997(B)(C)(D)(E)(F)
---------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures.... $1,805,742 $6,172,660 $(43,873,990) $(43,873,990)
Cash flows provided by
operating activities... 1,437,317 8,188,618 6,302,123 9,292,694
EBITDA (h).............. 974,678 8,885,726 21,784,757 21,784,757
Ratio of earnings to
fixed charges (i)...... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA CONSOLIDATED
CONSOLIDATED CONSOLIDATED(D) AS ADJUSTED(D)(E)
------------ --------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $116,445,515 $ 48,975,045 $204,315,045
Property and equipment, net.... 141,534,626 141,534,626 141,534,626
Total assets................... 386,104,477 304,893,486 464,091,819
Long-term debt and capital
lease obligations, including
current portions.............. 203,889,536 133,889,536 293,729,536
Accumulated deficit............ (15,009,336) (21,562,317) (23,445,506)
Total stockholders' equity..... 148,265,527 141,712,546 139,829,357
</TABLE>
- --------
(a) On January 29, 1996, the Company purchased DeltaCom. DeltaCom's results of
operations are included in the historical consolidated statement of
operations data since the date of acquisition. See Note 13 to the financial
statements.
(b) On March 27, 1997, the Company purchased the Georgia Fiber Assets. The
results of operations for the Georgia Fiber Assets were included in the
consolidated statements of operations beginning March 27, 1997. See Note 15
to the financial statements.
(c) On March 27, 1997, the Company purchased the remaining 64% partnership
interest in Gulf States FiberNet. Gulf States FiberNet's revenues and
expenses have been included in the consolidated statement of operations
effective January 1, 1997 with the preacquisition losses attributable to
the previous owner from January 1, 1997 through March 27, 1997 deducted to
determine the Company's consolidated net loss for the year ended December
31, 1997. See Note 15 to the financial statements.
(d) Reflects the 1997 Senior Notes Offering.
(e) Reflects the Redemption.
(f) Reflects the Senior Notes Offering.
(g) Pursuant to Staff Accounting Bulletin ("SAB") 98, for periods prior to the
Equity 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 anti-dilutive. For 1997, the effect of the Company's potential common
stock equivalents is not included in the computation of diluted net loss
per share as their effect is anti-dilutive.
(h) EBITDA represents earnings before extraordinary item, preacquisition
(earnings) losses, equity in losses of unconsolidated subsidiaries, net
interest, income taxes, depreciation and amortization. EBITDA is provided
because it is a measure commonly used in the industry. EBITDA is not a
measurement 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 flow as a measure of liquidity. EBITDA is
not necessarily comparable with similarly titled measures for other
companies.
(i) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consist of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing
interest (estimated to be one-third of such expense). Earnings were
insufficient to cover fixed charges for the years ended December 31, 1995,
1996, 1997 and pro forma 1997 by approximately $.8 million, $5.1 million,
$13.7 million and $22.2 million, respectively.
16
<PAGE>
PRO FORMA FINANCIAL DATA
The pro forma adjustments to the statements of operations for the year ended
December 31, 1997 reflect (i) the Reorganization, (ii) the 1997 Senior Notes
Offering and the application of the net proceeds therefrom, (iii) the Merger,
(iv) the Redemption, and (v) the Senior Notes Offering, as if each of such
transactions had occurred on January 1, 1997. The pro forma adjustments to the
balance sheet reflect (i) the Redemption, and (ii) the Senior Notes Offering as
if each of such transactions had occurred on December 31, 1997.
The pro forma financial and operating information does not purport to
represent what the Company's consolidated results of operations would have been
if these transactions had in fact occurred on these dates, nor does it purport
to indicate the future consolidated financial position or consolidated results
of future operations of the Company. The pro forma adjustments are based on
currently available information and certain assumptions that management
believes to be reasonable.
[TABLES APPEAR ON FOLLOWING PAGES.]
17
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
HISTORICAL PRO FORMA PRO FORMA FOR THE SENIOR CONSOLIDATED
CONSOLIDATED ADJUSTMENTS CONSOLIDATED NOTES OFFERING AS ADJUSTED
------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equiva-
lents.................. $ 94,373,610 $(60,412,137)(a) $ 33,961,473 $155,340,000(d) $188,659,806
Current restricted as-
sets................... 22,000,000 (7,700,000)(a) 14,300,000 0 14,300,000
Accounts receivable, net
of allowance........... 23,451,187 0 23,451,187 0 23,451,187
Other current assets.... 4,591,217 0 4,591,217 0 4,591,217
Long-term restricted as-
sets................... 28,495,831 (10,379,530)(a) 18,116,301 0 18,116,301
Intangible assets, net.. 61,347,786 0 61,347,786 0 61,347,786
Property, plant, and
equipment, net......... 141,534,626 0 141,534,626 0 141,534,626
Other long-term assets.. 10,310,220 (2,719,324)(b) 7,590,896 4,500,000(d) 12,090,896
------------ ------------ ------------ ------------ ------------
Total assets........... $386,104,477 $(81,210,991) $304,893,486 $159,840,000 $464,091,819
============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable........ 15,020,262 0 15,020,262 0 15,020,262
Accrued interest........ 1,867,208 (641,667)(a) 1,225,541 0 583,874
Other accrued liabili-
ties................... 10,170,992 0 10,170,992 0 10,170,992
Current maturities of
long-term debt and cap-
ital lease obligations. 912,037 0 912,037 0 912,037
Long-term debt and capi-
tal lease obligations.. 202,977,499 (70,000,000)(a) 132,977,499 159,840,000(e) 292,817,499
Deferred income taxes... 6,890,952 (2,133,154)(c) 4,757,798 0 4,757,798
Preferred Stock......... 14,808 0 14,808 0 14,808
Common Stock............ 248,176 0 248,176 0 248,176
Additional paid-in capi-
tal.................... 163,011,879 0 163,011,879 0 163,011,879
Accumulated deficit..... (15,009,336) (8,436,170)(c) (23,445,506) 0 (23,445,506)
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity.. $386,104,477 $(81,210,991) $304,893,486 $159,840,000 $464,091,819
============ ============ ============ ============ ============
</TABLE>
- --------
(a) Reflects (i) the release of restricted assets to cash and cash equivalents
upon completion of the Redemption and (ii) the Redemption, including the
payment of $70,000,000 principal, $7,700,000 premium, $641,667 accrued but
unpaid interest and an estimated $150,000 in transaction expenses.
(b) Reflects the write-off of 1997 Senior Notes issuance costs in connection
with the Redemption.
(c) Reflects the $10,569,324 extraordinary loss on early extinguishment of debt
($8,436,170 after tax) upon completion of the Redemption.
(d) Reflects the proceeds of the Senior Notes Offering net of estimated
issuance expenses of $4,500,000.
(e) Reflects the Senior Notes Offering.
18
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
CONSOLIDATED(A) ADJUSTMENTS CONSOLIDATED
--------------- ------------ -------------
<S> <C> <C> <C>
Operating revenues............. $ 114,589,998 $ -- $ 114,589,998
Cost of services............... 54,550,348 -- 54,550,348
------------- ------------ -------------
Gross margin................... 60,039,650 -- 60,039,650
------------- ------------ -------------
Operating expenses:
Selling, operations, and ad-
ministration................ 38,254,893 -- 38,254,593
Depreciation & amortization.. 18,332,451 -- 18,332,451
------------- ------------ -------------
Total operating expenses... 56,587,344 -- 56,587,344
------------- ------------ -------------
Operating income............... 3,452,306 -- 3,452,306
Other income (expense):
Interest expense............. (21,367,351) (8,212,444)(b) (29,579,795)
Interest and other income.... 4,251,088 (414,150)(c) 3,836,938
------------- ------------ -------------
Total other expense........ (17,116,263) (8,626,594) (25,742,857)
------------- ------------ -------------
Loss before income taxes,
preacquisition loss and
extraordinary item............ (13,663,957) (8,626,594) (22,290,551)
Income tax benefit............. (3,324,466) (3,278,106)(d) (6,602,572)
------------- ------------ -------------
Loss before preacquisition loss
and extraordinary item........ (10,339,491) (5,348,488) (15,687,979)
Preacquisition loss............ 74,132 -- 74,132
------------- ------------ -------------
Net Loss from continuing
operations(e)................. $ (10,265,359) $ (5,348,488) $ (15,613,847)
============= ============ =============
Basic and diluted loss from
continuing operations per
common share.................. $ (0.51) $ (0.78)
Basic and diluted weighted av-
erage common shares
outstanding(f)................ 20,124,908 20,124,908
</TABLE>
- --------
(a) Includes the results of operations for Georgia Fiber since March 27, 1997.
(b) Reflects (i) interest expense of $1,612,331 on the 1997 Senior Notes after
giving effect to the Redemption; (ii) the amortization of $70,113 of debt
issuance costs relating to the 1997 Senior Notes after giving effect to the
Redemption (iii) $11,997,250 of interest expense on the Senior Notes
Offering, net of estimated capitalized interest of $2,218,750; (iv) the
amortization of $450,000 of debt issuance costs relating to the Senior
Notes Offering; and (v) the elimination of $5,917,250 of interest expense
related to the DeltaCom Indebtedness and the Gulf States FiberNet debt.
(c) Reflects the estimated interest income that would have been earned on
restricted assets, placed in a pledged account to secure and fund the first
six scheduled payments of interest on the 1997 Senior Notes (at an average
interest rate of 6.28%) after giving effect to the Redemption. Under the
terms of the 1997 Senior Notes Indenture, the amounts placed in the pledged
account are required to be invested in pledged securities, which secure the
1997 Senior Notes.
(d) Represents the income tax impacts of the pro forma adjustments.
(e) Excludes the effect of the extraordinary loss net of tax, on the early
retirement of debt in March 1997 totaling $507,515, or ($0.03) per share,
the extraordinary loss, net of tax on the Redemption in 1998 of $8,436,170
or ($0.42) per share, and the loss of $1,557,514, net of tax, or ($0.08)
per share related to reclassifying the Company's interest rate hedge of an
anticipated transaction to a trading security as a result of the Senior
Notes Offering.
(f) Basic and diluted weighted average shares outstanding are the same, as the
effect of potential common stock equivalents are excluded from the
computation of diluted net loss per share as their effect is anti-dilutive.
19
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Senior Notes should consider carefully the following factors before
tendering their Senior Notes for Exchange Notes.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in any forward-looking statements of
the Company made by or on behalf of the Company, whether oral or written.
Accordingly, any such statements are qualified in their entirety by reference
to the following important factors, among others, that could cause the
Company's actual results to differ materially from those projected in forward-
looking statements of the Company.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW
AFTER CAPITAL EXPENDITURES
The Company expects to incur significant and increasing operating losses and
negative cash flow (after capital expenditures) during the next several years
as it implements its business strategy to expand its telecommunications
service offerings, expand its fiber optic network and enter new markets.
Although the Company expects that a majority of its revenue growth will come
from Retail Services, it does not expect its Retail Services to obtain a
significant share of the market for telecommunications services in the
southern United States, and there can be no assurance that the Company will
achieve or sustain profitability or positive net cash flow in the future. If
the Company cannot achieve or sustain operating profitability and positive net
cash flow, it may not be able to meet its working capital or debt service
requirements, which could have a material adverse effect on the Company's
ability to meet its obligations on the Notes. See "--Significant Capital
Requirements; Uncertainty of Additional Financing," "Selected Financial and
Operating Data," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FINANCING
Expansion of the Company's network, operations and services will require
significant capital. The Company currently estimates that its aggregate
capital requirements will total approximately $155.0 million in 1998 and 1999,
of which approximately $105.0 million is expected to be incurred in 1998 and
approximately $50.0 million is expected to be incurred in 1999. The Company
anticipates making substantial capital expenditures thereafter. Capital
expenditures will be primarily for the following: (i) the addition of
facilities-based local telephone service to the Company's bundle of integrated
telecommunications services, including acquisition and installation of
switches; (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 Company
believes that cash on hand, cash flow from operations and borrowings expected
to be available under the Credit Facility will provide sufficient funds to
enable the Company to expand its business as currently planned through the
maturity of the Credit Facility in 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 2003. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Certain Indebtedness."
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimate depending on the demand for
the Company's services and as a result of regulatory, technological and
competitive developments (including new market developments and new
opportunities) in the Company's industry. The Company may also require
additional capital in the future (or sooner than currently anticipated) for
new business activities related to its current and planned businesses, or in
the event it decides to make acquisitions or enter into joint ventures and
strategic alliances. Sources of additional capital may include
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cash flow from operations and public and private equity and debt financings.
There can be no assurance, however, that the Company will be successful in
producing sufficient cash flows or raising sufficient debt or equity capital
to meet its strategic objectives or that such funds, if available at all, will
be available on a timely basis or on terms that are acceptable to the Company.
Failure to generate or raise sufficient funds would require the Company to
delay or abandon some or all of its future expansion plans or expenditures,
which could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
HIGH LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
At December 31, 1997, on a pro forma basis, giving effect to the Senior
Notes Offering and the Redemption, the Company would have had $293.7 million
of indebtedness and its stockholders' equity would have been $141.7 million.
On a pro forma basis, the Company's earnings would have been insufficient to
cover its fixed charges for the year ended December 31, 1997 by $22.2 million
and its EBITDA less capital expenditures and interest expense would have been
negative $51.7 million.
The Indenture, the indenture pursuant to which the 1997 Senior Notes were
issued (the "1997 Note Indenture" and, together with the Indenture, the
"Indentures") and the Credit Facility contain restrictions on the Company and
its subsidiaries that affect, and in certain cases significantly limit or
prohibit, among other things, the ability of the Company and its subsidiaries
to incur additional indebtedness, create liens, make investments, issue stock
of subsidiaries and sell assets. In addition, the Credit Facility requires the
Company to maintain certain financial ratios. See "Description of Certain
Indebtedness--Credit Facility." There can be no assurance that the Company
will be able to maintain such ratios or that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interest of the
Company. The limitations in the Indentures are subject to a number of
important qualifications and exceptions. In particular, while the Indentures
restrict the Company's ability to incur indebtedness by requiring compliance
with specified leverage ratios, they permit the Company to incur an unlimited
amount of additional indebtedness to finance the acquisition of equipment,
inventory or network assets.
There can be no assurance that the Company will be able to improve its
earnings before fixed charges or that the Company will be able to meet its
debt service obligations, including its obligations under the Notes. If the
Company is unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments, or if the Company otherwise fails to
comply with the various covenants in its debt obligations, it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Company. Such defaults could result
in a default on the Notes and could delay or preclude payment of interest or
principal on the Notes. 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. See "Description of Certain Indebtedness."
The level of the Company's indebtedness could adversely affect the Company
in a number of ways. For example, (i) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (ii) the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to, changes in its business; (iii) the Company will be more highly leveraged
than some of its competitors, which may place it at a competitive
disadvantage; (iv) the Company's degree of indebtedness may make it more
vulnerable to a downturn in its business or the economy generally; (v) the
debt service requirements of any additional indebtedness could make it more
difficult for the Company to make payments on the Notes; and (vi) a
substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness and
will not be available for other purposes.
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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, including
its obligations under the Notes. 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 meet its debt
service obligations and working capital requirements. In the event the
implementation of the Company's strategy is delayed or is unsuccessful or the
Company does not generate sufficient cash flow to meet its debt service and
working capital requirements, the Company may need to seek additional
financing. There can be no assurance that any such financing could be obtained
on terms that are acceptable to the Company, or at all. In the absence of such
financing, the Company could be forced to dispose of assets in order to make
up for any shortfall in the payments due on its indebtedness under
circumstances that might not be favorable to realizing the highest price for
such assets. A substantial portion of the Company's assets consists of
intangible assets, the value of which will depend upon a variety of factors
(including the success of the Company's business). As a result, there can be
no assurance that the Company's assets could be sold quickly enough or for
sufficient amounts to enable the Company to meet its obligations, including
its obligations with respect to the Notes.
ABILITY TO MANAGE GROWTH
The expansion and development of the Company's business will depend on,
among other things, the Company's ability to implement successfully its sales
and marketing strategy, evaluate markets, design fiber routes, secure
financing, install facilities, acquire rights of way, obtain any required
government authorizations, implement interconnection to, and collocation with,
facilities owned by incumbent local exchange carriers and obtain appropriately
priced unbundled network elements and wholesale services from the incumbent
local exchange carriers, all in a timely manner, at reasonable cost and on
satisfactory terms and conditions. The Company's rapid growth, particularly in
the provision of Retail Services, has placed, and anticipated growth in other
services in the future may also place, a significant strain on its
administrative, operational and financial resources. The Company's ability to
continue to manage its growth successfully will require the Company to enhance
its operational, management, financial and information systems and controls
and to hire and retain qualified sales, marketing, administrative, operating
and technical personnel. There can be no assurance that the Company will be
able to do so. In addition, as the Company increases its service offerings and
expands its targeted markets, there will be additional demands on customer
support, sales and marketing, administrative resources and network
infrastructure. The Company's inability to manage its growth effectively could
have a material adverse effect on the Company's business, results of
operations and financial condition.
BUSINESS DEVELOPMENT AND EXPANSION RISKS
The successful implementation of the Company's business strategy to provide
an integrated bundle of telecommunications services and expand its operations
will be subject to a variety of risks, including competition and pricing, the
availability of capital on favorable terms, regulatory uncertainties,
operating and technical problems, the need to establish interconnection and
collocation arrangements with incumbent local exchange carriers in its target
markets and the potential difficulties in adding a local service offering. See
"--Dependence on Incumbent Local Exchange Carriers." In addition, the
expansion of the Company's business may involve acquisitions of other
telecommunications businesses and assets that, if made, could divert the
resources and management time of the Company and could require integration
with the Company's operations. There can be no assurance that any such
acquisition could be successfully integrated into the Company's operations or
that any acquired business will perform as expected. Failure of the Company to
implement its expansion and growth strategy successfully would have a material
adverse effect on the Company's business, results of operations and financial
condition.
RISKS RELATED TO LOCAL SERVICES STRATEGY
The Company has recently entered the newly created competitive local
telecommunications services industry. The local telephone services market has
been opened to competition through the passage of the
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Telecommunications Act of 1996 (the "Telecommunications Act") and subsequent
state and federal regulatory actions designed to implement the
Telecommunications Act. Regulatory bodies have not completed all actions
expected to be needed to implement local service competition, and there is
little experience under those decisions that have been made to date. The
Company will have to make significant operating and capital investments in
order to implement its local exchange services strategy. There are numerous
operating complexities associated with providing these services. The Company
will be required to develop new products, services and systems and will need
to develop new marketing initiatives and train its sales force in connection
with selling these services. The Company will also need to implement the
necessary billing and collecting systems for these services. The Company will
face significant competition from the Regional Bell Operating Companies, whose
core business is providing local dial tone service. The Regional Bell
Operating Companies, who currently are the dominant providers of services in
their markets, are expected to mount a significant competitive response to new
entrants in their markets such as the Company. The Company also will face
significant competitive product and pricing pressures from other incumbent
local exchange carriers and from other firms seeking to compete in the local
services market.
The Company also expects that the addition of local service to its bundle of
telecommunications services will have an adverse impact on its gross margin
because the gross margin on the resale of local services through incumbent
local exchange carrier facilities is lower than the gross margin on the
Company's existing business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its Carriers' Carrier
Services will continue to decline over the next several years. The Company is
aware that certain long distance carriers are expanding their capacity and
believes that other long distance carriers, as well as potential new entrants
to the industry, are constructing new fiber optic and other long distance
transmission networks in the southern United States. Since the cost of the
actual fiber (as opposed to construction costs) is a relatively small portion
of the cost of building new transmission lines, persons building such lines
are likely to install fiber that provides substantially more transmission
capacity than will be needed over the short or medium term. Further, recent
technological advances may greatly expand the capacity of existing and new
fiber optic cable. Although such technological advances may enable the Company
to increase its capacity, an increase in the capacity of the Company's
competitors could adversely affect the Company's business. If industry
capacity expansion results in capacity that exceeds overall demand along any
of the Company's routes, severe additional pricing pressure could develop. In
addition, strategic alliances or similar transactions, such as the long
distance capacity purchasing alliance among certain Regional Bell Operating
Companies announced in the spring of 1996, could result in additional pricing
pressure on long distance carriers. Furthermore, the marginal cost of carrying
an additional call over existing fiber optic cable is extremely low. As a
result, within a few years, there may be dramatic and substantial price
reductions. See "--Competition."
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. As the Company commences providing
dial tone and switched local access services, the need for enhanced billing
and information systems will increase significantly. The inability of the
Company to identify adequately all of its information and processing needs, or
to upgrade systems as necessary, could have a material adverse effect on the
Company's ability to reach its objectives and on its financial condition and
results of operations.
RISKS ASSOCIATED WITH 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. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year
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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. The Company is
currently unable to predict the extent to which the Year 2000 issue will
affect its internal systems, or those of its vendors and third party network
service providers. Any failure by the Company, such vendors or third party
network service providers to resolve any Year 2000 issues on a timely basis,
or in a manner that is compatible with the Company's systems, could have a
material adverse effect on the Company. Although the Company may incur
substantial costs, particularly costs resulting from charges by its vendors or
third party network service providers, in correcting Year 2000 issues, such
costs cannot currently be estimated. Additionally, such costs will be expensed
as incurred, which will have a negative effect on current operating results.
DEPENDENCE ON RIGHTS OF WAY AND OTHER THIRD PARTY AGREEMENTS
The Company has obtained easements, rights of way, franchises and licenses
from various private parties, including actual and potential competitors, and
local governments in order to construct and maintain its fiber optic network.
There can be no assurance that the Company will continue to have access to
existing rights of way and franchises after the expiration of such agreements,
or that the Company will obtain additional rights necessary to extend its
network on reasonable terms. If a franchise, license or lease agreement were
terminated and the Company were forced to remove or abandon a significant
portion of its network, such termination could have a material adverse effect
on the Company. Similarly, the Company's business plans could be adversely
affected if its network expansion is hindered through delays or denial of
rights of way, easements or related licenses on competitive terms.
REGULATION
The Company is required to obtain certain authorizations from the Federal
Communications Commission ("FCC") and public utility commissions ("PUCs") to
offer certain of its telecommunications services, as well as file tariffs for
many of its services. To date the Company has not experienced significant
difficulties in receiving certification, maintaining tariffs or otherwise
complying with its regulatory obligations. The Company will face new
regulatory obligations as it begins to enter the local telephone market. It
also is likely that state PUCs will regulate the local telephone services
offered by the Company and other competitive local exchange carriers more
heavily than competitive long distance services have been regulated in the
past. Because the FCC and the states have yet to adopt many of the rules and
policies necessary to implement local telephone competition, or to respond to
other related issues, it is uncertain how burdensome these requirements will
be for the Company.
In addition, the Company's plans to provide local telephone service are
heavily dependent upon implementation of provisions of the Telecommunications
Act. The Telecommunications Act preempted state and local laws to the extent
that they prohibited local telephone competition, and imposed a variety of new
duties on incumbent local exchange carriers intended to advance such
competition, including the duty to negotiate in good faith with competitors
requesting interconnection to the incumbent local exchange carrier's network.
However, negotiations with incumbent local exchange carriers have sometimes
involved considerable delays and the resulting negotiated agreements may not
necessarily be obtained on terms and conditions that are acceptable to the
Company. In such instances, the Company may petition the proper state
regulatory agency to arbitrate disputed issues. There can be no assurance that
the Company will be able to negotiate acceptable new interconnection
agreements with incumbent local exchange carriers or that if state regulatory
authorities impose terms and conditions on the parties in arbitration, such
terms will be acceptable to the Company. Although the Company entered into the
Interconnection Agreement pursuant to which it will obtain wholesale local
services and access to unbundled network elements from BellSouth, the terms of
the Interconnection Agreement are subject to the
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approval of the PUCs regulating the Company's markets. Such approval has been
received from the PUCs of Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina and Tennessee. However, the
Company continues to face issues related to implementation of those
interconnection agreements.
On August 8, 1996, the FCC adopted rules and policies implementing the local
competition provisions of the Telecommunications Act, which rules, in general,
were considered favorable to new competitive entrants, but those rules have
not been fully implemented. The FCC's rules were challenged in the federal
courts by GTE, Regional Bell Operating Companies, large independent incumbent
local exchange carriers and state regulatory commissions. On October 15, 1996,
the U.S. Court of Appeals for the Eighth Circuit (the "Eighth Circuit") issued
a stay of the implementation of certain of the FCC's rules, and on July 18 and
October 14, 1997, the same Court issued decisions finding that the FCC lacked
statutory authority under the Telecommunications Act for certain of its rules.
In particular, the Eighth Circuit found that the FCC was not empowered to
establish the pricing standards governing unbundled local network elements or
wholesale local services of the incumbent local exchange carriers, or to
require such carriers to provide network elements in a combined form. The
Eighth Circuit also struck down other FCC rules, including one that would have
enabled new entrants to "pick and choose" from provisions of established
interconnection agreements between the incumbent local exchange carriers and
other carriers. The Eighth Circuit rejected certain other objections to the
FCC rules brought by the incumbent local exchange carriers or the states,
including challenges to the FCC's definition of unbundled elements, and to the
FCC's rules allowing new competitors to create their own networks by combining
incumbent local exchange carrier network elements together without adding
additional facilities of their own. The overall impact of the Eighth Circuit's
decision is to limit the obligations of incumbent local exchange carriers as
originally interpreted by the FCC, materially reduce the role of the FCC in
fostering local competition, including its ability to take enforcement action
if the Telecommunications Act is violated, and increase the role of state
utility commissions. On January 26, 1998, the United States Supreme Court (the
"Supreme Court") granted a request by the FCC and other parties to review the
Eighth Circuit decisions. The Supreme Court is not expected to complete this
process until late 1998 or early 1999. Meanwhile, certain state commissions
have asserted that they will be active in promoting local telephone
competition using the authority they have under the Eighth Circuit decisions,
lessening the significance of the reduced FCC role. At this time the impact of
the Eighth Circuit decisions cannot be evaluated and there can be no assurance
that those decisions and related developments will not have a material adverse
effect on the Company. Furthermore, other FCC rules related to local telephone
competition remain the subject of legal challenges, and there can be no
assurance that decisions affecting those rules will not be adverse to
companies seeking to enter the local telephone market.
The Telecommunications Act also creates the foundation for increased
competition in the long distance market from the incumbent local exchange
carriers, which could affect the successful implementation of the Company's
business plans. For example, certain provisions eliminate previous
prohibitions on the provision of interLATA long distance services (both retail
and carriers' carrier) by the Regional Bell Operating Companies subject to
compliance by such companies with requirements set forth in the
Telecommunications Act and implemented by the FCC. The FCC has rejected
Regional Bell Operating Company applications to provide interLATA services
including applications from BellSouth covering the states of South Carolina
and Louisiana. However, the FCC, states and other parties are actively
considering actions that could expedite approval of interLATA service.
Separately, on December 31, 1997, the U.S. District Court for the Northern
District of Texas (the "District Court") ruled that the imposition of these
preconditions on the Regional Bell Operating Companies was unconstitutional,
and that these Companies must be allowed to provide interLATA services without
meeting them. The District Court has stayed its order pending appeal. The
Company could be adversely affected if the Regional Bell Operating Companies
(and particularly BellSouth) are allowed to provide wireline interLATA long
distance services within their own regions before local competition is
established.
In a related development, the FCC is considering proposed new policies and
rules that would grant the incumbent local exchange carriers additional
flexibility in the pricing of interstate access services, and states are
considering or are expected to consider incumbent local exchange carrier
requests for similar regulatory relief with respect to intrastate services.
Such flexibility is likely to come first for services offered in the business
market. Any pricing flexibility or other significant deregulation of the
incumbent local exchange carriers could have a material adverse effect on the
Company. The Company also could be adversely affected by FCC or state
regulatory decisions affecting access charges and universal service. See
"Business--Regulation."
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COMPETITION
The Company operates in a highly competitive environment, and the level of
competition, particularly with respect to pricing, is increasing. Local
telephone and intraLATA long distance services substantially similar to those
expected to be offered by the Company are also offered by the incumbent local
exchange carriers serving the markets that the Company plans to serve.
BellSouth is the incumbent local exchange carrier and a particularly strong
competitor in most of the markets to be served by the Company. BellSouth and
other incumbent local exchange carriers already have relationships with every
customer and have the potential to subsidize services of the type offered by
the Company from service revenues not subject to effective competition, which
could result in even more intense price competition. The Company competes with
long distance carriers in the provision of interLATA long distance Retail and
Carriers' Carrier Services. The interLATA long distance market consists of
four major competitors (AT&T, MCI, Sprint and WorldCom) but other companies
operate or are building networks in the southern United States and other
geographic areas. Other competitors of the Company in the Retail and Carriers'
Carrier Services markets are likely to include Regional Bell Operating
Companies providing out-of-region (and, with the future removal of regulatory
barriers, in-region) long distance services, other competitive local exchange
carriers, microwave and satellite carriers, and private networks owned by
large end-users. The Company also may increasingly face competition from firms
offering long distance data and voice services over the Internet. Such firms
could enjoy a significant cost advantage because at this time they do not pay
carrier access charges or universal service fees, although this matter will be
the subject of further consideration by the FCC and other bodies. In addition,
the Company competes with direct marketers, equipment vendors and installers,
and telecommunications management companies with respect to certain portions
of its business. Many of the Company's existing and potential competitors have
financial, technical and other resources and customer bases and name
recognition far greater than those of the Company. The long distance business
is extremely competitive and prices have declined substantially in recent
years and are expected to continue to decline, which will adversely affect the
Company's gross margins as a percentage of revenues. See "--Dependence on
Incumbent Local Exchange Carriers" and "Business--Regulation."
The Telecommunications Act, other recent state legislative actions, and
current federal and state regulatory initiatives provide increased business
opportunities for the Company by removing or substantially reducing certain
barriers to local exchange competition. However, these new competitive
opportunities will be accompanied by new competitive opportunities for the
incumbent local exchange carriers including interLATA long distance service by
BellSouth. It is also expected that increased local competition will result in
increased pricing flexibility for, and relaxation of regulatory oversight of,
the incumbent local exchange carriers. If the incumbent local exchange
carriers are permitted to engage in increased volume and discount pricing
practices or charge competitive local exchange carriers increased fees for
interconnection to their networks, or if the incumbent local exchange carriers
seek to delay implementation of interconnection by competitors to their
networks, the Company's results of operations and financial condition could be
adversely affected. There can be no assurance that the Company will be able to
achieve or maintain adequate market share or revenues, or compete effectively
in any of its markets.
In addition, a continuing trend toward business combinations and strategic
alliances in the telecommunications industry may further enhance competition.
For example, the national long distance carrier WorldCom has a pending
agreement to merge with MCI. WorldCom also has acquired competitive local
exchange carriers, including MFS Communications Company, Inc. and Brooks Fiber
Properties, Inc. In January 1998, AT&T announced plans to acquire another
competitive local exchange carrier, Teleport Communications Group Inc.
("TCG"). Additionally, in March 1998, Qwest Communications Inc. ("Qwest")
announced its intention to acquire LCI, which combination would result in the
nation's fourth-largest long distance carrier. These types of strategic
alliances could put the Company at a significant competitive disadvantage.
The Company will face competition in the markets in which it operates from
one or more competitive local exchange carriers operating fiber optic
networks, in some cases in conjunction with the local cable television
operator. One of the primary purposes of the Telecommunications Act is to
promote competition, particularly in the local telephone market. AT&T, MCI,
Sprint and others have begun to offer local telecommunications services,
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either directly or in conjunction with other competitive local exchange
carriers in certain locations, and are expected to expand that activity as
opportunities created by the Telecommunications Act develop. BellSouth has
announced plans to provide local service in areas of its region where it is
not the incumbent local exchange carrier.
To complement its telecommunications services offerings, the Company offers
data transmission services. The data transmission business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by
the Company. Under this agreement, the United States and other members of the
WTO have committed themselves to opening their telecommunications markets to
competition and foreign ownership.
The Company also believes that providers of wireless services increasingly
will offer, in addition to products that supplement a customer's wireline
communications (as cellular telephone services are used today), wireline
replacement products that may result in wireless services becoming the
customer's primary mode of communication. Competition with providers of
wireless telecommunications services may be intense. Many of the Company's
potential wireless competitors have substantially greater financial,
technical, marketing, sales, manufacturing and distribution resources than
those of the Company. Furthermore, the FCC has made additional spectrum
available through public auction over the past several years for use in
wireless communications. This additional spectrum is intended by the FCC to be
used for broadband, data and video transmission but its use in wireless local
loop is also possible.
DEPENDENCE ON INCUMBENT LOCAL EXCHANGE CARRIERS
The Company is dependent on incumbent local exchange carriers to provide
access service for the origination and termination of its toll long distance
traffic and interexchange private lines. Historically charges for such access
service have made up a significant percentage of the overall cost of providing
long distance service. On May 7, 1997, the FCC adopted changes to its
interstate access rules that, among other things, have reduced per-minute
access charges and substituted new per-line flat rate monthly charges. The FCC
also approved reductions in overall access rates, and established new rules to
recover subsidies to support universal service and other public policies.
Additional access charge adjustments will be implemented in the future. The
impact of these changes on the Company or its competitors is not yet clear.
The Company could be adversely affected if it does not experience access cost
reductions proportionally equivalent to those of its competitors. Insofar as
new Internet-based competitors continue to be exempt from these charges, they
could enjoy a significant cost advantage in this area. See "--Regulation."
The Company also generally will be dependent on incumbent local exchange
carriers for provision of local telephone service through access to local
loops, termination service and, in some markets, central office switches of
such carriers. In addition, the Company intends to obtain the local telephone
services of the incumbent local exchange carriers on a wholesale basis and
resell that service to end users, particularly in the early stages of its
local telephone service business.
Any successful effort by the incumbent local exchange carriers to deny or
substantially limit the Company's access to the incumbent local exchange
carrier's network elements or wholesale services would have a material adverse
effect on the Company's ability to provide local telephone services. Although
the Telecommunications Act imposes interconnection obligations on incumbent
local exchange carriers, there can be no assurance that the Company will be
able to obtain access to such network elements or services at rates, and on
terms and conditions, that permit the Company to offer local services at rates
that are both profitable and competitive. As noted above, the Eighth Circuit
recently struck down certain FCC rules intended to govern such rates, terms
and conditions. See "--Regulation." One result of this decision is to give
state utility commissions a significantly larger role in implementing the
Telecommunications Act. It is uncertain whether such commissions will adopt
and enforce rules or take other actions that will permit new carriers to have
economical use of incumbent local
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exchange carrier networks and facilities. Furthermore, some Regional Bell
Operating Companies are taking the position that they should not be required
to provide competitors with access to network enhancements such as local loops
suitable for high speed data or broadband services. The Interconnection
Agreement currently allows the Company to provide local service on a resale
basis or by purchasing all unbundled network elements required to provide
local service on a facilities basis, without using Company-owned facilities.
The terms of the Interconnection Agreement, including interim pricing terms
agreed to by the Company and BellSouth, have been approved by state regulatory
authorities in all states in which BellSouth operates, although they remain
subject to review and modification by such authorities. In addition, the
Interconnection Agreement does not resolve all operational issues, which
issues the Company and BellSouth are continuing to negotiate to resolve. Also,
many issues relevant to the terms and conditions by which competitors may use
the incumbent local exchange carrier network and wholesale services remain to
be resolved. For example, BellSouth and certain other incumbent local exchange
carriers have taken the position that when a carrier seeking to provide local
service obtains all necessary elements (loops and switches) from the incumbent
local exchange carrier, the incumbent local exchange carrier retains the right
to receive the access revenues associated with the service to the customers
served on that basis. Although the FCC has rejected this position, further
legal challenges are in progress and other important issues related to this
form of interconnection remain open. For example, many new carriers, including
the Company, have experienced problems with respect to the operational support
systems used by new carriers to order and receive network elements and
wholesale services from the incumbent local exchange carriers. These systems
are necessary for new carriers like the Company to provide local service to
customers on a timely and competitive basis. The FCC has created a task force
to examine problems that have slowed the development of local telephone
competition. The Telecommunications Act creates incentives for local exchange
carriers to permit access to their facilities by denying such carriers the
ability to provide long distance services until there is adequate competition
at the local level. However, the District Court has found these provisions
unconstitutional, but this order has been stayed pending appeal. BellSouth is
not yet permitted to offer long distance services. There can be no assurance,
however, that BellSouth or other local exchange carriers will be accommodating
to the Company once they are permitted to offer long distance service. See "--
Regulation" and "Business--Services and Facilities."
DEPENDENCE ON CERTAIN CUSTOMERS
For the year ended December 31, 1997, the Company's two largest Carriers'
Carrier customers would together have accounted for approximately 12.5% of the
Company's consolidated revenues. For the year ended December 31, 1997, the
Company's five largest Retail Services customers would have represented an
aggregate of approximately 10% of the Company's consolidated revenues. The
Company's customers generally use more than one service provider and may
reduce their use of the Company's services and switch to other providers
without incurring significant expense. The Company's agreements with its
customers generally provide that the customer may terminate service without
penalty in the event of certain outages in service and for certain other
defined causes. Although as of December 31, 1997, the Company's Carriers'
Carrier business had remaining future long-term contract commitments totaling
approximately $77.9 million, some of such contractual commitments provide
that, if the customer is offered lower pricing with respect to any circuit by
another carrier, the customer's commitment to the Company will be reduced to
the extent the Company does not match the price for such circuit and the
customer purchases such circuit from the other carrier. There can be no
assurance that the Company will be able to retain its customers. The loss of
or a significant decrease of business from any of its largest customers would
have a material adverse effect on the Company's business, results of
operations and financial condition.
RISK OF RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. Although the Company believes that, for the foreseeable future,
these changes will neither materially affect the continued use of its fiber
optic network, digital switches and transmission equipment, nor materially
hinder its ability to acquire necessary technologies, the effect of
technological changes on the business of the Company, such as changes relating
to emerging wireline (including fiber optic) and wireless (including
broadband) transmission technologies, and use of the Internet for traditional
voice, data or broadband communications, cannot be
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predicted. In addition, the Company may be required to select in advance one
technology over another, but it will be impossible to predict with any
certainty, at the time the Company is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.
DEPENDENCE ON NETWORK INFRASTRUCTURE
The Company has entered into marketing and management agreements with three
southern public utility companies to sell long-haul private line services on a
commission basis on the fiber optic networks owned by these companies.
Pursuant to these agreements, which have remaining terms ranging from four to
seven years, the Company generally earns a commission based upon a percentage
of the gross revenues generated by the sale of capacity on the utility's
networks. By interconnecting the Company's owned network to these other
networks owned by the public utilities, and by marketing and selling capacity
on such networks to the Company's customers, the Company has effectively
extended its network with minimal capital expenditure. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview." The Company also has a buy-sell agreement with Carolinas Fibernet,
LLC, which manages fiber optic facilities in North Carolina and South
Carolina. Although the Company does not believe that any of these agreements
will be terminated in the near future, cancellation or non-renewal of any of
such agreements could materially adversely affect the Company's business. In
addition, two of the Company's three agreements with public utility companies
are nonexclusive, and the Company may encounter competition for capacity on
the utilities' networks from other service providers that enter into
comparable arrangements with the utilities. Any reduction in the amount of
capacity that is made available to the Company could adversely affect the
Company. To the extent the Company is unable to establish similar arrangements
in new markets, it may be required to make additional capital expenditures to
extend its fiber optic network.
The Company's business also could be materially adversely affected by a
cable cut or equipment failure in the Company's fiber optic network. Although
the Company has implemented electronic redundancy throughout its network,
which enables traffic to be rerouted to another fiber in the same fiber sheath
in the event of a partial fiber cut or electronics failure, a substantial
portion of the Company's owned and managed fiber optic network is not
protected in the event of a total cable cut.
DEPENDENCE ON KEY PERSONNEL
The Company's business is currently managed by a small number of key
management and operating personnel. The Company does not have any employment
agreements with, nor does the Company maintain "key man" insurance on, these
employees. The loss of the services of key personnel, or the inability to
attract, recruit and retain sufficient or additional qualified personnel,
could have a material adverse effect on the Company. See "Management--
Directors and Executive Officers."
POTENTIAL INFLUENCE BY AND RELATIONSHIP WITH CERTAIN STOCKHOLDERS
As of December 31, 1997, Campbell B. Lanier, III beneficially owned
approximately 18% of the outstanding Common Stock. See "Principal
Stockholders." To the extent that Mr. Lanier exercises his voting rights in
concert with other stockholders, Mr. Lanier and such other stockholders may be
able to exercise control over the Company's business by virtue of their voting
power with respect to the election of directors and other actions requiring
stockholder approval.
HOLDING COMPANY STRUCTURE; PRIORITY OF SECURED DEBT
The Company is a holding company with no direct operations and no
significant assets other than the stock of its subsidiaries. The Company is
dependent on the cash flows of its subsidiaries to meet its obligations,
including the payment of interest and principal on the Notes. The Company's
subsidiaries are separate legal entities that have no obligation to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. Because the Company's
subsidiaries will not guarantee
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the payment of the principal or interest on the Notes, any right of the
Company to receive assets of any of its subsidiaries upon its liquidation or
reorganization (and the consequent right of holders of the Notes to
participate in the distribution or realize proceeds from those assets) will be
effectively subordinated to the claims of the creditors of any such subsidiary
(including trade creditors and holders of indebtedness of such subsidiary),
except if and to the extent the Company is itself a creditor of such
subsidiary, in which case the claims of the Company would still be effectively
subordinated to any security interest in the assets of such subsidiary held by
other creditors. As of December 31, 1997, the subsidiaries of the Company had
approximately $34.0 million of liabilities (excluding intercompany payables),
including approximately $3.9 million of indebtedness (including capital
leases). Interstate FiberNet has up to $50.0 million of availability under the
Credit Facility, and each of the other subsidiaries of the Company are
guarantors thereunder.
The Notes are unsecured and therefore will be effectively subordinated to
any secured indebtedness of the Company. The Indenture and the 1997 Note
Indenture permit the Company and its subsidiaries to incur an unlimited amount
of indebtedness to finance the acquisition of equipment, inventory and network
assets and to secure such indebtedness, and up to $100.0 million ($150 million
under the Indenture, which may be increased to $250.0 million under certain
conditions) of other secured indebtedness pursuant to one or more credit
facilities, including the Credit Facility. The Credit Facility is secured by
substantially all of the assets of the Company's subsidiaries. Consequently,
in the event of a bankruptcy, liquidation, dissolution, reorganization or
similar proceeding with respect to the Company, such assets would be available
to satisfy obligations of the secured debt before any payment could be made on
the Notes. In addition, to the extent such assets did not satisfy in full the
secured indebtedness, the holders of such indebtedness would have a claim for
any shortfall that would be pari passu (or effectively senior if the
indebtedness were issued by a subsidiary) with the Notes. Accordingly, there
may only be a limited amount of assets available to satisfy any claims of the
holders of the Notes upon an acceleration of the Notes.
VARIABILITY OF OPERATING RESULTS
As a result of the significant expenses associated with the construction and
expansion of its network and services, the Company anticipates that its
operating results could vary significantly from period to period. Such
variability could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ABSENCE OF PUBLIC MARKET
The Senior Notes have been designated for trading by qualified buyers in the
PORTAL Market. The Senior Notes have not been registered under the Securities
Act, however, and will continue to be subject to restrictions on
transferability to the extent that they are not exchanged for Exchange Notes.
Furthermore, the Exchange Offer will not be conditioned upon any minimum or
maximum aggregate principal amount of Senior Notes being tendered for
exchange. No assurance can be given as to the liquidity of the trading market
of the Senior Notes following the Exchange Offer.
Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders thereof (other than any holder that is
(i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) a broker-dealer that acquired Senior Notes as a result
of market-making activities or other trading activities) without compliance
with the registration requirements under the Securities Act, the Exchange
Notes will constitute a new issue of securities for which there is currently
no established trading market. If a trading market does not develop or is not
maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may cease at any time. If a
public trading market develops for the Exchange Notes, future trading prices
of the Exchange Notes will depend on many factors, including, among other
things, prevailing interest rates, the market for similar securities, the
financial conditions and results of operations of the Company and other
factors beyond the control of the Company, including general economic
conditions. The Company does not intend to list the Exchange Notes on any
national securities exchange or to seek approval for
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quotation through any automated quotation system. The Company has been advised
by the Placement Agents that following completion of the Exchange Offer, the
Placement Agents intend to make a market in the Exchange Notes. However, the
Placement Agents are not obligated to do so and any market-making activities
with respect to the Exchange Notes may be discontinued at any time without
notice. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes.
Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" of the Company (within the meaning of Rule
405 under the Securities Act) may publicly offer for sale or resell the
Exchange Notes only in compliance with the provisions of Rule 144 under the
Securities Act or any other available exemptions under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
CONSEQUENCES OF A FAILURE TO EXCHANGE SENIOR NOTES
The Senior Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions. Senior Notes
that remain outstanding after consummation of the Exchange Offer will continue
to bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Senior Notes that remain
outstanding will not be entitled to any rights to have such Senior Notes
registered under the Securities Act, except under certain limited
circumstances. The Company does not intend to register under the Securities
Act any Senior Notes that remain outstanding after consummation of the
Exchange Offer. See "The Exchange Offer." To the extent that Senior Notes are
not tendered and accepted in the Exchange Offer, a holder's ability to sell
such Senior Notes could be adversely affected.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Senior Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent
of (i) such Senior Notes or a book-entry confirmation of a book-entry transfer
of the Senior Notes into the Exchange Agent's account at The Depository Trust
Company ("DTC"); (ii) the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees;
and (iii) any other documents required by the Letter of Transmittal. Holders
of the Senior Notes desiring to tender such Senior Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company and the Exchange Agent are under no duty to give notification of
defects or irregularities with respect to the tenders of Senior Notes for
exchange. See "The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Senior Notes, the Company entered into
the Registration Rights Agreement with the Placement Agents, pursuant to which
the Company agreed to file and to use its best efforts to cause to become
effective with the Commission a registration statement with respect to the
exchange of the Senior Notes for Exchange Notes with terms identical in all
material respects to the terms of the Senior Notes. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part (the "Registration Statement"). The Exchange
Offer is being made to satisfy the contractual obligations of the Company
under the Registration Rights Agreement.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company that: (i) any Exchange Notes to be received by such
holder will be acquired in the ordinary course of such holder's business; (ii)
such holder has no arrangement or understanding with any person to participate
in a distribution (within the meaning of the Securities Act) of the Exchange
Notes; (iii) such holder is not an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act), or if such holder is an
affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (iv)
such holder has full power and authority to tender, exchange, sell, assign and
transfer the tendered Senior Notes; (v) the Company will acquire good,
marketable and unencumbered title to the tendered Senior Notes, free and clear
of all liens, restrictions, charges and encumbrances; and (vi) the Senior
Notes tendered for exchange are not subject to any adverse claims or proxies.
Each tendering holder also will warrant and agree that such holder will, upon
request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange,
sale, assignment, and transfer of the Senior Notes tendered pursuant to the
Exchange Offer. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Notes, where such Senior Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Senior Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to the
Exchange Offer means any person in whose name the Senior Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any participant in DTC
whose name appears on a security position listing as a holder of Senior Notes
(which, for purposes of the Exchange Offer, include beneficial interests in
the Senior Notes held by direct or indirect participants in DTC and Senior
Notes held in definitive form).
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange $1,000 principal amount of Exchange Notes for each $1,000 principal
amount of Senior Notes properly tendered prior to the Expiration Date and not
properly withdrawn in accordance with the procedures described below. Holders
may tender their Senior Notes in whole or in part in integral multiples of
$1,000 principal amount.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Senior Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
holders of the Exchange Notes will not be entitled to certain rights of
holders of the Senior Notes under the Registration Rights Agreement. The
Exchange Notes will evidence the same indebtedness as the Senior Notes (which
they will replace) and will be issued pursuant to, and entitled to the
benefits of, the Indenture.
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered for exchange. The Company reserves the
right in its sole discretion to purchase or make offers for any Senior Notes
that remain outstanding after the Expiration Date or, as set forth under "--
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Senior Notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer. As of
the date of this Prospectus, $160.0 million aggregate principal amount of
Senior Notes is outstanding.
Holders of Senior Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Senior Notes that are not tendered, or are
tendered but not accepted, in connection with the Exchange Offer will remain
outstanding and continue to accrue interest in accordance with their terms,
but will not retain any rights under the Registration Rights Agreement. See
"Risk Factors--Consequences of a Failure to Exchange Senior Notes."
If any tendered Senior Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Senior Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Senior Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Senior Notes in connection with the Exchange Offer. The Company
will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "--Fees and
Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
SENIOR NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF SENIOR
NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE
OFFER AND, IF SO, THE AGGREGATE AMOUNT OF SENIOR NOTES TO TENDER AFTER READING
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS, AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on June 17,
1998 unless the Exchange Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i)
to delay the acceptance of the Senior Notes for exchange; (ii) to terminate
the Exchange Offer (whether or not any Senior Notes have theretofore been
accepted for exchange) if the Company determines, in its sole and absolute
discretion, that any of the events or conditions referred to under "--
Conditions to the Exchange Offer" has occurred or exists or has not been
satisfied; (iii) to extend the Expiration Date of the Exchange Offer and
retain all Senior Notes tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of Senior Notes to withdraw their tendered
Senior Notes as described under "--Withdrawal Rights;" and (iv) to waive any
condition or otherwise amend the terms of the Exchange Offer in any respect
(whether or not any Senior Notes have theretofore been accepted for exchange).
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, or if the Company waives a material condition of
the Exchange Offer, the Company will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the registered holders
of the Senior
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Notes, and the Company will extend the Exchange Offer to the extent required
by Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
Any such delay in acceptance, termination, extension or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent (any
such oral notice to be promptly confirmed in writing) and by making a public
announcement thereof, and such announcement in the case of an extension will
be made no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Without limiting the manner in
which the Company may choose to make any public announcement, and subject to
applicable laws, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by issuing a
release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes
for Senior Notes validly tendered and not withdrawn (pursuant to the
withdrawal rights described under "--Withdrawal Rights") promptly after the
Expiration Date.
In all cases, delivery of Exchange Notes in exchange for Senior Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) Senior Notes or a book-
entry confirmation of a book-entry transfer of Senior Notes into the Exchange
Agent's account at DTC; (ii) the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees;
and (iii) any other documents required by the Letter of Transmittal.
Accordingly, the delivery of Exchange Notes might not be made to all tendering
holders at the same time, and will depend upon when Senior Notes, book-entry
confirmations with respect to Senior Notes and other required documents are
received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of Senior Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Senior Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent (any such oral notice to be promptly
confirmed in writing) of the Company's acceptance of such Senior Notes for
exchange pursuant to the Exchange Offer. The Company's acceptance for exchange
of Senior Notes tendered pursuant to any of the procedures described above
will constitute a binding agreement between the tendering holder and the
Company upon the terms and subject to the conditions of the Exchange Offer.
The Exchange Agent will act as agent for the Company for the purpose of
receiving tenders of Senior Notes, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
Senior Notes, Letters of Transmittal and related documents and transmitting
Exchange Notes to holders who validly tendered Senior Notes. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever
the acceptance for exchange or the exchange of any Senior Notes tendered
pursuant to the Exchange Offer is delayed (whether before or after the
Company's acceptance for exchange of Senior Notes), or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange Senior Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered Senior Notes and such Senior Notes may not be withdrawn except
to the extent tendering holders are entitled to withdrawal rights as described
under "--Withdrawal Rights."
PROCEDURES FOR TENDERING SENIOR NOTES
Valid Tender. Except as set forth below, in order for Senior Notes to be
validly tendered pursuant to the Exchange Offer, either (i) (a) a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must be
received by the Exchange Agent at the address set forth under "--Exchange
Agent" prior to the Expiration Date and (b) tendered Senior
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Notes must be received by the Exchange Agent, or such Senior Notes must be
tendered pursuant to the procedures for book-entry transfer set forth below
and a book-entry confirmation must be received by the Exchange Agent, in each
case prior to the Expiration Date, or (ii) the guaranteed delivery procedures
set forth below must be complied with.
If less than all of the Senior Notes held by a holder are tendered by such
holder, such holder should fill in the amount of Senior Notes being tendered
in the appropriate box on the Letter of Transmittal. The entire amount of
Senior Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company, in its sole discretion, of such person's
authority to so act must be submitted.
Any beneficial owner of Senior Notes that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
THE METHOD OF DELIVERY OF SENIOR NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE
OBTAINED. NO LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH
HOLDERS.
Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Senior Notes at DTC for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the Senior Notes by causing
DTC to transfer such Senior Notes into the Exchange Agent's account at DTC in
accordance with DTC's procedures for transfers. However, although delivery of
Senior Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees
and any other required documents, must in any case be delivered to and
received by the Exchange Agent at its address set forth under "--Exchange
Agent" prior to the Expiration Date, or the guaranteed delivery procedure set
forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
Signature Guarantees. Certificates for Senior Notes need not be endorsed and
signature guarantees on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are unnecessary unless (a) a certificate for Senior Notes is
registered in a name other than that of the person surrendering the
certificate or (b) a registered holder completes the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal. In the case of (a) or (b) above, such certificates for Senior
Notes must be duly endorsed or accompanied by a properly executed bond power,
with the endorsement or signature on the bond power and on the Letter of
Transmittal or the notice of withdrawal, as the case may be, guaranteed by a
firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an
"eligible guarantor institution," including (as such terms are defined
therein) (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government
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securities broker or dealer; (iii) a credit union; (iv) a national securities
exchange, registered securities association or clearing agency; or (v) a
savings association that is a participant in a Securities Transfer Association
(each an "Eligible Institution"), unless surrendered on behalf of such
Eligible Institution. See Instructions 2 and 5 to the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender Senior Notes pursuant to
the Exchange Offer and the certificates for such Senior Notes are not
immediately available or time will not permit all required documents to reach
the Exchange Agent before the Expiration Date, or the procedures for book-
entry transfer cannot be completed on a timely basis, such Senior Notes may
nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter of
Transmittal, setting forth the name and address of the holder of Senior
Notes and the amount of Senior Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock
Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Senior
Notes, in proper form for transfer, or a book-entry confirmation, as the
case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent. The
Notice of Guaranteed Delivery may be delivered by hand, or transmitted by
facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed
Delivery; and
(iii) the certificates (or book-entry confirmation) representing all
tendered Senior Notes, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange
of any tendered Senior Notes will be determined by the Company, in its sole
discretion, which determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance for exchange of which may, in the view of counsel to the Company,
be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any defect or irregularity
in any tender of Senior Notes of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will
be final and binding on all parties. No tender of Senior Notes will be deemed
to have been validly made until all defects or irregularities with respect to
such tender have been cured or waived. Neither the Company, any affiliates or
assigns of the Company, the Exchange Agent or any other person shall be under
any duty to give any notification of any defects or irregularities in tenders
or incur any liability for failure to give any such notification.
RESALES OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission, as set forth in no-
action letters issued to third parties unrelated to the Company, the Company
believes that holders of Senior Notes (other than any holder that is (i) a
broker-dealer that acquired Senior Notes as a result of market-making
activities or other trading activities or (ii) an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) who exchange their
Senior Notes for Exchange Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery provisions of the
36
<PAGE>
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. Any holder who tenders
Senior Notes in the Exchange Offer with the intention to participate, or for
the purpose of participating, in a distribution of the Exchange Notes or who
is an affiliate of the Company may not rely upon such interpretations by the
staff of the Commission and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Failure to
comply with such requirements in such instance may result in such holder
incurring liabilities under the Securities Act for which the holder is not
indemnified by the Company. The staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter, and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior Notes, where such Senior
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. The Company has agreed that, for a period
not to exceed 180 days after the Expiration Date, it will furnish additional
copies of this Prospectus, as amended or supplemented, to any broker-dealer
that reasonably requests such documents for use in connection with any such
resale. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "--Exchange Agent" prior to
the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the Senior Notes to be withdrawn, the aggregate
principal amount of Senior Notes to be withdrawn, and (if certificates for
such Senior Notes have been tendered) the name of the registered holder of the
Senior Notes as set forth on the Senior Notes, if different from that of the
person who tendered such Senior Notes. If certificates for Senior Notes have
been delivered or otherwise identified to the Exchange Agent, the notice of
withdrawal must specify the certificate number on the particular Senior Notes
to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Senior Notes
tendered for the account of an Eligible Institution. If Senior Notes have been
tendered pursuant to the procedures for book-entry transfer set forth in "--
Procedures for Tendering Senior Notes," the notice of withdrawal must specify
the name and number of the account at DTC to be credited with the withdrawal
of Senior Notes and must otherwise comply with the procedures of DTC.
Withdrawals of tenders of Senior Notes may not be rescinded. Senior Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time prior to the
Expiration Date by following any of the procedures described above under "--
Procedures for Tendering Senior Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates of the Company, the Exchange
Agent or any other person shall be under any duty to give any notification of
any defects or irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Senior Notes which
have been tendered but which are withdrawn will be returned to the holder
thereof promptly after withdrawal.
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes will accrue at the rate of 8 7/8% per annum
and will be payable in cash semi-annually on March 1 and September 1, of each
year, commencing September 1, 1998.
37
<PAGE>
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Senior Notes for any Exchange Notes, and may, at
any time and from time to time, terminate the Exchange Offer or waive any
conditions to or amend the Exchange Offer in any respect (whether or not any
Senior Notes have theretofore been accepted for exchange), if the Exchange
Offer is determined by the Company, in its sole and absolute discretion, to
violate applicable law or any applicable interpretation of the staff of the
Commission.
If such waiver or amendment constitutes a material change to the Exchange
Offer, the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered holders of the Senior
Notes, and the Company will extend the Exchange Offer to the extent required
by Rule 14e-1 under the Exchange Act.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The exchange of the Senior Notes for the Exchange Notes will not be a
taxable exchange for federal income tax purposes, and holders of Senior Notes
should not recognize any taxable gain or loss or any interest income as a
result of such exchange.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Delivery of the Letters of Transmittal and any other
required documents, questions, requests for assistance, and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent as follows:
BY FACSIMILE
(212) 780-0592
Attention: Customer Service
Confirm by telephone: (800) 548-6565
BY MAIL
United States Trust Company of New York
P.O. Box 843
Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
BY HAND BEFORE 4:30 P.M. (E.S.T.)
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level Corporate Trust Window
BY OVERNIGHT COURIER AND BY HAND AFTER 4:30 P.M. (E.S.T.)
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
DELIVERY TO OTHER THAN THE ABOVE ADDRESSES OR FACSIMILE NUMBER WILL NOT
CONSTITUTE A VALID DELIVERY.
38
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail. Additional solicitation may be
made personally or by telephone or other means by officers, directors or
employees of the Company.
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company
has agreed to pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Senior Notes, and in handling or tendering for
their customers.
Holders who tender their Senior Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that if Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Senior Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Senior Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
39
<PAGE>
HISTORY OF THE COMPANY
ITC^DeltaCom was incorporated in Delaware in March 1997 as a wholly owned
subsidiary of ITC Holding to acquire and operate ITC Holding's Retail Services
and Carriers' Carrier Services businesses. The Company acquired such
businesses on July 25, 1997 in the Reorganization.
BACKGROUND
BACKGROUND. ITC Holding began providing operator and directory assistance
services in March 1992 through its subsidiary, Eastern Telecom, Inc., which
did business as InterQuest. Carriers' Carrier Services have been offered since
April 1992 through Interstate FiberNet, a partnership originally formed by ITC
Holding (with a 49% interest) and SCANA (with a 51% interest). In August 1994,
ITC Holding acquired SCANA's interest in Interstate FiberNet through
Transmission II, a wholly owned subsidiary of ITC Holding. Also in August
1994, ITC Holding and SCANA formed a second partnership, Gulf States FiberNet,
to construct and operate a fiber optic route primarily between Atlanta,
Georgia and Shreveport, Louisiana with several supplemental spur routes. In
the 1997 Gulf States Acquisition, ITC Holding acquired SCANA's 64% partnership
interest in Gulf States FiberNet and the Georgia Fiber Assets. Following the
Gulf States Acquisition, ITC Holding contributed the remaining 64% interest in
Gulf States FiberNet to Gulf States Transmission, a wholly owned subsidiary of
ITC Holding, and the Georgia Fiber Assets to Transmission, a wholly owned
subsidiary of ITC Holding. Members of the Company's management have been
managing the businesses of both Interstate FiberNet and Gulf States FiberNet
since their inception.
In January 1996, through the DeltaCom Acquisition, ITC Holding entered the
retail long distance business and acquired several fiber optic routes within
the state of Alabama that complemented the existing networks operated by
Interstate FiberNet (including a fiber optic route from Atlanta, Georgia to
Columbus, Georgia) and Gulf States FiberNet. DeltaCom, a provider of
telecommunications services since its inception in 1982, provides long
distance services to mid-sized businesses primarily in Alabama. In July 1996,
DeltaCom purchased substantially all of the assets of ViperNet, which provides
Internet access, Web-hosting and Web page development services to business
customers.
To finance the DeltaCom Acquisition and to refinance existing DeltaCom debt,
ITC Holding incurred the DeltaCom Indebtedness of approximately $74.0 million,
which was pushed down to the Company. The aggregate consideration paid by ITC
Holding in the Gulf States Acquisition was approximately $27.9 million, of
which $10.0 million consisted of an unsecured note which was repaid in
November 1997, and $17.9 million consisted of ITC Holding preferred stock. In
connection with the Gulf States Acquisition, Gulf States Transmission borrowed
$41.6 million under the Bridge Facility with NationsBank, N.A., to refinance a
project loan incurred by Gulf States FiberNet.
1997 SENIOR NOTES OFFERING; REDEMPTION. On June 3, 1997, the Company
completed the 1997 Senior Notes Offering of $200.0 million principal amount of
its 11% Senior Notes due 2007. The net proceeds from the sale of the 1997
Senior Notes, other than the portion of such proceeds invested in U.S.
government securities pledged to secure and fund the first six scheduled
interest payments on the 1997 Senior Notes, were released to the Company in
July 1997 in connection with the Reorganization described below. On April 2,
1998, the Company redeemed $70.0 million principal amount of the 1997 Senior
Notes with proceeds remaining from the Equity Offering described below, at an
aggregate redemption price of 111% of such principal amount, plus accrued and
unpaid interest of approximately $2.6 million.
REORGANIZATION. On July 25, 1997, ITC Holding contributed to the Company in
a series of transactions the businesses of Interstate FiberNet, Gulf States
FiberNet, DeltaCom and InterQuest. In connection with such transactions,
approximately $31.0 million of the $74.0 million of the DeltaCom Indebtedness
was forgiven by ITC Holding and contributed to the Company as additional
equity. Following the Reorganization, the Company repaid the remaining $43.0
million of the DeltaCom Indebtedness, accrued interest on all $74.0 million of
such indebtedness and the $41.6 million of indebtedness outstanding under the
Bridge Facility and accrued interest
40
<PAGE>
thereon with a portion of the net proceeds from the 1997 Senior Notes
Offering. On October 20, 1997, as part of a reorganization of the ITC Holding
group of companies, ITC Holding transferred all of its assets (other than its
stock in the Company) and all of its liabilities to another entity (which is
now called ITC Holding Company, Inc.) and then merged with and into the
Company, which was the surviving corporation in the merger. On December 31,
1997, Gulf States Transmission merged with and into Interstate FiberNet, Inc.,
a wholly owned subsidiary of the Company.
INITIAL PUBLIC OFFERING. On October 29, 1997, the Company completed the
Equity Offering of Common Stock in which it issued 5,750,000 shares at a price
of $16.50 per share. On April 2, 1997, the Company used $77.7 million of the
net proceeds of the Equity Offering to fund the Redemption. See "--1997 Senior
Notes Offering; Redemption."
SENIOR NOTES OFFERING; MODIFICATION OF CREDIT FACILITY. On March 3, 1998,
the Company completed the sale at a price of 99.9% of $160.0 million principal
amount of its 8 7/8% Senior Notes due 2008. Additionally, the Company has
modified the Credit Facility to, among other things, reduce available
borrowings from $100.0 million to $50.0 million. See "--Description of Certain
Indebtedness."
The following chart reflects the organizational structure of the Company
following the Reorganization:
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
x x
x ITC/\DELTACOM, INC. x
x x
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
x
x
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
x x
x INTERSTATE FIBERNET, INC. x
x (FORMERLY TRANSMISSION, TRANSMISSION II, INTERQUEST x
x INTERSTATE FIBERNET AND GULF STATES TRANSMISSION SYSTEMS, INC. x
x x
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
x
x
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
x x
x ITC/\DELTACOM COMMUNICAITONS, INC. x
x (FORMERLY DELTACOM, INC.) x
x x
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
41
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain obligations of the Company
under the Registration Rights Agreement. The Company will not receive any
proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive, in exchange, an equal number of Senior
Notes in like principal amount. The form and terms of the Exchange Notes will
be identical in all material respects to the form and terms of the Senior
Notes, except as otherwise described herein under "The Exchange Offer--Terms
of the Exchange Offer."
The net proceeds to the Company from the sale of the Senior Notes were
approximately $155.3 million, after deducting the estimated underwriting
discounts and commissions and other expenses payable by the Company. The
Company intends to use the net proceeds from the Senior Notes Offering,
together with cash on hand and borrowings expected to be available under the
Credit Facility, as follows: (i) to fund market expansion activities of the
Company's telecommunications business, including development and construction
costs of the Company's fiber optic network and its regional branch offices;
and (ii) for additional working capital and other general corporate purposes.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." The Company currently intends
to allocate substantial proceeds to each of the foregoing uses. The precise
allocation of funds among these uses, however, will depend on future
technological, regulatory and other developments in or affecting the Company's
business, the competitive climate in which it operates and the emergence of
future opportunities.
As part of its business strategy, the Company intends to continue to
evaluate potential acquisitions, joint ventures and strategic alliances in
areas such as wireline and wireless services, network construction and
infrastructure and Internet access. The Company has no definitive agreement
with respect to any acquisition (other than the acquisition of PSP Marketing
Group, Inc., d/b/a IT Group Communications Company, as described in Note 17 to
the Consolidated Financial Statements), although from time to time it has
discussions with other companies and assesses opportunities on an ongoing
basis. A portion of the net proceeds from the Senior Notes Offering may be
used to fund any such acquisitions, joint ventures and strategic alliances.
Pending the foregoing uses, the net proceeds of the Senior Notes Offering
have been invested in short-term, interest-bearing, investment grade
securities.
42
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1997, (i) the actual
consolidated capitalization of the Company; (ii) the Redemption, and (iii) the
pro forma consolidated capitalization of the Company as adjusted for the
Senior Notes Offering. The data set forth below should be read in conjunction
with "History of the Company," "Use of Proceeds," "Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and notes thereto and the other
financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA CONSOLIDATED
CONSOLIDATED CONSOLIDATED (A) AS ADJUSTED (B)
------------ ---------------- ---------------
<S> <C> <C> <C>
Long term debt and capital lease
obligations:
Capital lease obligations, in-
cluding current portion of
$605,155..................... $ 3,249,424 $ 3,249,424 $ 3,249,424
1997 Senior Notes............. 200,000,000 130,000,000 130,000,000
Senior Notes ................. -- -- 159,840,000
Other, including current por-
tion of $306,882............. 640,112 640,112 640,112
------------ ------------ ------------
Total long-term debt and
capital lease obligations,
including current portion.. 203,889,536 133,889,536 293,729,536
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.01 par
value, 5,000,000 shares
authorized; 1,480,771 shares
issued and outstanding at
December 31, 1997, pro forma
and pro forma adjusted,
respectively................. 14,808 14,808 14,808
Common Stock, $.01 par value,
90,000,000 shares authorized;
24,817,556 shares issued and
outstanding at December 31,
1997, pro forma and pro forma
adjusted, respectively (c)... 248,176 248,176 248,176
Additional paid-in capital.... 163,011,879 163,011,879 163,011,879
Accumulated deficit........... (15,009,336) (23,445,506) (23,445,506)
------------ ------------ ------------
Total stockholders' equity.. 148,265,527 139,829,357 139,829,357
------------ ------------ ------------
Total capitalization........ $352,155,063 $273,718,893 $433,558,893
============ ============ ============
</TABLE>
- --------
(a) Includes the Redemption, including an extraordinary loss on the early
retirement of debt of approximately $10.6 million ($8.4 million net of
tax). Excludes any potential borrowings under the Credit Facility. See
"Description of Certain Indebtedness--Credit Facility."
(b) Includes the Senior Notes Offering.
(c) Excludes 5,130,111 shares of common stock issuable upon the exercise of
options outstanding as of December 31, 1997.
43
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for the
Company. The selected historical statement of operations data for each of the
years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the selected
historical balance sheet data for the years then ended, have been derived from
the consolidated financial statements that have been audited by Arthur Andersen
LLP, independent public accountants.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1993(A) 1994(A)(B) 1995 1996(C) 1997(D)(E)
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues...... $ 636,913 $ 4,945,902 $ 5,750,587 $ 66,518,585 $114,589,998
----------- ----------- ----------- ------------ ------------
Operating expenses:
Cost of services...... 578,206 2,484,744 3,149,231 38,756,287 54,550,348
Selling, operations,
and administration
expense.............. 235,627 948,230 1,626,678 18,876,572 38,254,893
Depreciation and amor-
tization............. 47,068 738,052 1,267,882 6,438,074 18,332,451
----------- ----------- ----------- ------------ ------------
Total operating ex-
penses............. 860,901 4,171,026 6,043,791 64,070,933 111,137,692
Operating income (loss). (223,988) 774,876 (293,204) 2,447,652 3,452,306
Equity in income (loss-
es) of unconsolidated
subsidiaries........... 360,257 (96,920) (258,242) (1,589,812) 0
Interest expense........ 0 (273,759) (297,228) (6,172,421) (21,367,351)
Interest and other
income (other expense). (826) 82,348 41,734 171,514 4,251,088
----------- ----------- ----------- ------------ ------------
Income (loss) before
taxes, preacquisition
earnings (losses) and
extraordinary item..... 135,443 486,545 (806,940) (5,143,067) (13,663,957)
Income tax provision
(benefit).............. 54,582 113,248 (302,567) (1,233,318) (3,324,466)
Preacquisition earnings
(losses)............... 0 (236,300) 0 0 74,132
Extraordinary item (net
of tax benefit)........ 0 0 0 0 (507,515)
----------- ----------- ----------- ------------ ------------
Net income (loss)....... $ 80,861 $ 136,997 $ (504,373) $ (3,909,749) $(10,772,874)
=========== =========== =========== ============ ============
Basic and diluted net
income (loss) per com-
mon share:
Before extraordinary
loss................. $ 0.00 $ 0.01 $ (0.03) $ (0.20) $ (0.51)
Extraordinary loss.... 0.00 0.00 0.00 0.00 (0.03)
----------- ----------- ----------- ------------ ------------
Net income (loss)....... $ 0.00 $ 0.01 $ (0.03) $ (0.20) $ (0.54)
=========== =========== =========== ============ ============
Basic weighted average
common shares
outstanding(f)......... 19,053,675 19,053,675 19,053,675 19,053,675 20,124,908
Diluted weighted average
common shares
outstanding(f)......... 19,101,926 19,101,926 19,101,926 19,101,926 20,124,908
BALANCE SHEET DATA:
Working capital (defi-
cit)................... $ 382,562 $ 254,988 $ (242,136) $ 3,415,088 $116,445,515
Total assets............ 6,294,266 20,062,286 20,922,337 113,207,979 386,104,477
Long-term debt, advances
from ITC Holding and
capital lease obliga-
tions, including cur-
rent portions.......... 797,288 4,013,977 3,143,977 75,442,971 203,889,536
Stockholders' equity.... 4,737,090 13,761,409 14,307,036 19,256,526 148,265,527
OTHER FINANCIAL DATA:
Capital expenditures.... 531,187 3,703,835 1,805,742 6,172,660 43,873,990
Cash flows provided by
operating activities... 33,667 978,775 1,437,317 8,188,618 6,302,123
EBITDA (g).............. (176,920) 1,512,928 974,678 8,885,726 21,784,757
Ratio of earnings to
fixed charges(h)....... N/A 2.65x -- -- --
</TABLE>
(Footnotes appear on following page.)
44
<PAGE>
- --------
(a) Through August 17, 1994, the Company owned a 49% interest in Interstate
FiberNet and accounted for this investment under the equity method. On
August 17, 1994, the Company purchased the remaining 51% interest in
Interstate FiberNet. Therefore, Interstate FiberNet's revenues and
expenses have been included in the consolidated statement of operations
data effective January 1, 1994, with the preacquisition earnings
attributable to the previous owner deducted to determine the Company's
consolidated net income for 1994.
(b) On August 17, 1994, the Company entered into the Gulf States FiberNet
partnership. The Company obtained a 36% general partnership interest, and
the investment was accounted for under the equity method. See Note 5 to
the financial statements.
(c) On January 29, 1996, the Company purchased DeltaCom. DeltaCom's results of
operations are included in the historical statement of operations data
since the date of acquisition. See Note 13 to the financial statements.
(d) On March 27, 1997, the Company purchased the Georgia Fiber Assets. The
results of operations for the Georgia Fiber Assets are included in the
consolidated statements of operations beginning March 27, 1997. See Note
15 to the financial statements.
(e) On March 27, 1997, the Company purchased the remaining 64% partnership
interest in Gulf States FiberNet. Gulf States FiberNet's revenues and
expenses have been included in the consolidated statement of operations
effective January 1, 1997 with the preacquisition losses attributable to
the previous owner from January 1, 1997 through March 27, 1997 deducted to
determine the Company's consolidated net loss for the year ended December
31, 1997. See Note 15 to the financial statements.
(f) Pursuant to SAB 98, for periods prior to the completion of the Equity
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
anti-dilutive. For 1997, the effect of the Company's potential common
stock equivalents is not included in the computation of diluted net loss
per share as their effect is anti-dilutive.
(g) EBITDA represents earnings before extraordinary item, preacquisition
(earnings) losses, equity in losses of unconsolidated subsidiaries, net
interest, income taxes, depreciation and amortization. EBITDA is provided
because it is a measure commonly used in the industry. EBITDA is not a
measurement 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 flow as a measure of liquidity. EBITDA
is not necessarily comparable with similarly titled measures for other
companies.
(h) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consist of interest charges and amortization of debt issuance
costs and the portion of rent expense under operating leases representing
interest (estimated to be one-third of such expense). Earnings were
insufficient to cover fixed charges for the years ended December 31, 1995,
1996 and 1997 by $.8 million, $5.1 million and $13.7 million,
respectively.
45
<PAGE>
RECENT DEVELOPMENTS
Summarized below are certain selected financial data of the Company for the
three months ended March 31, 1998 and 1997 and balance sheet data as of March
31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
OPERATING REVENUES
Retail........................................ $ 25,582,562 $19,538,523
Carriers' Carrier............................. 11,111,940 5,884,055
------------ -----------
Total operating revenues...................... 36,694,502 25,422,578
COST OF SERVICES
Retail........................................ 15,662,140 11,293,248
Carriers' Carrier............................. 1,211,401 904,073
------------ -----------
Total cost of services........................ 16,873,541 12,197,321
------------ -----------
GROSS MARGIN................................... 19,820,961 13,225,257
OPERATING EXPENSES:
Selling, operations, and administration:
Retail........................................ 10,054,642 6,164,429
Carriers' Carrier............................. 3,512,316 1,724,415
------------ -----------
Total selling, operations and administration.. 13,566,958 7,888,844
Depreciation and amortization:
Retail........................................ 2,193,760 1,487,139
Carriers' Carrier............................. 4,106,517 2,355,550
Corporate Segment............................. 20,424 --
------------ -----------
Total depreciation and amortization........... 6,320,701 3,842,689
------------ -----------
Total operating expenses...................... 19,887,659 11,731,533
------------ -----------
OPERATING INCOME (LOSS)....................... (66,698) 1,493,724
------------ -----------
OTHER INCOME (EXPENSES):
Interest expense.............................. (7,498,422) (3,467,314)
Interest and other income..................... 2,833,680 24,497
Other expenses................................ (2,290,814) --
------------ -----------
Total other expense........................... (6,955,556) (3,442,817)
------------ -----------
LOSS BEFORE INCOME TAXES, PREACQUISITION LOSSES
AND EXTRAORDINARY ITEM........................ (7,022,254) (1,949,093)
INCOME TAX BENEFIT............................. (2,387,567) (575,528)
------------ -----------
LOSS BEFORE PREACQUISITION LOSSES AND EXTRAOR-
DINARY ITEM................................... (4,634,687) (1,373,565)
PREACQUISITION LOSSES.......................... -- 74,132
------------ -----------
LOSS BEFORE EXTRAORDINARY ITEM................. (4,634,687) (1,299,433)
EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISH-
MENT OF DEBT (LESS RELATED
INCOME TAX BENEFIT OF $2,133,154)............. (8,436,170) --
------------ -----------
NET LOSS....................................... $(13,070,857) $(1,299,433)
============ ===========
BASIC AND DILUTED NET LOSS PER SHARE:
Before extraordinary items.................... $ (0.18) $ (0.07)
Extraordinary item............................ (0.34) (0.00)
------------ -----------
Net loss...................................... $ (0.52) $ (0.07)
============ ===========
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTAND-
ING........................................... 25,095,029 19,053,675
DILUTED WEIGHTED AVERAGE COMMON SHARES OUT-
STANDING...................................... 25,095,029 19,101,926
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------ ---------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $236,741,779 $94,373,610
Current assets, less restricted portion......... 267,578,953 122,416,014
Restricted assets............................... 51,432,845 50,495,831
Property, plant and equipment, net.............. 158,822,692 141,534,626
Other assets (excluding restricted assets)...... 72,904,695 71,658,006
Total assets.................................... 550,739,185 386,104,477
Current liabilities............................. 50,263,884 27,970,499
Long-term debt and capital lease obligations.... 362,664,062 202,977,499
Other long-term liabilities..................... 1,926,749 6,890,952
Total liabilities............................... 414,854,695 237,838,950
Stockholders' equity............................ 135,884,490 148,265,527
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures............................ $ 22,041,206 $ 3,791,318
Net cash flows provided by operating
activities..................................... 9,701,566 3,748,227
Net cash flows provided by (used in) investing
activities..................................... (22,965,880) 3,216,718
Net cash flows provided by financing
activities..................................... 155,632,483 385,635
EBITDA.......................................... 6,254,003 5,336,413
</TABLE>
For the quarter ended March 31, 1998, the Company reported revenue growth of
44.5%, to $36.7 million in the first quarter of 1998 from $25.4 million in the
first quarter of 1997. EBITDA was reported at $6.3 million for the first
quarter of 1998 compared to $5.3 million for the first quarter of 1997.
Carriers' Carrier segment revenue for the first quarter of 1998 was $11.1
million, an increase of 88.1% over the first quarter of 1997 revenue of $5.9
million.
Retail Services segment revenue for the first quarter of 1998 was $25.6
million, an increase of 31.3% over the first quarter of 1997 revenue of $19.5
million.
The Company completed its initial roll out of competitive local exchange
services during the first quarter of 1998, completing local product
introduction in the remaining five of its planned 14 southeastern markets.
Local services were introduced in the first quarter in Columbus, Georgia;
Columbia, South Carolina; Pensacola, Florida; and New Orleans and Baton Rouge,
Louisiana. The Company sold an additional 7,400 local lines and completed the
provision of 7,300 local lines bringing the totals to 16,000 local lines sold
and 10,800 local lines in service.
The Company completed a $160 million private offering of 8 7/8% Senior Notes
due 2008, at a price of 99.9%, yielding net proceeds of approximately $155
million. The Company intends to use 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
due 2007, at a redemption price of 111%, (ii) to fund the Company's continued
expansion, and (iii) to replace funds that would otherwise have been available
under the Company's secured credit facility which was modified to, among other
things, reduce available borrowings thereunder from $100 million to $50
million. In connection with this early extinguishment of debt, the Company
recorded an extraordinary loss of approximately $10.6 million ($8.4 million,
net of tax benefit) and a nonrecurring expense of approximately of $2.3
million.
On March 18, 1998, the Company announced the acquisition of IT Group
Communications Company, a Jackson, Mississippi-based long distance carrier.
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.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS 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, INCLUDING
THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS, AS WELL AS FACTORS WHICH MAY BE IDENTIFIED FROM TIME TO TIME
IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE COMPANY HAS INCLUDED EBITDA DATA IN THE FOLLOWING ANALYSIS BECAUSE IT IS
A MEASURE COMMONLY USED IN THE INDUSTRY. EBITDA REPRESENTS EARNINGS BEFORE
EXTRAORDINARY ITEM, PREACQUISITION LOSSES, EQUITY IN LOSSES OF UNCONSOLIDATED
SUBSIDIARIES, NET INTEREST, 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. DOLLAR AMOUNTS OVER $1 MILLION HAVE BEEN ROUNDED TO ONE DECIMAL
PLACE AND DOLLAR AMOUNTS LESS THAN $1 MILLION HAVE BEEN ROUNDED TO THE NEAREST
THOUSAND.
OVERVIEW
COMPANY BACKGROUND. The Company was incorporated in March 1997 as a wholly
owned subsidiary of ITC Holding to acquire and operate ITC Holding's Retail
Services and Carriers' Carrier Services businesses. As discussed in Note 1 to
the financial statements, this reorganization has been accounted for in a
manner similar to a pooling of interests.
The Company has provided operator and directory assistance services since
March 1992 through InterQuest. Carriers' Carrier Services have been offered
since late 1992 through Interstate FiberNet, a partnership originally formed
by ITC Holding (with a 49% interest) and SCANA (with a 51% interest). In
August 1994, ITC Holding acquired SCANA's interest in Interstate FiberNet.
Also in August 1994, ITC Holding formed a second partnership with SCANA, Gulf
States FiberNet, to construct and operate a fiber optic route primarily
between Atlanta, Georgia and Shreveport, Louisiana with several supplemental
spur routes. In the Gulf States Acquisition, ITC Holding acquired SCANA's 64%
partnership interest in Gulf States FiberNet and the Georgia Fiber Assets,
which included one customer contract representing $3.5 million in annual
revenues through August 2001, the term of the contract. Members of the
Company's management have been managing the businesses of both Interstate
FiberNet and Gulf States FiberNet since their inception. In 1995, the Company
began offering Signaling System 7 Services ("SS7") to its Carriers' Carrier
customers.
In January 1996, as a result of the DeltaCom Acquisition, the Company
entered the retail long distance business and acquired several fiber optic
routes within Alabama that complemented the existing networks operated by
Interstate FiberNet and Gulf States FiberNet. DeltaCom, a provider of
telecommunications services since its inception in 1982, provides long
distance services to mid-sized businesses primarily in Alabama.
REVENUES. The Company derives revenues primarily from two business segments:
(i) Retail Services, which encompass the retail sale of local, long distance,
data, and Internet services and the sale and installation of customer premise
equipment to mid-sized and major regional business customers and certain
switched services telecommunications companies, and (ii) Carriers' Carrier
Services, which encompass the sale of long-haul private
48
<PAGE>
line services on a wholesale basis to other telecommunications companies,
using the Company's owned and managed fiber optic network, and operator and
directory assistance services.
The Company currently offers a wide range of Retail Services, including
retail long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, ATM and frame
relay, high capacity broadband private line, as well as Internet, Intranet and
Web page hosting and development services, and customer premise equipment
installation and repair. Since January 1996, the Company has expanded its
retail long distance operations into the following markets: Pensacola and
Jacksonville, Florida; Atlanta and Columbus, Georgia; Charlotte, North
Carolina; Greenville and Columbia, South Carolina; and New Orleans and Baton
Rouge, Louisiana. As of December 31, 1997, the Company provided Retail
Services to over 7,700 business customers and approximately 7,100 residential
customers. Such residential customers represented less than 5% of the
Company's revenues during 1997.
The Company offers local exchange services as part of its Retail Services in
a majority of its markets. Although the Company's local exchange services
offerings are in the very early stages, initial expressions of customer
interest in such services have been positive, consistent with management's
expectations. However, there can be no assurance that demand for the Company's
local services will match such preliminary indications of customer interest.
The Company currently offers local exchange services in 11 of the 15 markets
to which it provides Retail Services.
In connection with offering local exchange services, the Company has entered
into the Interconnection Agreement with BellSouth to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of gaining immediate access to all of
BellSouth's unbundled network elements. This agreement allows the Company to
enter new markets with minimal capital expenditures and to offer local
exchange service to its current customer base. The Interconnection Agreement
currently allows the Company to provide local service on a resale basis or by
purchasing all unbundled network elements required to provide local service on
a facilities basis, without using Company-owned facilities. The terms of the
Interconnection Agreement, including interim pricing terms agreed to by the
Company and BellSouth, have been approved by state regulatory authorities in
all states in which BellSouth operates, although they remain subject to review
and modification by such authorities. In addition, the Interconnection
Agreement does not resolve all operational issues, which issues the Company
and BellSouth are continuing to negotiate to resolve. The Company believes
that the Interconnection Agreement provides a foundation for it to provide
local service on a reasonable commercial basis, but there can be no assurance
in this regard and important issues remain unsettled as a result of legal and
regulatory developments and related matters. The Interconnection Agreement
expires in July 1999, and there can be no assurance that the Company will be
able to renew it under favorable terms or at all.
The Company's strategy is ultimately to offer facilities-based local service
in certain established markets by collocating its equipment with that of
BellSouth which will enable the Company to purchase fewer unbundled network
elements. The Company expects that it will be able to begin providing local
service to such markets in the second quarter of 1998 by using its own
facilities and network, as supplemented by BellSouth's unbundled network
elements. The Company and BellSouth have finalized the terms of an agreement
with respect to the collocation of the Company's equipment with BellSouth in
certain markets in which the Company has an existing base of long distance
customers. BellSouth has been experiencing certain central office space
limitations, however, resulting in delays in completing arrangements for
physical collocation of Company equipment.
The Company anticipates that an increasing portion of its revenue will be
derived from local services, primarily those provided pursuant to the
Interconnection Agreement with BellSouth and similar agreements with other
local exchange carriers. Management expects that gross margin associated with
local Retail Services will be slightly better than gross margin associated
with long distance Retail Services, but that, in general, gross margin
associated with Retail Services will be lower than that associated with
Carriers' Carrier Services. There can be no assurance that the Company will be
able to enter into additional interconnection agreements on terms acceptable
to the Company or at all, or that the incumbent local exchange carriers will
provide the operational support required for the Company to provide local
services to end users.
49
<PAGE>
As the Company begins to offer local service on a facilities rather than
resale basis, it will begin to sell switched access and termination services
to carriers terminating calls to its local end user customers, and originating
switched access to long distance companies where the end users choose a
carrier other than the Company for that service. Certain incumbent local
exchange companies, including BellSouth, have taken the position that when a
carrier seeking to provide local service obtains all necessary elements (loops
and switches) from the incumbent local exchange carrier in a combined form,
the incumbent local exchange carrier retains the right to receive the access
revenues associated with service to the customers served on that basis.
Although a recent Eighth Circuit decision appears to reject this position,
further legal challenges are likely and important issues related to this form
of interconnection remain open.
The Company provides Carriers' Carrier Services using its owned and managed
fiber optic network, which reaches over 60 POPs in ten southern states
(Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Texas). Of the network's approximately 6,300
route miles, approximately 3,300 are Company-owned and operated and
approximately 3,000 are owned and operated principally by three public
utilities (Duke Power Company, Florida Power & Light Company and Entergy
Technology Company) with which the Company has marketing and management
arrangements. The Company's arrangement with Entergy is exclusive. In
addition, the Company has a buy-sell agreement with Carolinas Fibernet, LLC,
which manages fiber optic facilities in North Carolina and South Carolina.
This agreement enables the parties to buy and sell capacity on each other's
networks and allows the Company to provide customers with access to POPs
throughout those states. In addition, as part of its strategy, the Company
intends to continue to evaluate the potential expansion of its network through
a combination of new construction, long-term dark fiber leases and fiber swap
transactions, depending on the extent of capital required over the economic
life of the fiber assets to be deployed. To the extent that the Company elects
to expand its network through long-term leases in lieu of construction or
fiber swap transactions, the Company expects such leases to have a negative
effect on EBITDA; however, the Company expects any such expansion of its
network would provide opportunities to generate additional revenues, which
would partly offset such negative effects.
The Company derives commission revenues from the marketing, sale and
management of capacity on the utility-owned portions of the Company's network.
Negligible incremental costs are associated with these commissions, because
the Company uses the same marketing and sales force in servicing the utility-
owned portions of the network as it does for the portions owned by the
Company. In 1996, the Company's commission revenues from these arrangements
amounted to approximately $170,000 because, although the utility-owned
portions owned by Duke Power Company began generating revenues in late 1995,
the portions owned by Florida Power & Light Company and Entergy Technology
Company began generating revenues in late 1996. For the year ended December
31, 1997, the Company's commission revenues from these arrangements amounted
to approximately $1,533,000. The Company expects commissions associated with
the utility-owned portions of the network to continue to increase in 1998.
The Company provides long-haul services to its carrier customers on a "take
or pay" long-term basis, on an individual circuit basis, or on a month-to-
month basis after the initial term of the "take or pay" or individual circuit
contract. As of December 31, 1997, the Company had remaining future long-term
contract commitments totaling approximately $77.9 million. These contracts
expire on various dates through 2006 and are expected to generate
approximately $58.2 million in revenues to the Company through 2001. No single
Carriers' Carrier Services customer or Retail Services customer represented
over 10% of the Company's total revenues for the year ended December 31, 1997.
Although the Company expects that a majority of its revenue growth will come
from its Retail Services business, the Company does not expect its Retail
Services to obtain a significant share of the market for telecommunications
services in the southern United States. The customer contracts for Retail
Services generally provide for payment in arrears based on minutes of use for
switched services and payment in advance for private line services. The
contracts generally also provide that the customer may terminate the affected
services without penalty in the event of certain outages in service, and for
certain other defined causes. The contracts also typically provide that the
customer must use at least a minimum dollar amount of switched long distance
services per
50
<PAGE>
month for the term of the contract. During the past several years, market
prices for many telecommunications services segments have been declining,
which the Company believes will likely continue. In response to these and
other competitive pressures, the Company recently modified certain of its
retail contracts to extend to certain customers lower rates over longer terms
as a means of maintaining and developing the Company's customer base. In the
future, in response to competitive considerations, the Company may decide to
modify certain other retail customer contracts in a similar manner,
emphasizing lower pricing and longer commitment periods. A substantial portion
of the Company's total revenues are from retail long distance services.
Revenue per minute from such services has been declining and is expected to
continue to decline. This decline will have a negative effect on the Company's
gross margin which may not be offset completely by savings from decreases in
the Company's cost of services.
Operating Expenses. The Company's principal operating expenses consist of
cost of services, selling, operations and administration expenses, and
depreciation and amortization. Cost of services related to Retail Services
consists primarily of access charges and local facility charges paid to local
exchange carriers, as well as wholesale carrier origination, termination and
interexchange facility charges paid to other interexchange carriers. Cost of
services related to Carriers' Carrier Services are substantially all fixed
costs attributable to (i) the leasing of dark fiber under long-term operating
leases, (ii) the leasing of capacity outside the Company's owned or managed
network (off-net capacity) to meet customer requirements, (iii) labor
associated with operator services and (iv) network costs associated with the
provision of SS7 Services. The Company purchases off-net capacity to provide
Carriers' Carrier Services in cases where the Company plans to construct its
own network to replace the off-net portion of certain fiber routes. The
Company also purchases off-net capacity in connection with an existing
customer contract, pursuant to which the Company is the exclusive provider of
network capacity to such customer. Although the Company is substantially able
to meet the requirements of such customer on the Company's network, the
Company purchases off-net capacity to fill such customer's requirements that
cannot be met on the Company's network. Selling, operations and administration
expenses consist of expenses of selling and marketing, field personnel engaged
in direct network maintenance and monitoring, customer service and corporate
administration. Depreciation and amortization include depreciation of the
Company's telecommunications network and equipment and amortization of
goodwill and other intangible assets related to acquisitions, primarily the
DeltaCom Acquisition.
As the Company continues to expand into new geographic markets, add new
branch offices and facilities and enlarge its current product offerings to
include local telephone and other services, cost of services and selling,
operations and administration expenses are expected to increase substantially.
Therefore, the Company expects to incur increasing operating losses over the
next few years. Although the Company anticipates that it will continue to
generate positive cash flow from operations, it expects that such cash flows
will be more than offset by capital expenditures during the next several years
as it implements its business plan. The Company also expects that the addition
of local service to its bundle of telecommunications services will have an
adverse impact on its gross margin, because the gross margin on the resale of
local services through incumbent local exchange carrier facilities will be
lower than the gross margin on the Company's existing businesses. As the
Company increasingly uses incumbent local exchange carrier unbundled network
elements instead of resold services, the Company expects gross margin on local
service to improve. Such improvement is expected to result from reduced access
charges and from efficiencies realized through increased reliance on the
Company's owned network. Such improved margins, however, could be offset by
competitive market pressures to reduce prices for Retail Services, as
discussed above. There can be no assurance that growth in the Company's
revenues or customer base will continue or that the Company will be able to
achieve or sustain profitability or positive net cash flows. In addition, the
Company may from time to time engage in discussions involving potential
acquisitions, joint venture or strategic alliances. Depending upon the
circumstances, the Company may not disclose material acquisitions until
completion of a definitive agreement. Any significant transaction, shortfalls
in anticipated revenue, or increases in expenses could have a material adverse
effect on the Company's liquidity and capital resources and on its ability to
meet its strategic objectives, and could require the Company to seek
additional private or public equity or debt financing. There can be no
assurance that the Company will be able to raise any such capital on terms
acceptable to the Company or at all.
51
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth certain historical financial data for the
years ended December 31, 1995, 1996 and 1997 for the Carriers' Carrier
Services business and for the year ended December 31, 1996 and 1997 for the
Retail Services business.
The comparability of the historical financial data for the year ended
December 31, 1996 and 1997 has been affected by the DeltaCom Acquisition and
the Gulf States Acquisition. The historical financial statements for the year
ended December 31, 1996 include the results of operations for DeltaCom since
its acquisition on January 29, 1996. For the year ended December 31, 1996, the
Company's 36% interest in Gulf States FiberNet's results of operations is
reflected using the equity method. Due to the Gulf States Acquisition on March
27, 1997, the results of operations for the year ended December 31, 1997
reflect the total revenues and expenses from January 1, 1997 attributable to
Gulf States FiberNet with the preacquisition losses attributable to the
previous owner from January 1, 1997 through March 27, 1997, deducted to
determine the Company's consolidated net loss. The results of operations for
the year ended December 31, 1997 also reflect the revenues and expenses of
Georgia Fiber since March 27, 1997.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CARRIERS' CARRIER SERVICES
------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 % 1996 % 1997 %
---------- --- ---------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $5,750,587 100% $6,598,709 100% $31,024,054 100%
Cost of services............. 3,149,231 55 2,363,073 36 3,908,202 13
---------- ---------- -----------
Gross margin................. 2,601,356 45 4,235,636 64 27,115,852 87
---------- ---------- -----------
Selling, operations and ad-
ministration................ 1,626,678 28 1,826,420 28 8,401,158 27
Depreciation and amortiza-
tion........................ 1,267,882 22 1,656,685 25 12,077,349 39
---------- ---------- -----------
Total operating expenses..... 2,894,560 50 3,483,105 53 20,478,507 66
---------- ---------- -----------
Operating income (loss)...... $ (293,204) (5) $ 752,531 11 $ 6,637,345 21
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
RETAIL SERVICES
---------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
1996 % 1997 %
----------- --- ----------- ---
<S> <C> <C> <C> <C>
Revenues..................................... $59,919,876 100% $83,565,944 100%
Cost of services............................. 36,393,214 61 50,642,146 61
----------- -----------
Gross margin................................. 23,526,662 39 32,923,798 39
----------- -----------
Selling, operations and administration....... 17,050,152 28 29,853,735 36
Depreciation and amortization................ 4,781,389 8 6,255,102 7
----------- -----------
Total operating expenses..................... 21,831,541 36 36,108,837 43
----------- -----------
Operating income (loss)...................... $ 1,695,121 3 $(3,185,039) (4)
=========== ===========
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues
Total revenue increased $48.1 million (72.3%), from $66.5 million for the
year ended December 31, 1996 to $114.6 million for the year ended December 31,
1997. Revenues from Retail Services increased $23.7 million (39.6%), from
$59.9 million for the year ended December 31, 1996 to $83.6 million for the
year ended December 31, 1997. Results for the year ended December 31, 1996
exclude revenue of $5.3 million related to revenues earned before the
acquisition of DeltaCom, Inc. on January 29, 1996. The increase in the Retail
Services
52
<PAGE>
segment revenue was primarily attributable to continued geographic expansion
through the opening of branch sales offices, continued product expansion
through sales of new products to existing customers, and continuing low rates
of customer revenue turnover (churn). Revenues from Carriers' Carrier Services
increased $24.4 million (370%), from $6.6 million for the year ended December
31, 1996 to $31.0 million for the year ended December 31, 1997. Results for
the year ended December 31, 1997 reflect $19.8 million of revenues related to
revenues earned by Gulf States FiberNet in 1997. Gulf States FiberNet was not
consolidated in the Company's 1996 financial statements. The increase in
revenue for the Carriers' Carrier segment was primarily attributable to
continued increasing demand for bandwidth, continued owned and operated route
expansions and the continued growth in the managed, monitored, and marketed
routes.
Cost of Services
Total cost of services increased $15.8 million, from $38.8 million for the
year ended December 31, 1996 to $54.6 million for the year ended December 31,
1997. Cost of services for Retail Services operations increased $14.2 million,
from $36.4 million for the year ended December 31, 1996 to $50.6 million for
the year ended December 31, 1997. Cost of services for the Carriers' Carrier
operations increased $1.5 million, from $2.4 million for the year ended
December 31, 1996 to $3.9 million for the year ended December 31, 1997. The
cost of services as a percentage of revenue for Retail Services operations
remained consistent at a rate of approximately 61%. The cost of services as a
percentage of revenue for Carriers' Carrier operations, 13% in 1997 vs. 36% in
1996, decreased significantly due to the acquisition of Gulf States FiberNet
in March 1997 and the increased margins associated with this line of business.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $19.4
million, from $18.9 million (28% as a percentage of revenue) for the year
ended December 31, 1996 to $38.3 million (33% as a percentage of revenue) for
the year ended December 31, 1997. Selling, operations and administration
expense attributable to Retail Services increased $12.7 million, from $17.1
million (29% as a percentage of revenue) for the year ended December 31, 1996
to $29.9 million (36% as a percentage of revenue) for the year ended December
31, 1997. 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 $6.6 million, from $1.8 million (28% as a
percentage of revenue) for the year ended December 31, 1996 to $8.4 million
(27% as a percentage of revenue) for the year ended December 31, 1997. The
increase in selling, operations, and administration expense for the Carrier's
Carrier segment relate specifically to an increase in personnel stemming from
the geographic expansion and various costs associated with those personnel.
Selling, operations, and administration expenses are expected to continue to
increase as a percentage of revenue during 1998 and early 1999, due to the
continued expansion of the Retail Services segment, both geographically and in
terms of products offered. By mid-1999, such expansion is expected to be
substantially completed, and selling, operations and administration expenses
are expected to improve as a percentage of revenue.
Depreciation and Amortization
Total depreciation and amortization increased $11.9 million, from $6.4
million for the year ended December 31, 1996 to $18.3 million for the year
ended December 31, 1997. Retail Services accounted for $1.5 million of the
increase, which was primarily related to installation of new central office
equipment. Carriers' Carrier Services' operations accounted for $10.4 million
of the increase, with $8.2 million related to the acquisition of Gulf States
FiberNet.
Interest Expense
Total interest expense increased $15.2 million, from $6.2 million for the
year ended December 31, 1996 to $21.4 million for the year ended December 31,
1997. The increase in interest expense was primarily due to interest expense
incurred on the 1997 Senior Notes.
53
<PAGE>
Income Taxes
As a result of tax sharing arrangements with ITC Holding, the Company
received benefits for certain of its net operating losses. The benefit
received as a percentage of taxable income was 24.3% and 24.0% for the years
ended December 31, 1996 and 1997, respectively.
EBITDA
EBITDA increased $12.9 million, from $8.9 million for the year ended
December 31, 1996 to $21.8 million for the year ended December 31, 1997.
Carriers' Carrier Services accounted for $16.3 million of the increase. EBITDA
attributable to Retail Services for the year ended December 31, 1997 was $3.1
million compared to $6.5 million for the year ended December 31, 1996. EBITDA
attributable to Retail Services decreased from 11% of revenues for the year
ended December 31, 1996 to 4% of revenues for the year ended December 31,
1997, primarily due to increased costs associated with the opening of new
branch offices and the employment of additional support personnel to position
the Retail Services segment for expansion. The Company expects EBITDA for
Retail Services to continue to decline at least through 1998 as the Company
opens additional branch offices and expands its offerings of local service.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues
Revenues increased from $5.8 million in 1995 to $66.5 million in 1996. The
$60.7 million increase was primarily attributable to revenues of $59.9 million
generated by DeltaCom since it was acquired on January 29, 1996. Revenues from
Carriers' Carrier Services increased approximately $800,000 in 1996 (15%),
primarily due to the growth in new SS7 Services and directory assistance
products and growth in demand for Carriers' Carrier Services.
Cost of Services
Cost of services increased from $3.1 million in 1995 to $38.8 million in
1996. DeltaCom's operations accounted for $36.4 million of this increase.
Carriers' Carrier Services accounted for a decrease of $700,000 primarily due
to intersegment eliminations related to its utilization of DeltaCom's network
infrastructure.
Selling, Operations and Administration Expense
Selling, operations and administration expense increased from $1.6 million
in 1995 to $18.9 million in 1996. DeltaCom's operations accounted for $17.1
million of the increase. Carriers' Carrier Services accounted for $200,000 of
the increase.
Depreciation and Amortization
Depreciation and amortization expense increased from $1.3 million in 1995 to
$6.4 million in 1996. Of this $5.1 million increase, $4.8 million was
attributable to DeltaCom, including $1.3 million of intangible amortization on
$54.6 million of intangibles pushed down to the Company. See "--Effects of
Accounting Standards." Carriers' Carrier Services accounted for $300,000 of
the increase as a result of additional capital expenditures made for the
provision of SS7 Services, capital expenditures associated with the Company's
network management systems required to support the various management and
marketing agreements with various utilities, and small electronic overbuilds
on existing network segments.
Other Income (Expense)
Other expense increased from $200,000 in 1995 to $1.4 million in 1996. The
Company's share of Gulf States FiberNet's partnership losses accounted for
$1.3 million of this increase, which was partially offset by a $100,000
increase in other interest and miscellaneous income. Gulf States FiberNet
began full operations in late
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1995 and, accordingly, the effect of a full year of operations was not
reflected until 1996. Gulf States FiberNet recorded a pretax loss of $4.4
million in 1996, compared to a pretax loss of $700,000 in 1995. As of
December 31, 1995 and 1996, the Company owned 36% of Gulf States FiberNet and
recorded losses of $300,000 and $1.6 million, respectively, from such
interest.
Interest Expense
Interest expense increased from $300,000 in 1995 to $6.2 million in 1996.
The increase was primarily attributable to the increase in the Company's
aggregate indebtedness resulting from the $74.0 million of DeltaCom
Indebtedness. See "--Effects of Accounting Standards." The Company incurred
interest expense of $5.8 million related to such indebtedness in 1996.
EBITDA
EBITDA increased from $1.0 million in 1995 to $8.9 million in 1996. DeltaCom
accounted for $6.5 million and Carriers' Carrier Services accounted for $1.4
million of the increase. The increased EBITDA attributable to Carriers'
Carrier Services is a result of an increase in revenues with minimal increases
in associated variable costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow from operations
from its existing lines of business, but has required equity infusions and
advances from ITC Holding to finance a significant portion of its investing
and financing activities. In addition, during 1997, the Company generated
approximately $192.1 million and $87.5 million in net proceeds from the 1997
Senior Notes Offering and the Equity Offering, respectively, and in March
1998, generated approximately $155.0 million in net proceeds from the Senior
Notes Offering. The Company generated net cash from operating activities of
$1.4 million, $8.2 million, and $6.3 million for 1995, 1996 and 1997,
respectively. The components of cash flow from operations (consisting of net
loss adjusted for depreciation, amortization, deferred income taxes, equity in
losses of investee, preacquisition losses, extraordinary item-loss on
extinguishment of debt and other) totaled $1.5 million, $4.7 million, and
$11.3 million for 1995, 1996 and 1997, respectively. Changes in working
capital were ($42,000) in 1995, $3.5 million in 1996 and ($5.0 million) in
1997. The change in 1996 was primarily due to an increase in accrued interest,
accounts payable and unearned revenue, partially offset by an increase in
accounts receivable resulting primarily from the DeltaCom Acquisition. For
1997, such changes were primarily due to increases in unearned revenue and
accrued liabilities, offset by increases in accounts receivable. Of this
increase in accounts receivable and unearned revenue, $2.3 million and $1.3
million, respectively, resulted from the Gulf States Acquisition, with the
remaining increase in accounts receivable attributable to increased earned and
unearned revenue in the Carriers' Carrier Services and Retail Services.
Cash used for investing activities was $1.5 million, $72.7 million, and
$93.9 million for the years ended December 31, 1995, 1996 and 1997,
respectively. The cash used in 1996 was primarily attributable to the
investment of $63.5 million, net of cash received, in connection with the
DeltaCom Acquisition in January 1996. The cash used in 1997 was primarily
attributable to the purchase of restricted investments held by a trustee to
fund the first six interest payments on the 1997 Senior Notes, as required by
the 1997 Note Indenture, and to fund capital expenditures. The Company made
capital expenditures of $1.8 million, $6.2 million, and $43.9 million for the
years ended December 31, 1995, 1996 and 1997, respectively. Of the $6.2
million of capital expenditures in 1996, $4.1 million related to Retail
Services and $2.1 million related to Carriers' Carrier Services. In addition,
the Company contributed an additional $2.4 million to Gulf States FiberNet in
1996 to meet debt service requirements and to fund additional capital
requirements of that business. Of the $43.9 million of capital expenditures
for the year ended December 31, 1997, $27.5 million related to Carriers'
Carrier Services and $16.4 million related to Retail Services.
Cash provided by financing activities was $200,000, $65.1 million, and
$180.6 million for the years ended December 31, 1995, 1996 and 1997,
respectively. For 1996, cash provided by financing activities was primarily
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attributable to the DeltaCom Indebtedness, which was advanced to the Company
by ITC Holding. See "--Effects of Accounting Standards." Net cash provided by
financing activities for the year ended December 31, 1997 consisted primarily
of net proceeds of $192.1 million from the sale of the 1997 Senior Notes and
$87.5 million from the Equity Offering, less $43.2 million of repayment of
advances from ITC Holding, net repayments of other long-term debt and capital
leases of $52.6 million and $3.3 million of other cash used in financing
activities.
ITC Holding partially financed the DeltaCom Acquisition and the Gulf States
Acquisition with debt, which consisted of the following: (i) a $74.0 million
term loan under a bank facility incurred in connection with the DeltaCom
Acquisition and pushed down to the Company (the DeltaCom Indebtedness); (ii) a
$41.6 million Bridge Facility incurred in connection with the Gulf States
Acquisition, which required the refinancing of Gulf States FiberNet's existing
project facility; and (iii) a $10.0 million unsecured note issued in
connection with the Gulf States Acquisition and assumed by a subsidiary of the
Company. In November 1997, this note was repaid in full (approximately $9.0
million) with a portion of the net proceeds from the Equity Offering.
On July 25, 1997, in connection with the Reorganization, approximately $62.7
million of the $192.1 million of net proceeds from the sale of the 1997 Senior
Notes was used to purchase U.S. government securities. The U.S. government
securities are being held by the 1997 Senior Notes trustee in a pledged
account to fund the first six scheduled interest payments on the 1997 Senior
Notes. The balance of the net proceeds from the 1997 Senior Notes Offering,
approximately $129.4 million, was released to the Company. A portion of the
released proceeds was applied on July 25, 1997 as follows: (i) to repay
approximately $57.8 million of indebtedness to ITC Holding (including
approximately $9.5 million of accrued interest) associated with the DeltaCom
Acquisition and advances used by the Company for capital expenditures; and
(ii) to repay approximately $41.6 million of indebtedness incurred under the
Bridge Facility (together with approximately $200,000 of accrued interest). In
connection with the Reorganization, $31.0 million of the DeltaCom Indebtedness
was forgiven by ITC Holding and contributed to the Company as additional
equity.
In September 1997, Interstate FiberNet, Inc., a wholly owned subsidiary of
the Company, entered into a credit agreement with NationsBank of Texas, N.A.
for a five-year $100.0 million term and revolving credit facility to be used
for working capital and other corporate purposes, including refinancing
existing indebtedness, capital expenditures and permitted acquisitions. In
February 1998, the Company amended the Credit Facility, among other things, to
provide for a $50.0 million revolving credit facility. See "Business--
Description of Certain Indebtedness." The Company recorded a pre-tax loss of
approximately $2.5 million in connection with the reclassification of the
Company's interest rate swap agreement converting a hedge of an anticipated
transaction to a trading security as a result of the Senior Notes Offering
described below. See Note 17 to the Consolidated Financial Statements for
further discussion of this interest rate swap agreement. The Credit Facility
contains restrictions on Interstate FiberNet, Inc. and its subsidiaries and
requires Interstate FiberNet, Inc. to comply with certain financial tests and
to maintain certain financial ratios. The Credit Facility is guaranteed by the
Company and DeltaCom and is secured by a first priority lien on all current
and future assets of Interstate FiberNet, Inc. and its subsidiaries and a
first priority pledge of the stock of Interstate FiberNet, Inc. and its
subsidiaries.
On October 29, 1997, the Company completed the Equity Offering in which it
issued 5,750,000 shares of Common Stock at a price of $16.50 per share. On
March 3, 1998, the Company completed the Senior Notes Offering, generating net
proceeds of approximately $155.0 million. On April 2, 1998, the Company
redeemed $70.0 million principal amount of the 1997 Senior Notes in the
Redemption, with proceeds remaining from the Equity Offering, at a redemption
price of 111% of such principal amount, plus accrued and unpaid interest of
approximately $2.6 million. The Company recorded a pre-tax extraordinary loss
of approximately $10.6 million related to the early redemption of this debt.
In connection with the Redemption, the trustee for the 1997 Senior Notes
released to the Company approximately $18.0 million held by the trustee as
security for the payment of remaining interest through June 1, 2000 on the
redeemed 1997 Senior Notes. See "Business--Description of Certain
Indebtedness--1997 Senior Notes."
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To achieve its business plan, the Company will need significant financing
for capital expenditure and working capital requirements, including repayment
of indebtedness and operating losses. Expansion of the Company's network,
operations and services will require significant capital expenditures. At
December 31, 1997, the Company had entered into agreements with vendors to
purchase approximately $9.8 million of equipment and services, and, for the
year ended December 31, 1997, had made capital expenditures of $43.9 million.
The Company currently estimates that its aggregate capital requirements will
total approximately $155.0 million in 1998 and 1999, of which a total of
approximately $105.0 million is expected to be incurred in 1998 and
approximately $50.0 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), or in the event the Company decides to make acquisitions or
enter into joint ventures and strategic alliances in the Company's industry.
See "Business--Risk Factors--Significant Capital Requirements; Uncertainty of
Additional Financing."
Although the Company's liquidity has improved, the Company's level of
indebtedness and debt service obligations significantly increased as a result
of the 1997 Senior Notes Offerings and the Senior Notes Offering. 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. 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. The Company is currently unable to predict the extent to which the
Year 2000 issue will affect its internal systems, or those of its vendors and
third party network service providers. Any failure by the Company, such
vendors or third party network service providers to resolve any Year 2000
issues on a timely basis, or in a manner that is compatible with the Company's
systems, could have a material adverse effect on the Company. Although the
Company may incur substantial costs, particularly costs resulting from charges
by its vendors or third party network service providers, in correcting Year
2000 issues, such costs cannot currently be estimated. Additionally, such
costs will be expensed as incurred, which will have a negative effect on
current operating results.
EFFECTS OF ACCOUNTING STANDARDS
SFAS No. 121, SFAS No. 123 and SFAS No. 128. Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to Be Disposed Of, issued by the
Financial Accounting Standards Board, requires the Company to review for
impairment, and potentially write down, the carrying values of long-lived
assets and certain identifiable intangibles (including goodwill) to be held
and used by the Company whenever events or changes in circumstances indicate
that the
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carrying amount of any such asset may not be recoverable. The Company adopted
SFAS No. 121, effective January 1, 1996, with no material impact on the
consolidated financial statements.
SFAS No. 123, Accounting for Stock-Based Compensation, establishes a fair
market value based method for financial accounting and reporting stock-based
employee compensation plans. Companies may elect to adopt the measurement
criteria of SFAS No. 123 for accounting purposes, thereby recognizing
compensation expense in results of operations on a prospective basis, or to
disclose the pro forma effects of the new measurement criteria. The Company
has elected to disclose the pro forma effects of the new measurement criteria.
See Note 9 to the consolidated financial statements.
SFAS No. 128, Earnings Per Share, which was adopted on December 31, 1997,
establishes new guidelines for the calculation and presentation of earnings
per share. In February 1998, the Commission issued SAB No. 98, on computations
of earnings per share in an initial public offering. SAB No. 98 revised prior
Commission guidance including earnings per share computations in periods prior
to an initial public offering, to reflect the requirements of SFAS No. 128.
SAB No. 98 was effective immediately upon issuance and the Company has
restated its earnings per share for periods prior to its initial public
offering. This restatement increased basic and diluted net loss per share by
$.01 and $.02 for the years ended December 31, 1995 and 1996, respectively.
"Push Down" of Assets and Liabilities Related to the Acquisitions. ITC
Holding financed the cash purchase price for the DeltaCom Acquisition of
approximately $65.4 million and related debt refinancing of approximately $8.6
million principally with debt. The DeltaCom Acquisition was accounted for
under the purchase method of accounting. In accordance with applicable
accounting requirements of the Commission, purchase transactions that result
in one entity becoming substantially wholly owned by the acquiror establish a
new basis of accounting for the purchased assets and liabilities. Thus, the
purchase price for the DeltaCom Acquisition has been allocated to the
underlying assets purchased and liabilities assumed based on their estimated
fair market values at January 29, 1996, the acquisition date. Because the
DeltaCom Acquisition was recorded as a purchase, generally accepted accounting
principles require that the purchase price paid and the debt incurred by ITC
Holding for the DeltaCom Acquisition (and the related assets) be "pushed down"
to establish a new accounting basis in DeltaCom's financial statements so that
the basis of accounting for the purchased assets and liabilities is the same
between ITC Holding and DeltaCom. This accounting treatment is also required
because the Company used a portion of the proceeds of the 1997 Senior Notes
Offering to repay a significant portion of the debt incurred by ITC Holding to
finance the DeltaCom Acquisition. Similarly, the purchase price and debt
associated with the Gulf States Acquisition was also "pushed down" to the
financial statements of Interstate FiberNet and Gulf States Transmission.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
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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
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 in a single package tailored to the business
customer's specific needs. The Company had revenues of approximately $66.5
million for the year ended December 31, 1996 and revenues of approximately
$114.6 million for the year ended December 31, 1997.
The Company provides Carriers' Carrier Services to other telecommunications
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, LCI,
Frontier and IXC. The Company's fiber optic network reaches over 60 POPs in
ten southern states (Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Texas) and extends
approximately 6,300 route miles, of which approximately 3,300 miles are
Company-owned and approximately 3,000 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. For
the year ended December 31, 1997, revenue for the Company's Carriers' Carrier
Services was $31.0 million and EBITDA Margin for the Company's Carriers'
Carrier Services was 60%. As of December 31, 1997, the Company had remaining
future long-term contract commitments for Carriers' Carrier Services totaling
approximately $77.9 million. These contracts expire on various dates through
2006 and are expected to generate approximately $58.2 million in revenues to
the Company through 2001, of which approximately $18.0 million are expected to
be realized in 1998.
The Company currently provides a variety of Retail Services, including
retail long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, ATM, frame
relay, high capacity broadband private line services, as well as Internet,
Intranet and Web page hosting and development services, and customer premise
equipment installation and repair. The Company also offers local exchange
services as part of its Retail Services in a majority of its markets. As of
December 31, 1997, the Company provided Retail Services to over 7,700 business
customers. The Company currently offers Retail Services in 15 metropolitan
areas (including local exchange services in 11 markets) in Alabama, Florida,
Georgia, Louisiana, North Carolina and South Carolina. The Company intends to
provide a full range of Retail Services in a total of approximately 35
metropolitan areas throughout the southern United States over the next five
years. For the year ended December 31, 1997, revenue for the Company's Retail
Services was $83.6 million and EBITDA Margin for the Company's Retail Services
was 4%.
In connection with offering local exchange services, the Company has entered
into the Interconnection Agreement with BellSouth to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of immediately gaining access to all of
BellSouth's unbundled network elements. This agreement allows the Company to
enter new markets with minimal capital expenditures and to offer local
exchange services to its current customer base. The Interconnection Agreement
currently allows the Company to provide local service on a resale basis or by
purchasing all unbundled network elements required to provide local service on
a facilities basis, without using Company-owned facilities. The terms of the
Interconnection Agreement, including interim pricing terms agreed to by the
Company and BellSouth, have been approved by state regulatory authorities in
all states in which BellSouth operates, although they remain subject to review
and modification by such authorities. In addition, the Interconnection
Agreement does not resolve all operational issues, which issues the Company
and BellSouth are continuing to negotiate to resolve. The Company believes
that the Interconnection Agreement provides a foundation for it to provide
local services on a reasonable commercial basis, but there can be no assurance
in this regard and important issues remain unsettled as a result of legal and
regulatory developments and related matters. The Interconnection Agreement
expires in July 1999, and there can be no assurance that the Company will be
able to renew it under favorable terms, or at all.
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ITC^DeltaCom was incorporated in Delaware. The Company's principal executive
offices are located at 1241 O.G. Skinner Drive, West Point, Georgia 31833, and
its telephone number is (706) 645-3880.
INDUSTRY OVERVIEW
The long distance and local telecommunications markets are currently
undergoing substantial changes, including fundamental changes resulting from
the February 8, 1996 enactment of the Telecommunications Act, and the Company
believes that it is well positioned to take advantage of these developments.
LONG DISTANCE SERVICES. Until 1984, AT&T largely monopolized local and long
distance telephone services in the United States. Technological developments
gradually enabled others to compete with AT&T in the long distance market. In
1984, largely as the result of a court decree, AT&T was required to divest its
local telephone systems but was permitted to retain its long distance
operations. Since 1984, competition in the long distance market has increased,
service levels have improved, product offerings have increased and prices for
long distance services have generally declined, all of which has resulted in
increased consumer demand and significant market growth for long distance
services. The increase in competition among long distance providers has also
resulted in a growing trend toward industry consolidation.
LOCAL SERVICES. The market for local exchange services consists of a number
of distinct service components. These service components are defined by
specific regulatory tariff classifications including: (i) local network
services, which generally include basic dial tone, enhanced calling features
and data services (dedicated point-to-point and frame relay service); (ii)
network access services, which consist of access provided by local exchange
carriers to long distance network carriers; (iii) short-haul long distance
network services, which include intraLATA long distance calls; and (iv) other
varied services, including the publication of "white page" and "yellow page"
telephone directories. Industry sources have estimated that the 1996 aggregate
revenues of all local exchange carriers approximated $100 billion. Until
recently, there was virtually no competition in the local exchange markets.
Since 1984, several factors have served to promote competition in the local
exchange market, including: (i) rapidly growing customer demand for an
alternative to the local exchange carrier monopoly, spurred partly by the
development of competitive activities in the long distance market; (ii)
advances in the technology for transmission of data and video, which require
significant capacity and reliability levels; (iii) the development of fiber
optics and digital electronic technology, which reduced network construction
costs while increasing transmission speeds, capacity and reliability as
compared to copper-based networks; (iv) the significant access charges
interexchange carriers are required to pay to local exchange carriers to
access the local exchange carriers' networks; and (v) a willingness on the
part of legislators to enact and regulators to enforce legislation and
regulations permitting and promoting competition in the local exchange market.
In particular, the Telecommunications Act requires all local exchange carriers
to "unbundle" their local network offerings and allow other providers of
telecommunications services to interconnect with their facilities and
equipment. Most significantly, the incumbent local exchange carriers will be
required to complete local calls originated by the Company's customers and
switched by the Company and to deliver inbound local calls to the Company for
termination to its customers, assuring customers of unimpaired local calling
ability. The Company expects to obtain access to incumbent carrier local
"loop" facilities (the transmission lines connecting customers' premises to
the public telephone network) on an unbundled basis at reasonable rates. In
addition, local exchange carriers are obligated to provide local number
portability and dialing parity upon request and make their local services
available for resale by competitors. Local exchange carriers also are required
to allow competitors non-discriminatory access to local exchange carrier pole
attachments, conduit space and other rights-of-way. Moreover, states may not
erect "barriers to entry" of local competition, although they may regulate
such competition. The Company believes that, as a result of continued
regulatory and technological changes and competitive trends, competitive local
telecommunications companies have substantial opportunities for growth.
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BUSINESS STRATEGY
The Company's objectives are to maintain its leadership position in the
provision of Carriers' Carrier Services and to become a leading provider of
Retail Services in the southern United States. The Company intends to increase
its market share in existing markets and expand into new markets. The
principal elements of the Company's business strategy include the following:
PROVIDING INTEGRATED TELECOMMUNICATIONS SERVICES TO ITS EXISTING BASE OF
MID-SIZED AND MAJOR REGIONAL BUSINESS CUSTOMERS. By providing additional
telecommunications services such as local telephone service to its existing,
well-established base of long distance customers, the Company expects to be
able to increase revenues at relatively low incremental cost. The Company
believes that bundling a variety of telecommunications services and presenting
customers with one fully integrated monthly billing statement for all of those
services will allow it to penetrate its target markets rapidly and build
customer loyalty. The Company believes that there is substantial demand in its
target markets among mid-sized and major regional business customers for an
integrated package of telecommunications services that meets all of their
telecommunications needs.
LEVERAGING ITS EXTENSIVE FIBER OPTIC NETWORK. The Company intends to
leverage its extensive fiber optic network, which currently reaches over 60
POPs, by (i) continuing to provide switched and transport services to other
communications carriers throughout its region to enable such carriers to
diversify their routes and expand their networks; (ii) targeting customers
that need to transmit large amounts of data within the Company's service
region, such as banks and local and state governments; and (iii) offering
local exchange services to its business customers as part of its integrated
package of telecommunications services. The Company intends initially to
provide local exchange services by reselling the services of incumbent local
exchange carriers and, in some established markets, using its own local
switching facilities. Over time, the Company expects to provide local services
primarily using the Company's own switching facilities and existing regional
fiber optic network, supplemented by unbundled facilities of incumbent local
exchange carriers or other competitive local exchange carriers. The
configuration of the Company's network enables the Company to expand its
network by installing additional remote local switches, which operate in
conjunction with the Company's Nortel DMS-500 switches to provide facilities-
based local services. Because remote local switches are less expensive to
purchase and install than Nortel DMS-500 switches, and can be installed more
quickly than Nortel DMS-500 switches, the Company believes that it will be
able to enter new markets at less expense than many of its competitors. At
present, the Company does not plan to construct intra-city local loop
facilities.
FOCUSING ON THE SOUTHERN UNITED STATES. The Company intends to continue to
focus on the southern United States in order to leverage its extensive
telecommunications network in the region. The Company believes that its
regional focus will enable it to take advantage of economies of scale in
management, network operations and sales and marketing. The regional
concentration of the Company's network also provides an opportunity for
improved margins because a high portion of the Company's customers'
telecommunications traffic originates and terminates within the region. The
Company also believes that its regional focus will enable it to build on its
long-standing customer and business relationships in the region.
BUILDING MARKET SHARE THROUGH PERSONALIZED CUSTOMER SERVICE. The Company
believes that the key to revenue growth in its target markets is capturing and
retaining customers by emphasizing marketing, sales and customer service.
Management believes that customers prefer one company to be accountable for
their telecommunications services, and that a consultative, face-to-face sales
and service strategy is the most effective method of acquiring and maintaining
a high quality customer base. The Company seeks to obtain long-term
commitments from its business customers by responding rapidly and creatively
to their telecommunications needs. The Company currently operates 16 branch
offices in 15 markets in Alabama, Florida, Georgia, Louisiana, North Carolina
and South Carolina. Each branch office is staffed by personnel capable of
marketing all of the Company's products and providing comprehensive support to
the Company's customers. In the future, the Company expects to expand
significantly its direct sales force and open branch offices in additional
major and secondary population centers in the southern United States.
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EXPANDING ITS FIBER OPTIC NETWORK AND SWITCHING FACILITIES. The Company
expects to expand its fiber optic telecommunications network and switching
facilities to include additional markets within the southern United States.
The Company currently owns and operates approximately 3,300 route miles of
fiber optic network extending from Georgia to Texas. The Company also markets
and manages capacity on 3,000 additional network route miles through its
strategic relationships principally with public utilities. In addition, the
Company has a buy-sell agreement with Carolinas Fibernet, LLC, which manages
fiber optic facilities in North Carolina and South Carolina. This agreement
enables the parties to buy and sell capacity on each other's networks and
allows the Company to provide customers with access to POPs throughout those
states. The Company believes that, by continuing to combine its owned network
with the networks of public utilities and by adding switching facilities
throughout its network, it will be able to achieve capital efficiencies and
rapidly expand its network in a cost-effective manner.
LEVERAGING PROVEN MANAGEMENT TEAM. The Company's management team consists of
experienced telecommunications managers who in the past have successfully
implemented a customer-focused long distance telecommunications strategy in
the southern United States. Members of the team include Andrew Walker, Chief
Executive Officer of the Company, Foster McDonald, President of the Company,
and Douglas Shumate, Chief Financial Officer of the Company.
SERVICES AND FACILITIES
SERVICES. The Company currently provides two basic services: (i) Retail
Services and (ii) Carriers' Carrier Services.
RETAIL SERVICES. Retail Services involve the provision of voice, data or
video telecommunications services to end users or resellers. The Company
currently provides several types of Retail Services, including basic long
distance services (switched, dedicated, and calling card), dedicated Internet
access, data network solutions (frame relay, ATM, point-to-point), local
exchange services and the sale and installation of customer premise equipment.
The Company intends to provide additional types of Retail Services in the
future and expand the markets in which it offers local services as part of a
bundled "one-stop" integrated telecommunications service which will offer
customers a wide range of switch-based value-added services. The Company's
customer-focused software and network architecture permits the Company to
present its customers with one fully integrated monthly billing statement for
the entire package of Retail Services.
Set forth below are brief descriptions of the Company's Retail Services:
Local Services. The Company currently provides local exchange services by
reselling the services of incumbent local exchange carriers. Over time, the
Company expects to provide local services primarily using the Company's own
switching facilities and existing regional fiber optic network,
supplemented by unbundled facilities of incumbent local exchange carriers
or other competitive local exchange carriers. The Company offers local
exchange services in 11 of the 15 markets in which it currently provides
Retail Services and expects to offer local services in a total of 21
markets by the end of 1998.
In connection with offering local services, the Company has entered into
the Interconnection Agreement with BellSouth to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of immediately gaining access to the
unbundled network elements necessary to provide local exchange services.
The Interconnection Agreement contains "most favored nation" provisions
which grant the Company the right to obtain the benefit of any arrangements
entered into during the term of the Interconnection Agreement between
BellSouth and any other carrier that materially differ from the rates,
terms or conditions of the Interconnection Agreement. Under the
Interconnection Agreement, each party may resell one or more unbundled
network elements of the other party at agreed upon prices set forth in the
Interconnection Agreement. In addition, each party is required to pay for
the interconnection trunks needed to terminate traffic into the other
party's local network, with the costs of certain two-way interconnection
trunks and ports to be shared by the Company and BellSouth.
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The Interconnection Agreement has a term of two years beginning July 1,
1997, and requires the parties to begin to negotiate renewal terms by July
1, 1998 for interconnection commencing July 1, 1999. The Company and
BellSouth have begun negotiations to renew the terms of the Interconnection
Agreement. In the event the parties fail to agree on such renewal terms,
they have agreed to operate under the existing terms, pending a
determination of new terms by a state commission.
Long Distance. The Company offers a full range of retail long distance
services, including traditional switched and dedicated long distance,
800/888 calling, international, calling card and operator services.
Data Services. The Company provides high quality data services to its
customers primarily using frame relay switches distributed strategically
throughout the Company's network, which enables customers to use a single
network connection to communicate with multiple sites throughout the
Company's fiber optic network. The Company currently provides ATM services
on a resale basis. Beginning in the third quarter of 1998, the Company
intends to offer ATM services on its own network, providing data services
to customers that need to transmit large amounts of data within the
Company's service region, such as banks and local and state governments.
The Company will continue to seek, through strategic business relationships
with other providers, to interconnect its fiber optic network with the
fiber optic networks of other companies. The Company anticipates increased
demand for data services in the future, and expects that in the future a
larger percentage of its revenues will be derived from the sale of
dedicated data services.
Internet Access, Intranet Services and Web Development. Since its
acquisition in 1996 of substantially all of the assets of ViperNet, an
Internet access provider and Web page developer for business customers, the
Company has provided dedicated (frame relay) Internet access and Intranet
services, electronic mail, Web page design and Web hosting services. The
Company expects that mid-sized and larger businesses will require faster
Internet access and larger bandwidth in the future, and intends to offer
products that will meet that demand.
Customer Premise Equipment. The Company sells and installs customer
premise equipment such as telephones, office switchboard systems and, to a
lesser extent, private branch exchanges (PBX) for customers in the
Huntsville, Mobile, Birmingham, Dothan and Montgomery, Alabama and
Greenville, South Carolina markets. The Company intends to offer customer
premise equipment sales and installation in additional markets in the
future, with the goals of (i) enhancing and supporting the Company's sale
of local and long distance services and (ii) enhancing customer retention.
The Company plans to form relationships with local customer premise
equipment installation companies in all of its markets for the purpose of
selling and installing customer premise equipment not otherwise provided by
the Company.
CARRIERS' CARRIER SERVICES. The Company's Carriers' Carrier Services are
used by customers, such as major telecommunications carriers and non-
facilities based carriers that have switches but do not own transmission
facilities, to transport their already-switched traffic between LATAs. Calls
being transmitted over a long-haul circuit for a customer are generally routed
by the customer through a switch to a receiving terminal in the Company's
network. The Company transmits the signals over a long-haul circuit to the
terminal where the signals are to exit the Company's network. The signals are
then routed by the customer through another switch and to the call recipient
through a local exchange carrier. The Company provides DS-1, DS-3 and OC-N
services. OC-N services are used by the Company's customers for very high
capacity inter-city connectivity and specialized high speed data networking.
The interface between the Company's network and the customer's facilities is
by either local exchange carrier or a direct connection between the Company's
network and the facilities of the customer. The Company typically bills the
customers a fixed monthly rate depending on the capacity and length of the
circuit, regardless of the amount the circuit is actually used.
FACILITIES. The Company owns or manages approximately 6,300 route miles of a
high quality fiber optic network which covers portions of ten states in the
southern United States and extends to over 60 POPs. These POPs are located in
almost all major population centers in the areas covered by the fiber optic
network and in a significant number of smaller cities where the Company's only
competitor is the incumbent local exchange carrier.
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The Company owns approximately 3,300 route miles of its fiber optic network,
which the Company has built or acquired since 1992. In addition, the Company
has strategic relationships principally with three public utilities, Duke
Power Company, Florida Power & Light Company and Entergy Technology Company,
pursuant to which the Company markets, sells and manages capacity on
approximately 3,000 route miles of network owned and operated by the
utilities.
In addition, the Company is able to purchase network capacity to certain
cities not covered by the Company's owned and managed network in North
Carolina and South Carolina pursuant to a buy-sell agreement with Carolinas
Fibernet, LLC, which manages fiber optic facilities in North Carolina and
South Carolina. This agreement enables the parties to buy and sell capacity on
each other's networks at pre-established prices which are generally favorable
to the prices for such capacity available in the open market. Under this
agreement, neither party is responsible for network maintenance charges
relating to the other party's network.
The Company expects to add approximately 800 owned and operated route miles
to its fiber optic network by the end of 1998 through long-term dark fiber
leases. In addition, as part of its strategy, the Company intends to continue
to evaluate the potential expansion of its network through a combination of
new construction, long-term dark fiber leases and fiber swap transactions,
depending on the extent of capital required over the economic life of the
fiber assets to be deployed.
The Company's decision to further expand its fiber optic network will be
based on various factors, including: (i) the number of its customers in a
market; (ii) the anticipated operating cost savings associated with such
construction; and (iii) any strategic relationships with owners of existing
infrastructure (e.g., utilities and cable operators). Through its strategic
relationships with public utility companies, the Company believes that it will
be able to achieve capital efficiencies in constructing and expanding its
fiber optic network in a rapid and cost-effective manner. The Company also
believes that its fiber optic network, in combination with its personalized
approach to customer service, will create an attractive customer-focused
platform for the provision of local, long distance and enhanced services.
The Company has implemented electronic redundancy throughout its network,
which enables traffic to be rerouted to another fiber in the same fiber sheath
in the event of a partial fiber cut or electronic failure. Approximately 50%
of the Company's owned and operated fiber optic network is also protected by
geographically diverse routing, a network design (also called a "self healing
ring") which enables traffic to be rerouted to an entirely different fiber
optic cable (assuming capacity is available) in the event of a total cable
cut. The Company is continuing to increase the geographic diversity of its
fiber optic network, and expects to have 80% of its network protected in this
manner by the first quarter of 1999.
The Company's switching facilities currently consist of Nortel DMS 500
switches in Birmingham, Alabama and Columbia, South Carolina and a Nortel DMS
250 switch in Arab, Alabama. The Arab switch is capable of handling long
distance switching and the Birmingham and Columbia DMS 500 switches are
capable of handling both local and long distance switching. These
installations enable the Company to market its Retail Services, including
local services, on a switch-based facilities basis in, among other markets,
Huntsville, Birmingham and Montgomery, Alabama; Greenville, Columbia and
Charleston, South Carolina; Charlotte, North Carolina; and Atlanta, Georgia.
The Company expects to place Nortel DMS 500 switches into service in Ocala,
Florida and Atlanta, Georgia by the third quarter of 1998. The Company intends
to place additional switches strategically along its fiber optic network over
the next five years. The Company also intends to deploy a significant number
of Nortel Access Nodes in the majority of the markets which the Company
intends to serve. The additional switches and nodes will allow the Company to
perform local and long distance switching in its markets on a host/remote type
relationship to the applicable DMS 500 switch. The Nortel Access Nodes will be
connected to the Company's DMS 500 switching platform, utilizing the Company's
fiber optic network wherever possible. This networking design, together with
the Interconnection Agreement, will enable the Company to be a facilities-
based provider of local and long distance services in all of the markets that
it intends to enter. For those markets in which the Company intends to resell
the services of incumbent local exchange carriers, the Company's platform will
be BellSouth's Centrex product, known as MultiServ, which provides full
feature functionality,
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such as caller identification, call waiting, remote call forwarding, call
blocking, anonymous call rejection and conference calling.
The Company is a member of the Associated Communications Companies of
America (the "ACCA"), a 11-member trade association that negotiates with
carriers for wholesale telecommunications services for its members. The
collective buying power of its members enables the ACCA to negotiate as if it
were one of the larger long distance providers in the United States.
The Company's data network currently consists of six Cascade 9000 frame
relay switches located in Atlanta and West Point, Georgia; Birmingham,
Montgomery and Arab, Alabama; and Columbia, South Carolina. The Company's data
network connects with BellSouth's and Intermedia Communications' frame relay
networks to provide nationwide connectivity for the Company's customers. The
data network currently serves over 105 customers connected to approximately
1,200 customer locations. The Company's Cascade frame relay switches have the
capability to provide ATM connectivity, and the Company has one ATM connection
to the Internet. The Company intends to strategically locate additional frame
relay and ATM switch sites over the next five years, with approximately 13
frame relay switches and eight ATM switches being added in 1998. These frame
relay and ATM switches will be collocated with the Company's Nortel DMS-500
switches at strategic network facility locations where possible, and will
create a data backbone which will support the Company's data services.
SALES AND MARKETING
RETAIL SERVICES. The Company focuses its sales efforts on mid-sized and
major regional businesses in the southern United States. The Company believes
that it can effectively compete for business customers based upon service,
product diversity, price and reliability. The Company's sales force, composed
of direct sales personnel, technical consultants and technicians, markets the
Company's long distance and local communications services. The Company's
management believes that high quality employee training is a prerequisite for
superior customer service, and as a result each member of the Company's sales
force is required to complete the Company's intensive training program. The
Company's marketing strategy is built upon the belief that customers prefer to
hold one company accountable for all of their telecommunications services.
Each branch office provides technical assistance for its voice, data, Internet
and customer premise equipment as required. Customers are assured a single
point of contact, 24 hours a day, seven days a week.
Marketing to mid-sized and major regional businesses is currently conducted
by over 85 direct sales personnel (and over 120 other field personnel) located
in 16 branch offices in 15 markets in the southern United States. In the
future, the Company expects to expand significantly its direct sales force and
open branch offices in additional major and secondary population centers in
the southern United States. The Company's sales personnel make direct calls to
prospective and existing business customers, conduct analyses of business
customers' usage histories and service needs, and demonstrate how the
Company's service package will improve a customer's communications
capabilities and costs. Sales personnel locate potential business customers by
several methods, including customer referral, market research, telemarketing
and other networking alliances such as endorsement agreements with trade
associations and local chambers of commerce. The Company's sales personnel
work closely with the Company's network engineers and information systems
consultants to design new service products and applications. The Company's
branch offices are also primarily responsible for coordinating service and
customer premise equipment installation activities. Technicians survey
customers' premises to assess power and space requirements, and coordinate
delivery, installation and testing of equipment.
A primary element of the Company's Retail Services marketing strategy is to
enter into contracts with its customers. Those agreements generally provide
for payment in arrears based on minutes of use for switched services and in
advance for private line services. The agreements generally also provide that
the customer may terminate the affected service without penalty in the event
of substantial and prolonged outages arising from causes within the Company's
control, and for certain other defined causes. Generally, the agreements
provide that the customer must utilize at least a minimum dollar amount
(measured by dollars or minutes of use) of switched long distance services per
month for the term of the agreement.
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In addition, the Company markets its business communication services through
advertisements, event sponsorships, trade journals, direct mail and trade
forums. Because the Company intends to distinguish its retail products largely
on the convenience of its single communications bundle and the benefits of the
Company's comprehensive, individualized and innovative customer support, the
Company believes that advertising will play a larger role in its marketing
strategy than it has in the past.
CARRIERS' CARRIER SERVICES. The Company has long-haul circuit contracts with
major long distance carriers, including AT&T, MCI, Sprint, WorldCom, Cable &
Wireless, LCI, Frontier and IXC. As of December 31, 1997, the Company had
remaining future long term contract commitments totaling approximately $77.9
million. These contracts expire on various dates through 2006 and are expected
to generate approximately $58.2 million in revenues to the Company through
2001, of which $18.0 million are expected to be realized in 1998. The Company
also provides long-haul transmission to customers after contract expiration on
a month-to-month basis. The Company's long-haul contracts provide for fixed
monthly payments, generally in advance. Although sales volumes from particular
customers vary from year to year, the Company has historically enjoyed high
customer retention and circuit renewal rates.
The Company believes that it can continue to compete effectively in the
wholesale, carrier-to-carrier market on the basis of price, reliability,
state-of-the-art technology, route diversity, ease of ordering and customer
service. The Company believes that demand for its Carriers' Carrier Services
will increase as the incumbent local exchange carriers begin competing in the
long distance market.
COMPETITION
The telecommunications industry is highly competitive. The Company competes
primarily on the basis of price, availability, transmission quality,
reliability, customer service and variety of product offerings. The ability of
the Company to compete effectively will depend on its ability to maintain high
quality services at prices generally equal to or below those charged by its
competitors. In particular, price competition in the retail and carrier's
carrier long distance markets has generally been intense and is expected to
increase. Many of the Company's competitors (such as AT&T, MCI, Sprint and
WorldCom on an interexchange basis and BellSouth on an intraLATA basis) have
substantially greater financial, personnel, technical, marketing and other
resources, larger numbers of established customers and more prominent name
recognition than the Company and utilize more extensive transmission networks
than the Company. In addition, IXC, Qwest and Williams Communications are
constructing nationwide fiber optic systems, including routes through portions
of the southern United States. The Company will also increasingly face
competition in the long distance market from local exchange carriers,
switchless resellers, and satellite carriers and may eventually compete with
public utilities and cable companies. The Company also may increasingly face
competition from firms offering long distance data and voice services over the
Internet. Such firms could enjoy a significant cost advantage because at this
time they do not pay carrier access charges or universal service fees,
although this matter will be the subject of further consideration by the FCC
and other bodies.
Regional Bell Operating Companies such as BellSouth are now allowed to
provide interLATA long distance services outside their home regions, as well
as interLATA mobile services within their regions. Under the
Telecommunications Act, the Regional Bell Operating Companies will be allowed
to provide interLATA long distance services within their regions after meeting
certain requirements intended to foster opportunities for local telephone
competition. The Regional Bell Operating Companies already have extensive
fiber optic cable, switching, and other network facilities in their respective
regions that can be used for their long distance services. BellSouth and other
Regional Bell Operating Companies are already beginning to take steps toward
obtaining approval to provide in-region long distance services. The FCC forced
the withdrawal of the first Regional Bell Operating Company request for in-
region long distance authority, and rejected the next four applications,
including applications by BellSouth to provide interLATA service in South
Carolina and Louisiana. However, there can be no assurance that such approvals
will be delayed until local competition is established. Furthermore, on
December 31, 1997, the District Court ruled that the Telecommunications Act
provisions restricting interLATA service by the Regional Bell Operating
Companies were unconstitutional. Although that decision has
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been stayed pending appeal, it would, if sustained, allow BellSouth to enter
the interLATA market on a region-wide basis irrespective of the progress
towards local exchange service competition.
The Company's principal competitor for local exchange services will be the
incumbent local exchange carrier in the particular market, including BellSouth
in virtually all of the Company's initial market areas. The incumbent local
exchange carriers will enjoy substantial competitive advantages arising from
their historical monopoly position in the local telephone market, including
their preexisting customer relationship with all or virtually all end users.
Furthermore, the Company will be highly dependent on the competing incumbent
local exchange carrier for local network facilities and wholesale services
required in order for the Company to assemble its own local retail products.
The Company will also face competition from competitive local exchange
carriers, some of whom have already established local operations in the
Company's target markets. See "Risk Factors--Dependence on Incumbent Local
Exchange Carriers."
Large long distance carriers, such as AT&T, MCI, Sprint and WorldCom have
begun to offer local services together with their long distance
telecommunications services in certain markets, and are expected to expand
that activity as opportunities created by the Telecommunications Act develop.
In addition, incumbent local exchange carriers are expected to compete in each
other's markets in some cases. For example, BellSouth has recently announced
plans to provide local services within its geographic region in competition
with independent telephone companies. Wireless telecommunications providers
may develop into effective substitutes for wireline local telephone service.
The Company also competes with numerous direct marketers and telemarketers and
equipment vendors and installers with respect to certain portions of its
business.
A continuing trend toward consolidation, mergers, acquisitions and strategic
alliances in the telecommunications industry could also increase the level of
competition faced by the Company or the Company's carrier customers. For
example, WorldCom has a pending agreement to merge with MCI. WorldCom also has
acquired competitive local exchange carriers, including MFS Communications
Company, Inc. and Brooks Fiber Properties, Inc. In January 1998, AT&T
announced plans to acquire another competitive local exchange carrier, TCG.
Additionally, in March 1998, Qwest announced its intention to acquire LCI,
which combination would result in the nation's fourth-largest long distance
carrier. The telecommunications market is very dynamic, and additional
competitive changes are likely in the future.
REGULATION
OVERVIEW. The Company's services are subject to federal, state and local
regulation. The Company, through its wholly owned subsidiaries, holds various
federal and state regulatory authorizations. The FCC exercises jurisdiction
over telecommunications common carriers to the extent they provide, originate
or terminate interstate or international communications. The FCC also
establishes rules and has other authority over certain issues related to local
telephone competition. State regulatory commissions retain jurisdiction over
telecommunications carriers to the extent they provide, originate or terminate
intrastate communications. Local governments may require the Company to obtain
licenses, permits or franchises in order to use the public rights of way
necessary to install and operate its networks.
FEDERAL REGULATION. The Company is categorized as a non-dominant carrier by
the FCC, and as a result is subject to relatively limited regulation of its
interstate and international services. Certain general policies and rules
apply, as well as certain reporting requirements, but the Company's rates are
not reviewed. The Company has all the operating authority required by the FCC
to conduct its long distance business. As a non-dominant carrier, the Company
may install and operate additional facilities for the transmission of domestic
interstate communications without prior FCC authorization, except to the
extent that radio licenses are required.
The FCC also imposes prior approval requirements on transfers of control and
assignments of radio licenses and operating authorizations. The FCC has the
authority generally to condition, modify, cancel, terminate or revoke licenses
and operating authority for failure to comply with federal laws and/or the
rules, regulations and
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policies of the FCC. Fines or other penalties also may be imposed for such
violations. There can be no assurance that the FCC or third parties will not
raise issues with regard to the Company's compliance with applicable laws and
regulations.
The FCC also regulates the interstate access rates charged by incumbent
local exchange carriers for the origination and termination of interstate long
distance traffic. Those access rates make up a significant portion of the cost
of providing long distance service. The FCC has recently implemented changes
to its interstate access rules that result in restructuring of the access
charge system and changes in access charge rate levels. These changes reduce
per-minute access charges and substitute new per-line flat-rate monthly
charges. These actions, along with additional changes to occur later this year
and in subsequent years, are expected to reduce access rates, and hence the
cost of providing long distance service, especially to business customers.
However, the full impact of the FCC's new decisions will not be known until
those decisions are implemented over the next several years, during which time
those decisions may be revised. In a related proceeding, the FCC has adopted
changes to the methodology by which access has been used in part to subsidize
universal telephone service and other public policy goals. Telecommunications
providers like the Company will pay a fee calculated as a percentage of their
revenues to support these goals. The full implications of this decision also
remain uncertain and subject to change. In addition, the FCC and the courts
are considering related questions regarding the applicability of access charge
and universal service fees to Internet service providers. Currently such
providers are not subject to these expenses. However, the incumbent local
exchange carriers and other parties argue that this exemption unfairly
advantages Internet service providers, particularly when they provide data,
voice or other services in direct competition with conventional
telecommunications. The Company is not in a position to determine how these
access and universal service matters will be resolved, and whether or not such
resolution will be harmful to its competitive position.
The Telecommunications Act also gives the FCC a role, working with the state
PUCs, in establishing rules for the implementation of local telephone
competition. The Telecommunications Act imposes a variety of new duties on
incumbent local exchange carriers in order to promote competition in local
exchange and access services, and the FCC has authority to develop rules to
implement these duties. Some smaller independent incumbent local exchange
carriers may seek suspension or modification of these obligations, and some
companies serving rural areas are exempt from them.
In that regard, on August 8, 1996, the FCC adopted the Interconnection
Decision (the "Decision") to implement the interconnection, resale and number
portability provisions of the Telecommunications Act. The Decision establishes
rules pursuant to which incumbent local exchange carriers interconnect their
networks with the networks of competitive local exchange carriers at rates
that are reasonable and non-discriminatory. The Decision also establishes
rules governing the rights of competitive local exchange carriers to obtain
and use elements of the incumbent local exchange carriers' networks at cost-
based rates either to supplement or substitute for alternative local network
facilities that the competitive local exchange carrier would otherwise be
required to install. The Decision sets rules governing competitive local
exchange carrier access to wholesale versions of the incumbent local exchange
carriers' retail local services for resale. The incumbent local exchange
carriers are required to establish administrative support systems so that
these services and functionalities can be made available to other carriers on
a nondiscriminatory basis. The Decision also created rules to deal with
reciprocal compensation for the transport and termination of local
telecommunications, non-discriminatory access to rights of way, and related
matters. A related FCC order adopted the same day established rules
implementing the Telecommunications Act with respect to local and toll dialing
parity among competitors; nondiscriminatory access to telephone numbers,
operator services, directory assistance and listings, and network information;
and reform of numbering administration.
The FCC's rules were challenged in the federal courts by GTE, the Regional
Bell Operating Companies, large independent incumbent local exchange carriers
and state regulatory commissions. On October 15, 1996, the Eighth Circuit
issued a stay of the implementation of certain of the FCC's rules and on July
18 and October 14, 1997, the same Court issued decisions finding that the FCC
lacked statutory authority under the
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Telecommunications Act for certain of its rules. In particular, the Eighth
Circuit found that the FCC was not empowered to establish the pricing
standards governing unbundled local network elements or wholesale local
services of the incumbent local exchange carriers, or to require such carriers
to provide network elements in a combined form. The Eighth Circuit also struck
down other FCC rules, including one that would have enabled new entrants to
"pick and choose" from provisions of established interconnection agreements
between the incumbent local exchange carriers and other carriers. The Eighth
Circuit, however, rejected certain other objections to the FCC rules brought
by the incumbent local exchange carriers or the states, including challenges
to the FCC's definition of unbundled elements, and to the FCC's rules allowing
new competitors to create their own networks by combining incumbent local
exchange carrier network elements together without adding additional
facilities of their own. The overall impact of the Eighth Circuit's decisions
are to limit the obligations of incumbent local exchange carriers as
originally interpreted by the FCC, materially reduce the role of the FCC in
fostering local competition, including its ability to take enforcement action
if the Telecommunications Act is violated, and increase the role of state
utility commissions. On January 26, 1998, the Supreme Court granted a request
by the FCC and other parties to review the Eighth Circuit decisions. The
Supreme Court is not expected to complete this process until late 1998 or
early 1999. Meanwhile, certain state commissions have asserted that they will
be active in promoting local telephone competition using the authority they
have under the Eighth Circuit decisions, which may lessen the significance of
the reduced FCC role. At this time the impact of the Eighth Circuit's
decisions cannot be evaluated and there can be no assurance that these
decisions and related developments will not have a material adverse effect on
the Company. Furthermore, other FCC rules related to local telephone
competition remain the subject of legal challenges. For example, on August 22,
1997, the Eighth Circuit issued a separate order striking down certain FCC
rules regarding dialing parity for new competitors. There can be no assurance
that these and other pending decisions affecting local competition will not be
adverse to companies seeking to enter the local telephone market.
There can be no assurance that the FCC's remaining rules (including such
rules that may be reinstated by the Supreme Court, if any), together with
rules adopted by state public utility commissions, will be implemented in a
manner that will permit local telephone competition to develop to a
substantial extent and without significant delays. For example, many new
carriers, including the Company, have experienced problems with respect to the
operational support systems used by new carriers to order and receive network
elements and wholesale services from the incumbent local exchange carriers.
These systems are necessary for new carriers like the Company to provide local
service to customers on a timely and competitive basis. The FCC has recently
created a task force to examine problems that have slowed the development of
local telephone competition.
The Company has entered into the Interconnection Agreement with BellSouth.
The Interconnection Agreement currently allows the Company to provide local
service on a resale basis or by purchasing all unbundled network elements
required to provide local service on a facilities basis, without using
Company-owned facilities. The Company and BellSouth have agreed on interim
pricing terms for such resale and purchase of unbundled network elements. The
terms of the Interconnection Agreement, including the interim pricing terms,
are subject to the approval of the PUCs regulating the Company's markets. Such
approval has been received from the PUCs of Alabama, Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and
Tennessee. In addition, the Interconnection Agreement does not resolve all
operational issues, particularly those relating to the collocation of the
Company's equipment with that of BellSouth. The Company and BellSouth are
continuing to negotiate to resolve such issues. The Company expects that the
Interconnection Agreement will provide a foundation for it to provide local
service on a reasonable commercial basis, but there can be no assurance in
this regard and important issues remain unsettled as a result of the Court
decision and related matters. See "Risk Factors--Dependence on Incumbent Local
Exchange Carriers."
The Company expects to negotiate similar interconnection agreements with
other incumbent local exchange carriers. However, other carriers who have
preceded the Company in the negotiation process with certain of these
incumbent local exchange carriers have expressed dissatisfaction with some of
the terms of their agreements, or with the operational support systems by
which they obtain the interconnection they require to provide local services
to end users.
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As a general matter, no assurance is possible regarding how quickly or how
adequately the Company will be able to take advantage of the opportunities
created by the Telecommunications Act. The Company could be adversely affected
if the court decision reversing some of the new FCC rules, or problems in the
related arbitration and negotiation process, result in increasing the cost of
using incumbent local exchange carrier network elements or services, or if
such actions otherwise result in delays in the implementation of the
Telecommunications Act or impediments to the development of local telephone
competition.
The Telecommunications Act also imposes certain duties on non-incumbent
local exchange carriers, such as the Company. These duties include the
obligation to complete calls originated by competing carriers under reciprocal
arrangements or through mutual exchange of traffic without explicit payment;
the obligation to permit resale of their telecommunications services without
unreasonable restrictions or conditions; and the duty to provide dialing
parity, number portability, and access to rights of way. The Company does not
anticipate that these obligations will impose a material burden on its
operations. However, in view of the fact that local telephone competition is
still in its infancy and implementation of the Telecommunications Act has just
begun, there can be no assurance in this regard.
The Telecommunications Act also establishes the foundation for substantial
additional competition with the Company's long distance operations through
elimination or modification of previous prohibitions on the provision of
interLATA long distance services by the Regional Bell Operating Companies and
GTE. The Regional Bell Operating Companies are now permitted to provide
interLATA long distance service outside those states in which they provide
local exchange service ("out-of-region long distance service") upon receipt of
any necessary state and/or federal regulatory approvals that are otherwise
applicable to the provision of intrastate and/or interstate long distance
service. They also are allowed to provide long distance services for their
cellular and other mobile services within the regions in which they also
provide local exchange service ("in-region service"). Under the
Telecommunications Act, the Regional Bell Operating Companies will be allowed
to provide wireline in-region services upon specific approval of the FCC and
satisfaction of other conditions, including a checklist of interconnection
requirements. GTE is permitted to enter the long distance market without
regard to limitations by region. GTE is also subject to the provisions of the
Telecommunications Act that impose interconnection and other requirements on
local exchange carriers. BellSouth and other Regional Bell Operating Companies
have begun to take actions directed towards obtaining authority from the FCC
to offer in-region long distance services in certain of the states in their
respective regions. The FCC forced the withdrawal of the first Regional Bell
Operating Company request for in-region long distance authority, and rejected
the next four applications, including applications by BellSouth to provide
interLATA service in South Carolina and Louisiana. However, there can be no
assurance that such approvals will be delayed until local competition is
established. There can be no assurance that the Regional Bell Operating
Companies will be prevented from offering in-region long distance service
until local competition is established. The Eighth Circuit recently rejected
the FCC's attempt to condition interLATA entry on compliance with certain
pricing principles that the Court had previously found were outside the
jurisdiction of the FCC to mandate as a general matter. Other court actions
are now pending challenging the terms under which the FCC has denied an in-
region application. Furthermore, on December 31, 1997, the District Court
ruled that the Telecommunications Act provisions restricting interLATA service
by the Regional Bell Operating Companies were unconstitutional. Although that
decision has been stayed pending appeal, it would, if sustained, allow
BellSouth to enter the interLATA market on a region-wide basis irrespective of
the state of local competition.
The FCC has granted incumbent local exchange carriers certain flexibility in
pricing their interstate special and switched access services. Under this
pricing scheme, local exchange carriers may establish pricing zones based on
access traffic density and charge different prices for access provided in each
zone. The Company anticipates that the FCC will grant incumbent local exchange
carriers increasing pricing flexibility as the number of interconnection
agreements and competitors increases. In a pending rulemaking proceeding
scheduled for completion soon, the FCC is expected to announce new and more
specific policies regarding the conditions and timing under which incumbent
local exchange carriers will be eligible for such increased pricing
flexibility. There can be no assurance that such pricing flexibility will not
place the Company at a competitive disadvantage,
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either as a purchaser of access for its long distance operations, or as a
vendor of access to other carriers or end user customers.
STATE REGULATION. The Company is also subject to various state laws and
regulations. Most public utility commissions require providers such as the
Company to obtain authority from the commission prior to the initiation of
service. In most states, including Alabama, Georgia and Florida, the Company
also is required to file tariffs setting forth the terms, conditions and
prices for services that are classified as intrastate. The Company also is
required to update or amend its tariffs when it adjusts its rates or adds new
products, and is subject to various reporting and record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply
with state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties
will not raise issues with regard to the Company's compliance with applicable
laws or regulations.
The Company has all necessary authority to offer intrastate long distance
services in Alabama, Arkansas, California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey,
New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont,
Virginia, Washington, West Virginia, Wisconsin and Wyoming. The Company is
authorized to provide intrastate long distance service in the states of
Arizona and Pennsylvania while certificates in those states are pending. An
application for authority to provide intrastate long distance service is also
pending in Minnesota. Applications will be filed, in the near future, in the
states of Alaska and Hawaii. The Company seeks authority to provide long
distance service in states outside of its target markets to enhance its
ability to attract business customers with offices, or whose employees travel,
outside of the Company's target markets.
The Company now provides local exchange services in its region by reselling
the retail local services of the incumbent local exchange carrier in a given
territory and, in some established markets, using its own local switching
facilities. The Company has obtained competitive local exchange carrier
certification in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee.
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications Act
preempts the ability of states to forbid local service competition, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. However,
these statutes and related questions arising from the Telecommunications Act
will be elaborated further through rules and policy decisions made by PUCs in
the process of addressing local service competition issues.
The Company also will be heavily affected by state PUC decisions related to
the incumbent local exchange carriers, particularly in view of the decisions
of the Eighth Circuit noted above which recognizes a larger role for state
utility commissions and a reduced role for the FCC. For example, PUCs have
significant responsibility under the Telecommunications Act to oversee
relationships between incumbent local exchange carriers and their new
competitors with respect to such competitors' use of the incumbent local
exchange carriers' network elements and wholesale local services. PUCs
arbitrate interconnection agreements between the incumbent local exchange
carriers and new competitors such as the Company when necessary. PUCs are
considering incumbent local exchange carrier pricing issues in major
proceedings now underway. PUCs will also determine how competitors can take
advantage of the terms and conditions of interconnection agreements that
incumbent local exchange carriers reach with other carriers. It is too early
to evaluate how these matters will be resolved, or their impact on the ability
of the Company to pursue its business plan.
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States also regulate the intrastate carrier access services of the incumbent
local exchange carriers. The Company is required to pay such access charges to
originate and terminate its intrastate long distance traffic. The Company
could be adversely affected by high access charges, particularly to the extent
that the incumbent local exchange carriers do not incur the same level of
costs with respect to their own intrastate long distance services. In a
related development, states also will be developing intrastate universal
service charges parallel to the interstate charges created by the FCC. For
example, incumbent local exchange carriers such as BellSouth are proposing
that states create funds that would be supported by potentially large payments
by firms such as the Company based on their total intrastate revenues. Another
issue is use by certain incumbent local exchange carriers, with the approval
of PUCs, of extended local area calling that converts otherwise competitive
intrastate toll service to local service. States also are or will be
addressing various intraLATA dialing parity issues that may affect
competition. The Company's business could be adversely affected by these or
other developments.
The Company also will be affected by how states regulate the retail prices
of the incumbent local exchange carriers with which it competes. The Company
believes that, as the degree of intrastate competition increases, the states
will offer the incumbent local exchange carriers increasing pricing
flexibility. This flexibility may present the incumbent local exchange
carriers with an opportunity to subsidize services that compete with the
Company's services with revenues generated from non-competitive services,
thereby allowing incumbent local exchange carriers to offer competitive
services at lower prices than they otherwise could. In a related development,
BellSouth is seeking authority to create "CLEC" affiliates that would operate
on a much less regulated basis and therefore could provide significant
competition in the business market whether or not the traditional BellSouth
local business receives more pricing flexibility. The Company cannot predict
the extent to which these developments may occur or their impact on the
Company's business.
LOCAL GOVERNMENT AUTHORIZATIONS AND RELATED RIGHTS OF WAY. The Company is
required to obtain street use and construction permits and licenses and/or
franchises to install and expand its fiber optic networks using municipal
rights of way. In some municipalities where the Company has installed or
anticipates constructing networks, it will be required to pay license or
franchise fees based on a percentage of gross revenues or on a per linear foot
basis. There can be no assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many markets, the
incumbent local exchange carriers do not pay such franchise fees or pay fees
that are substantially less than those required to be paid by the Company,
although the Telecommunications Act requires that in the future such fees be
applied in a competitively neutral manner. To the extent that, notwithstanding
the Telecommunications Act, competitors do not pay the same level of fees as
the Company, the Company could be at a competitive disadvantage. Termination
of the existing franchise or license agreements prior to their expiration
dates or a failure to renew the franchise or license agreements and a
requirement that the Company remove its facilities or abandon its network in
place could have a material adverse effect on the Company. In addition, the
Company would be adversely affected if it is unable to obtain additional
authorization for new construction on reasonable terms. Furthermore, open
issues exist regarding the ability of new local service providers to gain
access to commercial office buildings to serve tenants.
GENERAL. The telecommunications market is in a period of substantial change
and uncertainty. As the Telecommunications Act and related FCC and state
actions are implemented, new issues are likely to arise that can affect the
Company and its business plan. No assurance can be given that future
regulatory developments will not have a materially adverse impact on the
Company.
FACILITIES, REAL PROPERTY AND LEASES
The Company leases its corporate headquarters space in West Point, Georgia
from KNOLOGY Holdings, Inc. ("KNOLOGY"). See "Certain Transactions." The
Company also owns a switch site in Birmingham, Alabama and leases space for a
network operations center and a switch site in Arab, Alabama. In addition, the
Company is constructing a multi-service facility in Anniston, Alabama to
function as a centralized switching control center for the Company's network
and an operator services center. Construction of the Anniston facility is
expected to be completed in the third quarter of 1998. The Company also
intends to begin construction on an administrative office in Arab, Alabama in
the second quarter of 1998.
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The Company operates branch offices in Atlanta (two offices), Georgia;
Pensacola and Jacksonville, Florida; Columbia and Greenville, South Carolina;
Charlotte, North Carolina; New Orleans and Baton Rouge, Louisiana; and
Huntsville, Mobile, Auburn, Dothan, Florence, Montgomery and Birmingham,
Alabama. The leases for these offices expire between 1998 and 2001.
As part of its fiber optic network and switched service system, the Company
owns or leases rights of way, land, office space and towers throughout the
southern United States.
The Company owns land and microwave transmission towers at various locations
in Alabama.
The Company expects to lease or purchase additional office space and
switching and other network facilities in connection with the planned
expansion of its telecommunications network system.
The Company believes that all of its properties are well maintained.
The Company is a party to legal proceedings in the ordinary course of its
business, including disputes with contractors or vendors, which the Company
believes are not material to the Company or its business. The Company also is
a party to regulatory proceedings affecting the relevant segments of the
communications industry generally.
EMPLOYEES
As of December 31, 1997, the Company had over 500 full-time employees, none
of whom was represented by a union or covered by a collective bargaining
agreement. The Company believes that its relationship with its employees is
good. In connection with the construction and maintenance of its fiber optic
network and the conduct of its other business operations, the Company uses
third party contractors, some of whose employees may be represented by unions
or covered by collective bargaining agreements.
LEGAL PROCEEDINGS
The Company is a party to legal proceedings in the ordinary course of its
business, including disputes with contractors or vendors, which the Company
believes are not material to the Company or its business. The Company also is
a party to regulatory proceedings affecting the relevant segments of the
communications industry generally.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth, as of March 31, 1998, certain information
concerning the directors and executive officers of the Company. The Board of
Directors (the "Board") currently consists of nine directors, divided into
three classes of directors serving staggered three-year terms. Directors and
executive officers of the Company are elected to serve until they resign or
are removed, or are otherwise disqualified to serve, or until their successors
are elected and qualified. Directors of the Company are elected at the annual
meeting of stockholders. Executive officers of the Company generally are
appointed at the Board's first meeting after each annual meeting of
stockholders.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION(S) WITH COMPANY EXPIRES
---- --- ------------------------ --------
<S> <C> <C> <C>
Campbell B. Lanier, III. 46 Chairman, Director 2000
Andrew M. Walker........ 55 Chief Executive Officer, Director 2000
Foster O. McDonald...... 35 President
Douglas A. Shumate...... 32 Senior Vice President--Chief Financial
Officer
Steven D. Moses......... 47 Senior Vice President--Network Services
J. Thomas Mullis........ 53 Senior Vice President--General Counsel,
Secretary
Roger F. Woodward....... 44 Senior Vice President--Sales, Marketing and
Customer Support
Sara L. Plunkett........ 47 Vice President--Finance, Treasurer
Donald W. Burton........ 53 Director 1998
Malcolm C. Davenport, V. 44 Director 1998
Robert A. Dolson (1).... 51 Director 1999
O. Gene Gabbard (1)(2).. 57 Director 1999
William T. Parr (2)..... 60 Director 1998
William H. Scott, III 49 1999
(2).................... Director
William B. Timmerman.... 50 Director 2000
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Campbell B. Lanier, III has been Chairman of the Company since March 1997.
Mr. Lanier served as Chairman of the Board and Chief Executive Officer of ITC
Holding prior to the Merger and served as a director of ITC Holding since its
inception in 1985 through a predecessor company. Mr. Lanier also is a director
of KNOLOGY (a broadband telecommunications services company) (formerly known
as CyberNet Holding, Inc.), MindSpring Enterprises, Inc. ("MindSpring") (a
company that provides Internet services), National Vision Associates, Ltd. (a
full service optical retailer) and K&G Men's Centers (a discount retailer of
men's clothing), Vice Chairman of the Board of AvData Systems, Inc. ("AvData")
(a company providing data communications networks) and Chairman of the Board
of Powertel, Inc. (formerly InterCel, Inc.) ("Powertel") (a wireless
telecommunications services company). He served as Chairman of the Board of
AvData from 1988 to 1990 and has served as a Managing Director of South
Atlantic Private Equity Fund IV, Limited Partnership since 1997.
Andrew M. Walker has been Chief Executive Officer of the Company since March
1997. He served as President and Chief Executive Officer of the managing
partner of each of Interstate FiberNet and Gulf States FiberNet from November
1994 until March 1997. Mr. Walker has served as a director of KNOLOGY since
July 1996, and he served as Chief Executive Officer and President of KNOLOGY
from July 1996 to February 1997. Mr. Walker worked for MCI from 1990 to 1994
as Vice President Carrier Services. From 1986 to 1990,
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Mr. Walker served as a Division President for Telecom*USA, Inc.
("Telecom*USA"). Prior to 1986, Mr. Walker held different positions with the
Christian Broadcasting Network, M/A-Com and Comsat Laboratories.
Foster O. McDonald has been President of the Company since March 1997. He
served as President of DeltaCom from January 1991 until March 1997. From
February 1996 until March 1997, Mr. McDonald also served as Chief Executive
Officer of DeltaCom. From May 1984 through December 1990, Mr. McDonald served
as Vice President and General Manager of DeltaCom. He also serves as a
director of Brindlee Mountain Telephone Company.
Douglas A. Shumate has been Senior Vice President and Chief Financial
Officer of the Company since March 1997. He served as Chief Financial Officer
of the Managing Partners of each of Interstate FiberNet and Gulf States
FiberNet from January 1995 until March 1997. From May 1991 to January 1995, he
served as Vice President-Finance and Chief Financial Officer of Interstate
Telephone Company ("Interstate Telephone"), a local telephone service provider
and wholly owned subsidiary of ITC Holding. From December 1986 through April
1991, Mr. Shumate was employed as a C.P.A. at Arthur Andersen LLP.
Steven D. Moses has been Senior Vice President--Network Services of the
Company since March 1997. He served as Vice President of Interstate FiberNet
from January 1992 until April 1995 and Chief Operating Officer of Interstate
FiberNet from April 1995 until March 1997. From May 1991 to January 1992, Mr.
Moses served as Director--Special Projects of Interstate Telephone and Valley
Telephone Company ("Valley Telephone") (a local telephone service provider and
a wholly owned subsidiary of ITC Holding).
J. Thomas Mullis has been Senior Vice President, General Counsel and
Secretary of the Company since March 1997. Mr. Mullis served as General
Counsel and Secretary of DeltaCom from May 1985 to March 1997 and as Executive
Vice President of DeltaCom from January 1994 to November 1996. From November
1996 to March 1997, he also served as Senior Vice President of DeltaCom. From
January 1990 to December 1993, Mr. Mullis served as President, General Counsel
and Secretary of both Southern Interexchange Services, Inc. (a switched
services carrier) and Southern Interexchange Facilities, Inc. (a private line
carriers' carrier).
Roger F. Woodward has been Senior Vice President--Sales, Marketing and
Customer Support of the Company since March 1997. Mr. Woodward served as
Senior Vice President-Sales of DeltaCom from October 1996 until March 1997.
From March 1990 until July 1996, Mr. Woodward served in a variety of
positions, including Regional Sales Director and Vice President-Sales, with
Allnet Communications, Inc., which was acquired by Frontier in August 1995.
Sara L. Plunkett has been Vice President--Finance and Treasurer for the
Company since March 1997. She served as Vice President--Finance of DeltaCom
from October 1996 until March 1997. From May 1989 through October 1996, she
served as Chief Financial Officer of DeltaCom.
Donald W. Burton has been a director of the Company since March 1997. He has
served as the Managing General Partner of South Atlantic Venture Funds since
1983 and as the General Partner of The Burton Partnership, Limited Partnership
since 1979. Since 1981, he has served as President of South Atlantic Capital
Corporation. Mr. Burton serves as director of Powertel, MTL, Inc. (a bulk
transportation service company), the Heritage Group of Mutual Funds and
several private companies.
Malcolm C. Davenport, V has been a director of the Company since March 1997.
He has operated his own C.P.A. and law practices since 1979 and 1983,
respectively. Mr. Davenport also serves as a director of ITC Holding and
several of its subsidiaries, Spintek Gaming Technologies, Inc. (a gaming
technology provider) and American Artists Film Corporation (a motion picture
production company).
Robert A. Dolson has been a director of the Company since March 1997. He has
served as President and Chairman of Continental Water Company (a holding
company for regulated water utilities) since 1982 and 1989, respectively. He
has served as President and Chairman of National Enterprises, Inc. (the parent
company of
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Continental Water Company) since 1984 and 1989, respectively. He has served as
a director of ITC Holding since December 1993. He also serves as a director of
several private companies.
O. Gene Gabbard has been a director of the Company since March 1997. He has
worked independently as an entrepreneur and consultant since February 1993.
Mr. Gabbard currently serves as Chairman of the Board of KNOLOGY and as a
director of ITC Holding, Powertel, MindSpring, KNOLOGY and InterServ Services
Corporation (a marketing company). He also currently serves as a director of
two telecommunications technology companies, Dynatech Corporation and Adtran,
Inc. and is a Managing Director of South Atlantic Private Equity Fund IV,
Limited Partnership. From August 1990 through January 1993, he served as
Executive Vice President and Chief Financial Officer of MCI. He served in
various senior executive capacities, including Chairman of the Board,
President and Chief Executive Officer of Telecom*USA from December 1988 until
Telecom's merger with MCI in August 1990. From July 1984 to December 1988, he
was Chairman and/or President of SouthernNet, Inc. ("SouthernNet"), a long
distance telecommunications company which was the predecessor to Telecom*USA.
William T. Parr has been a director of the Company since March 1997. Mr.
Parr has served as Vice Chairman of J. Smith Lanier & Co. (an insurance
placement company) since 1980. He currently serves as a director of ITC
Holding and several of its subsidiaries, including ITC Services Co., Inc. (a
management services company), Valley Telephone, InterCall, Inc. ("InterCall")
(a conference calling service provider) and Globe Telecommunications, Inc.
("Globe") (a non-regulated telecommunications provider). He also serves as a
director of AvData and J. Smith Lanier & Co.
William H. Scott, III has been a director of the Company since March 1997.
Mr. Scott has served as President of ITC Holding since December 1991 and has
been a director of ITC Holding since May 1989. Mr. Scott is a director of
Powertel, AvData, KNOLOGY and MindSpring. From 1989 to 1991, he served as
Executive Vice President of ITC Holding. From 1985 to 1989, Mr. Scott was an
officer and director of Async. Between 1984 and 1988, Mr. Scott held several
offices with SouthernNet, including Chief Operating Officer, Chief Financial
Officer, and Vice President-Administration. He was a director of SouthernNet
from 1984 to 1987.
William B. Timmerman has been a director of the Company since March 1997.
Since 1978 he has served in a variety of management positions at SCANA
Corporation (a diversified utility company), including Chief Executive
Officer, President, Senior Vice President, Executive Vice President and Chief
Financial Officer. Mr. Timmerman is also director of SCANA Corporation, ITC
Holding, Powertel and Liberty Corporation (a life insurance company).
COMMITTEES OF THE BOARD OF DIRECTORS
The Board currently has two committees, the Audit Committee and the
Compensation Committee. The Audit Committee, among other things, recommends
the firm to be appointed as independent accountants to audit the Company's
financial statements, discusses the scope and results of the audit with the
independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers
the adequacy of the internal accounting controls and audit procedures of the
Company and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Messrs. Dolson and
Gabbard.
The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's stock
option plans. The current members of the Compensation Committee are Messrs.
Gabbard, Parr and Scott.
DIRECTOR COMPENSATION
Directors of the Company who are also employees of the Company receive no
directors' fees. Non-employee directors receive directors' fees of $750 for
each Board meeting attended in person, $200 for each
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Board meeting attended by telephone and $200 for each Board committee meeting
attended (whether in person or by telephone conference). In addition,
directors are reimbursed for their reasonable out-of-pocket travel
expenditures incurred. Directors of the Company are also eligible to receive
grants of stock options under the Company's Director Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Messrs. Gabbard, Parr
and Scott.
INCENTIVE COMPENSATION PLANS
Employee Stock Option Plan
Upon the Reorganization, all employees of the Company became eligible to
receive stock options under the Company's 1997 Stock Option Plan, as amended
(the "Stock Option Plan"), which was adopted by the Company and approved by
ITC Holding on March 24, 1997.
The Stock Option Plan provides for the grant of options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") to employees of the Company, its
subsidiaries, and ITC Holding, as well as the grant of non-qualifying options
to any other individual whose participation in the Stock Option Plan is
determined to be in the best interests of the Company. The Stock Option Plan
authorizes the issuance of up to 2,407,500 shares of the Company's Common
Stock pursuant to options granted under the Stock Option Plan (subject to
antidilution adjustments in the event of a stock split, recapitalization, or
similar transaction). The maximum number of shares subject to options that can
be awarded under the Stock Option Plan to any person is 802,500 shares. The
Compensation Committee of the Company's board of directors will administer the
Stock Option Plan and will grant options to purchase Common Stock.
The option exercise price for incentive stock options granted under the
Stock Option Plan may not be less than 100% of the fair market value of the
Common Stock on the date of grant of the option (or 110% in the case of an
incentive stock option granted to an optionee beneficially owning more than
10% of the outstanding Common Stock). The option exercise price for non-
incentive stock options granted under the Stock Option Plan may not be less
than the par value of the Common Stock on the date of grant of the option. The
maximum option term is 10 years (or five years in the case of an incentive
stock option granted to an optionee beneficially owning more than 10% of the
outstanding Common Stock). There is also a $100,000 limit on the value of
Common Stock (determined at the time of grant) covered by incentive stock
options that become exercisable by an optionee in any year. Options granted
will become exercisable with respect to 50% of the shares subject to the
options on the second anniversary of the date of grant and with respect to 25%
of the shares subject to the options on each of the third and fourth
anniversaries of the date of grant.
The Company's board of directors may amend or terminate the Stock Option
Plan with respect to shares of Common Stock as to which options have not been
granted.
On March 24, 1997 and July 29, 1997, the Company granted options to purchase
1,266,345 shares and 168,933 shares, respectively, of Common Stock under the
Stock Option Plan. All options were granted at a price at least equal to the
estimated fair value of the common stock on the date of grant ($4.49) as
determined by the Company's board of directors based on equity transactions
and other analyses. Options to purchase an additional 48,251 shares of Common
Stock at $4.49 per share were granted on October 1, 1997. At December 31,
1997, unamortized compensation expense of $555,348 is recorded as an offset to
equity in the accompanying balance sheet related to this option grant since
the price of the options was below fair market value. Compensation expense
will be recognized over the vesting period.
Following the Company's initial public offering, options to purchase an
additional 61,915 shares of Common Stock at $17.25 per share were granted on
October 28, 1997. The $17.25 per share represents the closing value of the
Company's stock on the date of grant.
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Director Stock Option Plan
On March 24, 1997, the Company adopted and its stockholders approved the
Director Stock Option Plan (the "Director Plan"). The Director Plan provides
for the "formula" grant of options that are not intended to qualify as
"incentive stock options" under Section 422 of the Code to directors of the
Company who are not officers or employees of the Company or ITC Holding, (each
an "Eligible Director"). The Director Plan authorizes the issuance of up to
240,750 shares of Common Stock pursuant to options granted under the Director
Plan (subject to antidilution adjustments in the event of a stock split,
recapitalization, or similar transaction). The option exercise price for
options granted under the Director Plan will be at least 100% of the fair
market value of the shares of Common Stock on the date of grant of the option.
Under the Director Plan, each Eligible Director will be granted an option to
purchase 16,050 shares of Common Stock upon such person's initial election or
appointment to serve as director. Options granted will become exercisable with
respect to 50% of the shares subject to the options on the second anniversary
of the date of grant and with respect to 25% of the shares subject to the
options on each of the third and fourth anniversaries of the date of grant.
The options will expire ten years and 30 days after the date of grant.
On March 24, 1997, the Company granted options to purchase 16,050 shares of
its Common Stock to each of its six nonemployee directors. All options were
granted at a price equal to the estimated fair value of the common stock on
the date of grant ($4.49) as determined by the Company's board of directors
based on equity transactions and other analyses.
ITC Holding Stock Option Plan
Prior to the Reorganization, ITC Holding sponsored a stock option plan which
provided for the granting of stock options to substantially all employees of
ITC Holding and its wholly owned and majority owned subsidiaries, including
the Company. Options were generally granted at a price (established by ITC
Holding's board of directors based on equity transactions and other analyses)
equal to at least 100% of the fair market value of ITC Holding's common stock
on the option grant date. Options granted generally became exercisable 40%
after two years and 20% per annum for the next three years and remained
exercisable for ten years after the option grant date. At December 31, 1996,
employees of the Company held outstanding options for a total of 314,768 of
ITC Holding's shares at option prices ranging from $7.60 to $30.50 per share.
In connection with the Reorganization, stock options outstanding under ITC
Holding's stock option plan were adjusted. Each ITC Holding option holder
received an option in the spinoff entity and 2.295225 options in the Company
(the "Replacement Options"). All Replacement Options were at exercise prices
that preserved the economic benefit of the ITC Holding options as of the
effective time of the Reorganization. As a result, options for 3,540,088
shares of the Company's Common Stock were issued under the Stock Option Plan
at exercise prices ranging from $0.31 per share to $8.87 per share.
EXECUTIVE COMPENSATION
During 1998 Messrs. Walker, McDonald, Mullis, Woodward and Moses (the "Named
Executive Officers") expect to earn salaries at annual rates of $157,500,
$141,750, $138,045, $131,250 and $115,500, respectively. If certain
performance goals are met, Messrs. Walker, McDonald, Mullis, Woodward and
Moses expect to earn bonuses of $94,500, $78,750, $37,649, $52,500 and
$64,166, respectively.
On March 24, 1997, the Company granted Messrs. Walker, McDonald, Mullis,
Woodward and Moses options to purchase 200,625, 120,375, 64,200, 80,250 and
80,250 shares of Common Stock, respectively. Messrs. Walker, McDonald, Mullis,
Woodward and Moses were granted options to purchase 109,522, 55,924, 42,878,
36,723 and 72,530 shares of common stock of ITC Holding, respectively, under
the ITC Holding incentive stock option plan. In connection with the
Reorganization, options outstanding under such ITC Holding stock option plan
were assumed by the Company and were converted into options to purchase shares
of Common Stock. These options will continue to vest according to the schedule
set forth in each Named Executive Officer's respective stock option agreement
unless such Named Executive Officer's employment with the Company is
terminated, in which case options that have not vested at that time will
terminate.
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CERTAIN TRANSACTIONS
The Company has adopted a policy requiring that any material transactions
between the Company and persons or entities affiliated with officers,
directors or principal stockholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arm's-
length transactions with independent third parties.
The following is a summary of certain transactions and relationships between
the Company and ITC Holding, its other wholly owned subsidiaries, or entities
in which ITC Holding prior to the Merger held more than 10% of the equity
interests, and among the Company and its directors, executive officers and
stockholders and its associated entities. In connection with the
Reorganization, ITC Holding merged with and into the Company. See "History of
the Company--Reorganization."
The Company entered into an arrangement in January 1998 to lease its
executive offices in West Point, Georgia, from KNOLOGY for approximately
$11,000 per month.
The Company, through Interstate FiberNet, Inc. (and formerly through
Interstate FiberNet, a Georgia general partnership), sells capacity on its
fiber optic network to several ITC Holding subsidiaries and affiliates,
including Powertel and Powertel PCS, Inc., Globe, InterCall, KNOLOGY and
MindSpring. Together, these entities paid Interstate FiberNet, Inc.
approximately $1,739,000, $422,000 and $316,000 for such capacity for the
years ended December 31, 1997, 1996 and 1995, respectively.
Since 1996, the Company, through DeltaCom, has provided long distance and
carrier switched long distance service to several ITC Holding subsidiaries and
affiliates, including KNOLOGY, InterCall, Interstate Telephone, Valley
Telephone, Powertel and MindSpring. Together, these entities paid DeltaCom
approximately $1.4 million for the year ended December 31, 1996 and $4,254,000
for the year ended December 31, 1997. Since 1996, DeltaCom has also earned
commissions by serving as agent for certain interexchange carriers doing
business with Powertel, InterCall, InterQuest and MindSpring. Under these
agreements, DeltaCom contracts with the interexchange carrier and rebills the
appropriate access charges plus a margin to Powertel, InterCall and
MindSpring. Together, Powertel, InterCall and MindSpring paid DeltaCom
commissions totaling approximately $514,000 for the year ended December 31,
1996, and $735,000 for the year ended December 31, 1997.
In 1995, the Company, through Interstate FiberNet and Gulfstates FiberNet,
constructed a fiber route on behalf of KNOLOGY. KNOLOGY reimbursed the Company
for approximately $62,000 worth of construction expenses. The Company also
provided certain engineering and construction-related management services,
estimated to have a value of $50,000, to KNOLOGY in 1995. The Company did not
charge KNOLOGY for these services.
In addition to his responsibilities with the Company, Mr. Walker also served
as President and Chief Executive Officer of KNOLOGY for the period from July
15, 1996 through February 20, 1997. He served in this capacity at the request
of KNOLOGY and ITC Holding and received no compensation from KNOLOGY. The
Company estimates the value of services provided to be approximately $20,000.
In 1996, Interstate FiberNet provided certain engineering and construction-
related management services to Powertel. Interstate FiberNet charged
approximately $57,000 for these services.
In 1995, the Company provided certain network optimization services for
InterCall. InterCall paid $24,000 for such services.
The Company, through Interstate FiberNet, Inc. (and formerly through
InterQuest), provides directory assistance and operator service to Powertel,
Interstate Telephone and Valley Telephone. Revenues recorded by the Company
for these services were approximately $1,005,000, $433,000 and $245,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
79
<PAGE>
Since 1996, the Company has purchased feature group access and other
services from Interstate Telephone, Valley Telephone and InterCall totaling
approximately $762,000 in 1996 and $238,000 in 1997.
Since 1995, InterCall has provided conference calling services to Interstate
FiberNet (and now to Interstate FiberNet, Inc.) and (beginning in 1996) to
DeltaCom. The Company paid approximately $40,000, $80,000 and $1,000 for such
services for the years ended December 31, 1997, 1996 and 1995, respectively.
ITC Holding, through certain of its subsidiaries, from time to time provided
the Company (and its subsidiaries) with administrative and staff services. The
amounts paid by the Company to ITC Holding and its affiliates for these
services for the years ended December 31, 1997, 1996 and 1995 were $166,000,
$19,000 and $5,000, respectively.
The Company paid $300,000 in 1997 to Mr. Sidney L. McDonald, a stockholder
of DeltaCom's predecessor and the father of Foster McDonald, President of the
Company, to provide management services to the Company under a contract that
was completed on December 31, 1997. In addition, the Company leases real
property from entities controlled by Mr. Sidney L. McDonald. Under the lease
agreements, the Company paid approximately $174,000 in 1997 and is obligated
to pay approximately $180,000 annually from 1998 through 2005. The lease
agreements are cancelable by either of the parties with 24 months notice.
Since 1995, ITC Holding advanced funds to InterQuest at a variable rate
equal to the rate paid by ITC Holding through its credit facility with First
Union and CoBank, plus .5%. For the years ended December 31, 1995, 1996 and
1997, InterQuest recorded interest expenses to ITC Holding of approximately
$123,000, $97,000 and $51,000, respectively. For the years ended December 31,
1996 and 1997, DeltaCom advanced excess funds from its operations to ITC
Holding at an annual interest rate of 8.25% and DeltaCom recorded interest
income of approximately $78,000 and $7,000, respectively. The advance is
repayable on demand.
The Company leased office space in West Point, Georgia from ITC Holding
beginning in January 1995. Under its lease, the Company paid ITC Holding rent
in the amount of approximately $2,500 per month. The lease was terminable by
either party on 90 days' notice. Amounts charged to the Company related to
these leases for the years ended December 31, 1995 and 1996 were $21,669 and
$62,762, respectively. In 1996, the Company paid ITC Holding an additional
$7,000 in tax reimbursement payments for 1995 and 1996.
In 1996, InterQuest purchased certain switching equipment located in West
Point, Georgia from Globe for approximately $120,000. During the year ended
December 31, 1997, DeltaCom sold equipment and services to KNOLOGY for
$262,000.
Certain officers and directors of the Company held positions in ITC Holding
prior to the Merger and hold or have held positions with various former
subsidiaries of ITC Holding. See "Management--Directors and Executive
Officers." In addition, certain Company officers and directors held ownership
interests in ITC Holding.
SCANA
In March 1997, in the Gulf States Acquisition, ITC Holding acquired SCANA's
64% partnership interest in Gulf States FiberNet and the Georgia Fiber Assets.
The purchase price of approximately $27.9 million was paid in the form of an
unsecured note in the aggregate principal amount of approximately $10.0
million (repaid in November 1997) and 588,411 shares of Series A Convertible
Preferred Stock of ITC Holding. In addition, pursuant to an earn-out
provision, ITC Holding agreed that, no later than April 30, 1998, it would
issue to SCANA that number of shares of such Series A Convertible Preferred
Stock that in aggregate value equal 35.7% of the product of (a) 64%,
multiplied by (b)(i) six, multiplied by (ii) the amount (if any) by which the
earnings before interest, taxes, depreciation and amortization of the Gulf
States FiberNet business for the fiscal year ended December 31, 1997 exceeded
$11,265,696. Prior to the completion of the Reorganization, ITC Holding issued
to SCANA 56,742 shares of its Series A Convertible Preferred Stock pursuant to
this earn-out provision. In connection with the Reorganization, such shares of
Series A Convertible Preferred Stock of ITC Holding were converted into
130,238 shares of Series A Preferred Stock of the Company.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of December 31, 1997,
concerning beneficial ownership of the Company's Common Stock, by (i) each
stockholder who is known by the Company to be a beneficial owner of more than
5% of the Common Stock, (ii) each director of the Company, (iii) each
executive officer of the Company and (iv) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL PERCENTAGE
NAME OF BENEFICIAL OWNER OWNERSHIP (A)(B) OF CLASS
- ------------------------ ---------------- ----------
<S> <C> <C>
SCANA Communications, Inc.(c)...................... 1,777,919 7.2%
National Enterprises, Inc.(d)...................... 2,008,632 8.1
J. Smith Lanier(e)................................. 1,881,280 7.6
Donald W. Burton(f)................................ 1,197,731 4.8
Malcolm C. Davenport, V(g)......................... 340,789 1.4
Robert A. Dolson(h)................................ 2,009,632 8.1
O. Gene Gabbard.................................... 100,800 *
Campbell B. Lanier, III(i)......................... 4,641,777 18.5
Foster O. McDonald(j).............................. 252,582 1.0
Steven D. Moses.................................... 49,284 *
J. Thomas Mullis................................... 20,315 *
William T. Parr(k)................................. 128,906 *
Sara L. Plunkett................................... 14,362 *
William H. Scott, III(l)........................... 711,578 2.7
Douglas A. Shumate(m).............................. 74,789 *
William B. Timmerman(n)............................ 1,778,919 7.2
Andrew M. Walker(o)................................ 56,412 *
Roger F. Woodward.................................. 6,793 *
All executive officers and directors as a group (15
persons).......................................... 11,297,452 44.3%
</TABLE>
- --------
* Less than one percent.
(a) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), a person is deemed to be the beneficial
owner, for purposes of this table, of any shares of Common Stock if such
person has or shares voting power or investment power with respect to such
security, or has the right to acquire beneficial ownership at any time
within 60 days from December 31, 1997. As used herein, "voting power" is
the power to vote or direct the voting of shares and "investment power" is
the power to dispose or direct the disposition of shares. Unless otherwise
indicated, each stockholder listed has sole voting and investment power
with respect to the shares shown as beneficially owned by such
stockholder.
(b) Includes the following shares that the individuals named below have the
right to purchase within 60 days from December 31, 1997 pursuant to
options:
<TABLE>
<S> <C>
Donald W. Burton................. 2,715
O. Gene Gabbard.................. 2,715
Campbell B. Lanier, III.......... 237,207
Foster O. McDonald............... 19,279
Steven D. Moses.................. 44,878
J. Thomas Mullis................. 14,689
Sara L. Plunkett................. 10,098
William H. Scott, III............ 287,016
Douglas A. Shumate............... 57,559
Andrew M. Walker................. 28,919
-------
Total.......................... 705,075
=======
</TABLE>
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<PAGE>
(c) Excludes 1,480,771 shares of Common Stock which will be issuable upon
conversion of the Series A Preferred Stock issued in the Reorganization.
See "History of the Company--Reorganization." The address of SCANA
Communications, Inc. is 440 Knox Abbott Drive, Suite 240, Cayce, SC 29033.
(d) The address of National Enterprises, Inc. is 535 North New Ballas Road,
St. Louis, MO 63141.
(e) Includes 324,399 shares held of record by Mr. J. Lanier's wife; 29,837
shares held of record by the Lanier Family Foundation, of which Mr. J.
Lanier is co-trustee; and 57,380 shares held of record by the Campbell
Lanier, Jr. Irrevocable Life Insurance Trust, of which Mr. J. Lanier is
co-trustee.
(f) Includes 61,919 shares held of record by The Burton Partnership, Limited
Partnership, of which Mr. Burton is the sole general partner; 108,648
shares held of record by South Atlantic Venture Fund II, Limited
Partnership, of which South Atlantic Venture Partners II, Limited
Partnership is the sole general partner, of which Mr. Burton is the
managing general partner; 562,690 shares held of record by South Atlantic
Venture Fund III, Limited Partnership, of which South Atlantic Venture
Partners III, Limited Partnership is the sole general partner, of which
Mr. Burton is the managing partner; 180,758 shares held of record by South
Atlantic Venture Fund IV, L.P., of which Mr. Burton is a general partner;
and 278,286 shares held of record by South Atlantic Venture Fund IV (QP),
L.P., of which Mr. Burton is a general partner. Also includes 2,715
unexercised but vested options held of record by South Atlantic Venture
Fund II, Limited Partnership.
(g) Includes 298,311 shares held of record by the Malcolm C. Davenport, V
Family Trust, of which Mr. Davenport is co-trustee.
(h) Includes 2,008,632 shares held of record by National Enterprises, Inc., of
which Mr. Dolson is President.
(i) Includes 1,206 shares in the aggregate held of record by Mr. C. Lanier's
wife; 29,837 shares held of record by the Lanier Family Foundation, of
which Mr. C. Lanier is co-trustee; and 57,380 shares held of record by the
Campbell Lanier, Jr. Irrevocable Life Insurance Trust, of which Mr. C.
Lanier is co-trustee.
(j) Includes 175,809 shares held of record by three McDonald family trusts, of
which Mr. McDonald is trustee and 114 shares held of record by Mr.
McDonald's wife.
(k) Includes 1,000 shares held of record by Mr. Parr's wife.
(l) Includes 1,262 shares held of record by Mr. Scott's wife; 229 shares held
of record by Mr. Scott's minor daughter; 29,837 shares held of record by
the Lanier Family Foundation, of which Mr. Scott is co-trustee; 57,380
shares held by the Campbell Lanier, Jr. Irrevocable Life Insurance Trust,
of which Mr. Scott is co-trustee; 104,714 shares held of record by
Campbell B. Lanier, III Charitable Remainder Trust, of which Mr. Scott is
trustee; 23,581 shares held in trust for Mr. Scott's minor daughter, of
which Mr. Scott's wife is co-trustee; and 1,434 shares held of record by
the Campbell B. Lanier, IV 2503(c) Trust, of which Mr. Scott is trustee.
(m) Includes 1,211 shares held of record by Mr. Shumate's wife and 22 shares
held of record by Mr. Shumate's son.
(n) Includes 1,777,919 shares held of record by SCANA. Mr. Timmerman is Chief
Executive Officer of SCANA Corporation, SCANA's parent company.
(o) Includes 114 shares held of record by Mr. Walker's wife.
82
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
The Company's wholly owned subsidiary, Interstate FiberNet, Inc. (the
"Borrower"), has a credit agreement with NationsBank of Texas, N.A. (the
"Credit Agreement"). The Credit Facility will mature on February 24, 2003. The
Credit Agreement provides for a $50.0 million revolving Credit Facility to be
used for working capital and other purposes, including refinancing
indebtedness of the Borrower existing at the closing of the Credit Facility,
capital expenditures and permitted acquisitions. The following summary of the
material provisions of the Credit Agreement does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
Credit Agreement. Certain capitalized terms used in this description of the
Credit Facility are defined at the end of this section.
Amounts drawn under the Credit Facility will bear interest, at the
Borrower's option, at either the Base Rate or the LIBOR Rate, plus an
Applicable Margin. The Applicable Margin will be an annual rate which will
fluctuate based on the Borrower's Total Leverage Ratio and which will be
between 1.125% and 0% for Base Rate borrowings and between 2.125% and 1.0% for
LIBOR Rate borrowings.
The Credit Agreement requires the Borrower to repay indebtedness outstanding
under the Credit Facility with the net cash proceeds from sales of assets by
the Company, the Borrower or the Borrower's subsidiaries other than in the
ordinary course of business and from certain public or private issuances of
equity securities or debt securities (excluding the Senior Notes Offering) by
the Company, the Borrower or the Borrower's subsidiaries.
The Borrower's obligations under the Credit Facility are guaranteed by the
Company and the Borrower's subsidiaries and are secured by a first priority
lien on all current and future assets and properties of the Borrower and its
subsidiaries, except for certain contract rights and interests in real estate,
and by a first priority pledge of the stock of the Borrower and its
subsidiaries.
The Credit Agreement contains negative covenants limiting the ability of the
Borrower, the Borrower's current and future subsidiaries and the Company to
incur debt, create liens, pay dividends, make distributions or stock
repurchases, make investments or capital expenditures, change their business,
issue capital stock, engage in transactions with affiliates, sell assets,
engage in mergers and acquisitions and assume or make guaranties. In addition,
the Credit Agreement contains affirmative covenants, including covenants
requiring compliance with laws, maintenance of corporate existence, licenses,
properties and insurance, payment of taxes and performance of other material
obligations and the delivery of financial and other information.
The Credit Agreement restricts the Borrower from declaring and paying
dividends or other distributions to the Company. However, the Borrower is
permitted to pay dividends to the Company to pay scheduled interest on (i) the
1997 Senior Notes beginning after the sixth scheduled interest payment and
(ii) the Notes, unless at the time of such dividend or distribution an event
of default (other than an event of default resulting solely from the breach of
a representation or warranty) under the Credit Agreement exists or would be
caused by such dividend or distribution; provided that, with respect to any
event of default (other than a payment default, a bankruptcy event with
respect to the Company, the Borrower or (with respect to the Notes) any
Significant Subsidiary of the Company, or an event in which any portion of the
assets of the Borrower and its subsidiaries that has generated more than 5% of
the Operating Cash Flow for the most recently completed twelve-month period
shall not be operating for a period in excess of 30 days), the Borrower will
not be prohibited for more than 180 days from paying dividends to the Company
to pay scheduled cash interest due and payable on the 1997 Senior Notes and
the Notes.
The Credit Agreement also requires the Borrower to comply with certain
financial tests and to maintain certain financial ratios on a consolidated
basis. The Borrower must maintain (i) a Total Leverage Ratio no greater than
9.5:1.0 through June 30, 1999, 8.75 to 1.0 from July 1, 1999 to June 30, 2000,
7.5 to 1.0 from July 1, 2000 to June 30, 2001, 6.0 to 1.0 from July 1, 2001 to
June 30, 2002 and 4.5 to 1.0 from July 1, 2002 and thereafter;
83
<PAGE>
(ii) a Senior Leverage Ratio no greater than 2.75:1.0 through June 30, 2000
and 2.25:1.0 thereafter; (iii) an Interest Coverage Ratio no less than
1.50:1.0 (or, in the event the Borrower does not redeem 35% of the 1997 Senior
Notes within 60 days after the closing date of the Credit Agreement, 1.75:1.0)
through June 30, 2000 and 1.75:1.0 thereafter; and (iv) capital expenditures
no greater than $105,000,000 for fiscal year 1998, $100,000,000 for fiscal
year 1999, $50,000,000 for fiscal year 2000, $45,000,000 for fiscal year 2001
and for each fiscal year thereafter; provided, that (A) to the extent that
less than such amount is used for any fiscal year, the limitation on capital
expenditures for succeeding fiscal years may be increased by the amount of
such unused amount and (B) the Borrower may add $25,000,000 in the aggregate
to the maximum amounts set forth above, provided that at the time the Borrower
elects to increase the maximum amount by any portion of the $25,000,000, there
exists no event of default.
Failure to satisfy any of the financial covenants constitutes an event of
default under the Credit Facility, notwithstanding the ability of the Borrower
to meet its debt service obligations. The Credit Agreement also includes other
customary events of default, including, without limitation, a cross-default to
other indebtedness, material undischarged judgments, bankruptcy and a change
of control.
As used in this section:
"Annualized Operating Cash Flow" means Operating Cash Flow for the six-month
period most recently ended, multiplied by two.
"Interest Coverage Ratio" means, for the Borrower on a consolidated basis
for any period, the ratio of Annualized Operating Cash Flow to the aggregate
amount of interest due and payable by the Company, the Borrower and the
Borrower's subsidiaries with respect to Total Debt during such period net of
interest on the 1997 Senior Notes funded by pledged securities, interest
income for such period, interest actually paid-in-kind, any one-time facility
fees paid in connection with the Credit Facility and in connection with any
pre-existing debt of the Company, the Borrower or the Borrower's subsidiaries,
up to $9.5 million of accrued interest paid by the Borrower to ITC Holding
prior to September 17, 1987, one-time prepayment penalties incurred as a
result of the extinguishment on the closing date of the Credit Agreement of
interest rate protection agreements of the Borrower in an amount not in excess
of $2,800,000 and any interest expense associated exclusively with the mark to
market on such closing date of interest rate protection agreements of the
Borrower in an amount not in excess of $2,800,000.
"Operating Cash Flow" for any period means the consolidated net income
(loss) of the Company, the Borrower and the Borrower's subsidiaries for such
period plus the following amounts for such period, to the extent included in
the determination of such income (loss): depreciation expense, amortization
expense and other non-cash charges reducing income, net interest expense, and
income tax expense.
"Senior Leverage Ratio" means, for the Borrower on a consolidated basis at
any date, the ratio of Senior Debt (Total Debt minus the aggregate outstanding
principal amount, and accrued and unpaid interest, on the Notes and the 1997
Senior Notes plus aggregate cash balances in excess of $5,000,000) to
Annualized Operating Cash Flow.
"Total Debt" means the aggregate indebtedness of the Borrower for borrowed
money on a consolidated basis.
"Total Leverage Ratio" means at any date, for the Borrower on a consolidated
basis, the ratio of Total Debt (net of cash balances in excess of $5,000,000
plus the balance of pledged securities securing the 1997 Senior Notes) on such
date to Annualized Operating Cash Flow.
1997 SENIOR NOTES
On June 3, 1997, the Company completed the sale of $200.0 million principal
amount of its 11% Senior Notes due 2007. Interest on the 1997 Senior Notes is
payable semiannually in cash, on each June 1 and December 1.
84
<PAGE>
The 1997 Senior Notes are unsubordinated indebtedness of the Company,
ranking pari passu in right of payment with all existing and future
unsubordinated indebtedness of the Company, including the Notes. At December
31, 1997, approximately $50.5 million of the net proceeds from the sale of the
1997 Senior Notes were being held in a pledged account as security for and to
fund the balance of the first six interest payments on the 1997 Senior Notes.
The 1997 Senior Notes will mature on June 1, 2007. The 1997 Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after June 1, 2002, initially at 105.5% of their principal amount,
declining ratably to 100% of their principal amount, plus accrued interest, on
or after June 1, 2004. On April 2, 1998, the Company redeemed $70.0 million
principal amount of the 1997 Senior Notes with proceeds remaining from the
Equity Offering, at an aggregate redemption price of 111% of such principal
amount, plus accrued and unpaid interest of approximately $2.6 million.
Upon a "Change of Control" of the Company (as defined in the 1997 Note
Indenture), the Company will be required to make an offer to purchase the 1997
Senior Notes at a purchase price equal to 101% of their principal amount, plus
accrued interest.
The 1997 Note Indenture contains certain covenants that affect, and in
certain cases significantly limit or prohibit, among other things, the ability
of the Company to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations. If the Company fails to comply with
these covenants, the Company's obligation to repay the 1997 Senior Notes may
be accelerated. However, these limitations are subject to a number of
important qualifications and exceptions. In particular, while the 1997 Senior
Notes Indenture restricts the Company's ability to incur additional
indebtedness by requiring compliance with specified leverage ratios, it
permits the Company and its subsidiaries to incur an unlimited amount of
additional indebtedness to finance the acquisition of equipment, inventory and
network assets and up to $100.0 million of additional indebtedness.
85
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Senior Notes were, and the Exchange Notes will be, issued under the
Indenture, to be dated as of the Closing Date, between the Company and United
States Trust Company of New York, trustee under the Indenture (the "Trustee").
A copy of the Indenture is available from the Company upon request. The
following summary contains a description of certain provisions of the
Indenture, but does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended. For
definitions of certain capitalized terms used in the following summary, see
"--Certain Definitions."
GENERAL
The terms of the Exchange Notes will be indentical in all material respects
to the Senior Notes, except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
Holders of the Exchange Notes will not be entitled to certain rights of
Holders of Senior Notes under the Registration Rights Agreement.
The Exchange Notes will be unsecured unsubordinated obligations of the
Company, initially limited to $160,000,000 aggregate principal amount, and
will mature on March 1, 2008. Each Exchange Note will bear interest at the
rate of 8 7/8% from the Closing Date or from the most recent Interest Payment
Date to which interest has been paid or provided for, payable semiannually (to
Holders of record at the close of business on the February 15 or August 15
immediately preceding the Interest Payment Date) on March 1 and September 1 of
each year, commencing September 1, 1998.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially
will be the corporate trust office of the Trustee at 114 West 47th Street, New
York, New York 10036-1532); provided that, at the option of the Company,
payment of interest may be made by check mailed to the Holders at their
addresses as they appear in the Security Register.
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof. See "--Book-Entry; Delivery and Form." No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Exchange
Notes offered hereby and any additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, on or after March 1, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed
by first class mail to each Holder's last address, as it appears in the
Security Register, at the following Redemption Prices (expressed in
percentages of principal amount), plus accrued and unpaid interest to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is prior to the Redemption Date to receive interest
due on an Interest Payment Date), if redeemed during the 12-month period
commencing March 1 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003........................................................ 104.4375%
2004........................................................ 102.9583
2005........................................................ 101.4792
2006 and thereafter......................................... 100.0000
</TABLE>
86
<PAGE>
In addition, at any time prior to March 1, 2001, the Company may redeem up
to 35% of the principal amount of the Notes with the proceeds of one or more
Public Equity Offerings, at any time or from time to time in part, at a
Redemption Price (expressed as a percentage of principal amount) of 108.875%,
plus accrued and unpaid interest to the Redemption Date (subject to the rights
of Holders of record on the relevant Regular Record Date that is prior to the
Redemption Date to receive interest due on an Interest Payment Date); provided
that at least $104.0 million aggregate principal amount of Notes remains
outstanding after each such redemption.
If less than all of the Notes are to be redeemed at any time, the Trustee
will select the Notes, or portions thereof, for redemption in compliance with
the requirements of the principal national securities exchange, if any, on
which the Notes are listed or, if the Notes are not listed on a national
securities exchange, on a pro rata basis, by lot or by such other method as
the Trustee in its sole discretion shall deem to be fair and appropriate;
provided that no Note of $1,000 in principal amount or less shall be redeemed
in part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note shall state the portion of the principal amount thereof
to be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company entered into the Registration Rights Agreement with the
Placement Agents, for the benefit of the holders of Senior Notes, pursuant to
which the Company agreed to file the Registration Statement (of which this
Prospectus is a part) with the Commission. The Registration Rights Agreement
provides that the Company will, at its cost, use its best efforts to cause the
Registration Statement to be filed with the Commission not later than 60 days
after the Closing Date (as defined in the Purchase Agreement attached as an
exhibit to the Registration Statement of which this Prospectus is a part) and
declared effective under the Securities Act. Upon the effectiveness of the
Registration Statement, the Company will offer the Exchange Notes in exchange
for surrender of the Senior Notes. The Company has agreed to keep the Exchange
Offer open for not less than 20 days after the date notice of the Exchange
Offer is mailed to the holders of Senior Notes. For each Senior Note
surrendered to the Company pursuant to the Exchange Offer, the holder of such
Senior Note will receive an Exchange Note having a principal amount equal to
that of the surrendered Senior Note. Under existing Commission
interpretations, the Exchange Notes would be freely transferable by holders
other than affiliates of the Company after the Exchange Offer without further
registration under the Securities Act if the holder of the Exchange Notes
represents that it is acquiring the Exchange Notes in the ordinary course of
its business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Company, as such terms are interpreted by the Commission;
provided that broker-dealers ("Participating Broker-Dealers") receiving
Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to Exchange Notes with the
prospectus contained in the Registration Statement under certain
circumstances. Under the Registration Rights Agreement, the Company is
required to allow Participating Broker-Dealers and other persons, if any, with
similar prospectus delivery requirements to use this Prospectus in connection
with the resale of such Exchange Notes.
A holder of Senior Notes who wishes to exchange such Senior Notes for
Exchange Notes in the Exchange Offer will be required to represent that, among
other things, any Exchange Notes to be received by it will be acquired in the
ordinary course of its business and that at the time of the commencement of
the Exchange Offer it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
the Exchange Notes and that it is not an "affiliate" of the Company, as
defined in Rule 405 of the Securities Act, or if it is an affiliate, that it
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
The Company has filed the Registration Statement (of which this Prospectus
is a part) and will commence the Exchange Offer pursuant to the Registration
Rights Agreement. In the event that applicable interpretations of the staff of
the Commission do not permit the Company to effect the Exchange Offer, or
under certain other
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circumstances, the Company has agreed, at its cost, to use its best efforts to
file and cause to become effective a shelf registration statement (the "Shelf
Registration Statement") with respect to resales of the Senior Notes and to
keep the Shelf Registration Statement effective until the expiration of the
time period referred to in Rule 144(k) under the Securities Act or such
shorter period that will terminate when all Senior Notes covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement. The Company has agreed, in the event a Shelf Registration Statement
is filed, among other things, to provide to each holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is a part of
the Shelf Registration Statement, to notify each such holder when the Shelf
Registration Statement has become effective and to take certain other actions
as are required to permit unrestricted resales of the Senior Notes. A holder
selling such Senior Notes pursuant to the Shelf Registration Statement
generally would be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
In the event the Exchange Offer is not consummated and a Shelf Registration
Statement is not declared effective on or prior to the date that is six months
after the Closing Date, the interest rate on the Senior Notes will be
increased by .5% per annum until the Exchange Offer is consummated or the
Shelf Registration is declared effective.
Senior Notes not tendered in the Exchange Offer shall accrue interest at the
rate of 8 7/8% per annum and be subject to all of the terms and conditions
specified in the Indenture and to the transfer restrictions described in
"Transfer Restrictions."
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Rights Agreement, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
RANKING
The Exchange Notes will be unsubordinated indebtedness of the Company,
ranking pari passu in right of payment with the Senior Notes, the 1997 Senior
Notes and all other existing and future unsubordinated indebtedness of the
Company and senior in right of payment to all subordinated indebtedness of the
Company. At December 31, 1997, on a pro forma basis, giving effect to the
Senior Notes Offering and the Redemption, the Company would have had $293.7
million of indebtedness and its stockholders' equity would have been $141.7
million. On a pro forma basis, the Company's earnings would have been
insufficient to cover its fixed charges for the year ended December 31, 1997
by approximately $22.2 million and its EBITDA less capital expenditures and
interest expense would have been approximately negative $51.7 million. In
addition, under the Indenture, the Company is permitted to incur additional
indebtedness to finance the acquisition of equipment, inventory and other
assets and up to $100.0 million of other indebtedness (which may be increased
to $250.0 million under certain conditions) and is permitted to secure any
such indebtedness. The Exchange Notes will be effectively subordinated to such
security interests to the extent of such security interests.
The Company is a holding company which conducts substantially all of its
business through subsidiaries. The Company's subsidiaries will have no direct
obligation to pay amounts due on the Notes and will not guarantee the Notes.
As a result, the Notes will be effectively subordinated to all existing and
future indebtedness and other liabilities (including trade payables) of the
Company's subsidiaries. As of December 31, 1997, the Company's subsidiaries
had approximately $30.5 million of liabilities (excluding intercompany
payables), including approximately $3.9 million of indebtedness (including
capital leases). The Company will be dependent upon access to the cash flow or
assets of its subsidiaries to make payments on the Notes and the Company's
ability to obtain such access may be limited by law. See "Risk Factors--
Holding Company Structure; Priority of Secured Debt." In addition, a
subsidiary of the Company has $50.0 million of borrowings available under the
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Credit Facility. The Credit Facility is secured by substantially all of the
assets of the Company's subsidiaries. The Company and its other subsidiaries
have guaranteed all obligations under the Credit Facility. Indebtedness under
the Credit Facility will be effectively senior to the Exchange Notes to the
extent of such security interests. See "Risk Factors--Holding Company
Structure; Priority of Secured Debt."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for
which no definition is provided.
"Acquired Assets" means (i) the Capital Stock of any Person that becomes a
Restricted Subsidiary after the Closing Date and (ii) the real or personal
property (including tangible and intangible assets) of any Person that becomes
a Restricted Subsidiary after the Closing Date.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary; provided that Indebtedness of
such Person which is redeemed, defeased, retired or otherwise repaid at the
time of or immediately upon consummation of the transactions by which such
Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be
Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of any Person (other than a
Restricted Subsidiary) in which any Person (other than the Company or any of
its Restricted Subsidiaries) has a joint interest and the net income (or loss)
of any Unrestricted Subsidiary, except (x) with respect to net income, to the
extent of the amount of dividends or other distributions actually paid to the
Company or any of its Restricted Subsidiaries by such other Person or such
Unrestricted Subsidiary during such period and (y) with respect to net losses,
to the extent of the amount of cash contributed by the Company or any
Restricted Subsidiary to such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with the Company or any of its Restricted
Subsidiaries or all or substantially all of the property and assets of such
Person are acquired by the Company or any of its Restricted Subsidiaries;
(iii) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below,
any amount paid or accrued as dividends on Preferred Stock (other than accrued
dividends which, pursuant to the terms of the Preferred Stock, will not be
payable prior to the first anniversary after the Stated Maturity of the Notes)
of the Company or any Restricted Subsidiary owned by Persons other than the
Company and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting
from write-ups of capital assets (excluding write-ups in connection with
accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, all as set forth on the most recent quarterly or
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annual consolidated balance sheet of the Company and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the Commission
or provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant described below.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company
or any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of
the Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or
a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and assets (other than the Capital
Stock or other Investment in an Unrestricted Subsidiary) of the Company or any
of its Restricted Subsidiaries outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not governed
by the provisions of the Indenture applicable to mergers, consolidations and
sales of all or substantially all of the assets of the Company; provided that
"Asset Sale" shall not include (a) sales, transfers or other dispositions of
inventory, receivables and other current assets, (b) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $500,000 in any transaction or series of related
transactions or (c) sales, transfers or other dispositions of assets for
consideration at least equal to the fair market value of the assets sold,
transferred or otherwise disposed of to the extent the consideration received
would satisfy clause (B) of the "Limitation on Assets Sales" covenant
described below, provided that after giving pro forma effect to such exchange,
the Consolidated Leverage Ratio shall be no greater than the Consolidated
Leverage Ratio immediately prior to such exchange.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal
payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
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"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
of more than 35% of the total voting power of the Voting Stock of the Company
on a fully diluted basis and such ownership represents a greater percentage of
the total voting power of the Voting Stock of the Company, on a fully diluted
basis, than is held by the Existing Stockholders on such date; or (ii)
individuals who on the Closing Date constitute the Board of Directors
(together with any new directors whose election by the Board of Directors or
whose nomination by the Board of Directors for election by the Company's
stockholders was approved by a vote of at least two-thirds of the members of
the Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and non-
recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash
items reducing Adjusted Consolidated Net Income (other than items that will
require cash payments and for which an accrual or reserve is, or is required
by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated
Net Income, all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in conformity with GAAP; provided that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied
by (B) the quotient of (1) the number of shares of outstanding Common Stock of
such Restricted Subsidiary not owned on the last day of such period by the
Company or any of its Restricted Subsidiaries divided by (2) the total number
of shares of outstanding Common Stock of such Restricted Subsidiary on the
last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation
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of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net
Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in
connection with the offering of the Notes and the Reorganization, all as
determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the Four Quarter Period;
provided that, in making the foregoing calculation, (A) pro forma effect shall
be given to any Indebtedness to be Incurred or repaid on the Transaction Date;
(B) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of proceeds
of any Asset Disposition) that occur during the Reference Period, as if they
had occurred and such proceeds had been applied on the first day of such
Reference Period; (C) pro forma effect shall be given to asset dispositions
and asset acquisitions (including giving pro forma effect to the application
of proceeds of any asset disposition) that have been made by any Person that
has become a Restricted Subsidiary or has been merged with or into the Company
or any Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line
of business of the Person, that is acquired or disposed of for which financial
information is available; and (D) the aggregate amount of Indebtedness
outstanding as of the end of such Reference Period will be deemed to include
the total amount of funds outstanding and/or available on the Transaction Date
under any revolving credit or similar facilities of the Company or its
Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of the Company or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
"Consolidated Secured Indebtedness Leverage Ratio" means, on any Transaction
Date, the ratio of (i) the aggregate amount of Secured Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis outstanding on
such Transaction Date to (ii) the aggregate amount of Consolidated EBITDA for
the Four Quarter Period; provided that, in making the foregoing calculation,
(A) pro forma effect shall be given to any Secured Indebtedness to be Incurred
or repaid on the Transaction Date; (B) pro forma effect shall be given to
Asset Dispositions and Asset Acquisitions (including giving pro forma effect
to the application of proceeds of any Asset Disposition) that occur during the
Reference Period, as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; (C) pro forma effect shall be given
to asset dispositions and asset acquisitions (including giving pro forma
effect to the application of proceeds of any asset disposition) that have been
made by any Person that has become a Restricted Subsidiary or has been merged
with or into the Company or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions were Asset
Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; provided that to the extent that clause (B) or (C) of this
sentence requires
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that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line
of business of the Person, that is acquired or disposed of for which financial
information is available; and (D) the aggregate amount of Secured Indebtedness
outstanding as of the end of such Reference Period will be deemed to include
the total amount of funds outstanding and/or available on the Transaction Date
under any revolving credit or similar facilities of the Company or its
Restricted Subsidiaries to the extent that borrowings under such facilities
would constitute Secured Indebtedness.
"Credit Agreement" means the First Amended and Restated Credit Agreement
among Interstate FiberNet, Inc., NationsBank of Texas, N.A., as administrative
lender, and the lenders party thereto, as such agreement may be amended,
supplemented or modified from time to time.
"Credit Facilities" means revolving credit or working capital facilities or
similar facilities made available from time to time to the Company and its
Restricted Subsidiaries.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Existing Stockholders" means Campbell B. Lanier, III and SCANA Corporation
and their Affiliates, and Campbell B. Lanier, III's spouse and any one or more
of his lineal descendants and their spouses; provided however, that any such
person other than Campbell B. Lanier, III shall only be deemed to be an
"Existing Stockholder" to the extent such person's Capital Stock of the
Company was received, directly or indirectly, from Campbell B. Lanier, III.
"Fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a Board Resolution; provided that for purposes of clause
(viii) of the second paragraph of the "Limitation on Indebtedness" covenant,
(x) the fair market value of any security registered under the Exchange Act
shall be the average of the closing prices, regular way, of such security for
the 20 consecutive trading days immediately preceding the capital contribution
or sale of Capital Stock and (y) in the event the aggregate fair market value
of any other property (other than cash or cash equivalents) received by the
Company exceeds $10 million, the fair market value of such property shall be
determined by a nationally recognized investment banking firm and set forth in
their written opinion which shall be delivered to the Trustee.
"Four Quarter Period" means, with respect to any Transaction Date, the then
most recent four fiscal quarter period for which financial statements of the
Company have been filed with the Commission or provided to the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant described
below.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that computations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the offering of the
Notes or the Reorganization and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any
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obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services (unless such purchase arrangements are on arm's-
length and are entered into in the ordinary course of business), to take-or-
pay, or to maintain financial statement conditions or otherwise) or (ii)
entered into for purposes of assuring in any other manner the obligee of such
Indebtedness of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary
course of business. The term "Guarantee" used as a verb has a corresponding
meaning.
"Holder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables, (v) all Capitalized Lease
Obligations of such Person, (vi) all Indebtedness of other Persons secured by
a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness
of other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date (or, in the case of a revolving credit or
other similar facility, the total amount of funds outstanding and/or available
on the date of determination) of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (A)
that the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at the time of its issuance as determined in conformity with
GAAP, (B) that money borrowed and set aside at the time of the Incurrence of
any Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" and (C) that
Indebtedness shall not include any liability for federal, state, local or
other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the fair market value of the Capital Stock (or any other
Investment), held by the Company or any of its Restricted Subsidiaries, of (or
in) any Person that has ceased to be a Restricted Subsidiary, including,
without limitation, by
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reason of any transaction permitted by clause (iii) of the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant
described below. For purposes of the definition of "Unrestricted Subsidiary"
and the "Limitation on Restricted Payments" covenant described below, (i)
"Investment" shall include the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its
Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market
value of the assets (net of liabilities (other than liabilities to the Company
or any of its Subsidiaries)) of any Unrestricted Subsidiary at the time that
such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments and (iii) any property
transferred to or from any Person shall be valued at its fair market value at
the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes (whether or not such
taxes will actually be paid or are payable) as a result of such Asset Sale
without regard to the consolidated results of operations of the Company and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or
(B) is required to be paid as a result of such sale and (iv) appropriate
amounts to be provided by the Company or any Restricted Subsidiary as a
reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP, and (b) with respect to any capital contribution or
issuance or sale of Capital Stock, options, warrants or other rights to
acquire Capital Stock or Indebtedness, the proceeds of such capital
contribution or issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes or payable as a result thereof.
"Offer to Purchase" means an offer by the Company to purchase Notes from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue
to accrue interest pursuant to its terms; (iv) that, unless the Company
defaults in the payment of the purchase price, any Note accepted for payment
pursuant to the Offer to Purchase shall cease to accrue interest on and after
the Payment Date; (v) that Holders electing to have a Note purchased pursuant
to the Offer to Purchase will be required to surrender the Note, together with
the form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date; (vi) that Holders will be entitled to withdraw
their election if the Paying Agent receives, not later than the close of
business on the third Business Day immediately preceding the Payment Date, a
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of Notes delivered for purchase and a statement that such
Holder is withdrawing his election to have
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such Notes purchased; and (vii) that Holders whose Notes are being purchased
only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. On the Payment Date, the Company shall (i) accept
for payment on a pro rata basis Notes or portions thereof tendered pursuant to
an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions
thereof so accepted together with an Officers' Certificate specifying the
Notes or portions thereof accepted for payment by the Company. The Paying
Agent shall promptly mail to the Holders of Notes so accepted payment in an
amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The
Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Company is required to repurchase Notes
pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with
or into or transfer or convey all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided that such Person's primary
business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such Investment; (ii) a
Temporary Cash Investment; (iii) commission, payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (iv) stock,
obligations or securities received in satisfaction of judgments; (v)
Investments in prepaid expenses, negotiable instruments held for collection,
and lease, utility and workers' compensation, performance and other similar
deposits; and (vi) Interest Rate Agreements and Currency Agreements to the
extent permitted under clause (iv) of the "Limitation on Indebtedness"
covenant described below.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provisions, if any, as shall be required in
conformity with GAAP shall have been made; (ii) statutory and common law Liens
of landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of the
Company or any of its Restricted Subsidiaries; (vi) Liens (including
extensions and renewals thereof) upon real or personal property (including,
without limitation, tangible and intangible assets and Acquired Assets)
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including, without limitation, the cost of design, development, construction,
acquisition, installation, improvement, transportation or integration) of the
real or personal property (including tangible and intangible assets) subject
thereto and such Lien is created prior to, at the time of or within six months
after the latest of the acquisition, the completion of construction or the
commencement of full operation of such real or personal property; provided
that in the case of Acquired Assets, the Lien secures the Indebtedness
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Incurred to purchase the Capital Stock of the Person to make such Person a
Restricted Subsidiary, (b) the principal amount of the Indebtedness secured by
such Lien does not exceed 100% of such cost and (c) any such Lien shall not
extend to or cover any real or personal property other than such real or
personal property and any improvements on such real or personal property and
any proceeds thereof; (vii) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering
property or assets under construction arising from progress or partial
payments by a customer of the Company or its Restricted Subsidiaries relating
to such property or assets; (ix) any interest or title of a lessor in the
property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired and any proceeds
thereof; (xii) Liens in favor of the Company or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or order against
the Company or any Restricted Subsidiary that does not give rise to an Event
of Default; (xiv) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (xv) Liens in favor
of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods; (xvi)
Liens encumbering customary initial deposits and margin deposits, and other
Liens that are either within the general parameters customary in the industry
and incurred in the ordinary course of business, in each case securing
Indebtedness under Interest Rate Agreements and Currency Agreements and
forward contracts, options, future contracts, futures options or similar
agreements or arrangements designed solely to protect the Company or any of
its Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of the Company and
its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens on or
sales of receivables, including related intangible assets and proceeds
thereof; and (xix) Liens that secure Indebtedness with an aggregate principal
amount not to exceed $5 million at any time outstanding.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"Public Equity Offering" means an underwritten primary offering of Common
Stock of the Company pursuant to an effective registration statement under the
Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable in any
material respect to the holders of such Capital Stock than the provisions
contained in "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below are to the holders of the Notes
and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant
to the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of
Control" covenants described below.
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"Reference Period" means, with respect to any Transaction Date, the period
from the beginning of the Four Quarter Period with respect to such Transaction
Date through such Transaction Date.
"Reorganization" means the transactions in which ITC Holding Company, Inc.,
a Delaware corporation, contributed to the Company its investments in the
Reorganization Subsidiaries (or their successors-in-interest).
"Reorganization Subsidiaries" means, collectively, (i) DeltaCom, Inc., an
Alabama corporation; (ii) Eastern Telecom, Inc., a Georgia corporation; (iii)
Gulf States Transmission Systems, Inc., a Delaware corporation; (iv) ITC
Transmission Systems, Inc., a Delaware corporation; (v) ITC Transmission
Systems II, Inc., a Delaware corporation; and (vi) Interstate FiberNet, a
Georgia general partnership.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Secured Indebtedness" means Indebtedness of the Company or any of its
Restricted Subsidiaries that is secured by Liens on the property or assets of
the Company or any of its Restricted Subsidiaries.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent
fiscal year of the Company, accounted for more than 10% of the consolidated
revenues of the Company and its Restricted Subsidiaries or (ii) as of the end
of such fiscal year, was the owner of more than 10% of the consolidated assets
of the Company and its Restricted Subsidiaries, all as set forth on the most
recently available consolidated financial statements of the Company for such
fiscal year.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in the
Telecommunications Business that by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is Incurred, (i)
is expressly made subordinate in right of payment to the Notes and (ii)
provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of
the sale of Capital Stock (other than Redeemable Stock) of the Company after
the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Telecommunications Business" means the development, ownership or operation
of one or more telephone, telecommunications or information systems or the
provision of telephony, telecommunications or information services (including,
without limitation, any voice, video transmission, data or Internet services)
and any related, ancillary or complementary business.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of
America or any agency thereof, (ii) time deposit accounts, certificates of
deposit and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50 million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker
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dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) commercial paper, maturing not more than one year
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings
Service, and (v) securities with maturities of six months or less from the
date of acquisition issued or fully and unconditionally guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Service or Moody's Investors Service, Inc.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Restricted Subsidiary (including any newly acquired or newly formed Subsidiary
of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns
any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any Restricted Subsidiary; provided that either (A) the Subsidiary
to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the "Limitation on Restricted Payments" covenant described below. The
Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (i) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred
at such time, have been permitted to be Incurred for all purposes of the
Indenture. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur
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Indebtedness if, after giving effect to the Incurrence of such Indebtedness
and the receipt and application of the proceeds thereof, the Consolidated
Leverage Ratio would be less than or equal to 7 to 1, for Indebtedness
Incurred on or prior to June 30, 1998, or less than or equal to 5 to 1, for
Indebtedness Incurred thereafter.
Notwithstanding the foregoing, the Company, and (except as specified below)
any Restricted Subsidiary, may Incur each and all of the following: (i)
Indebtedness in an aggregate principal amount outstanding or available at any
time not to exceed the sum of (A) $150 million, plus (B) $100 million, if
after giving effect to the Incurrence of such Indebtedness and application of
the proceeds thereof the Consolidated Secured Indebtedness Leverage Ratio
would be less than or equal to 2.25 to 1, less (C) any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described below; (ii) Indebtedness owed (A) to the Company and
evidenced by an unsubordinated promissory note or (B) to any Restricted
Subsidiaries; provided that any event which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of
such Indebtedness (other than to the Company or another Restricted Subsidiary)
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness (other than Indebtedness Incurred under clause
(i), (ii), (iv), (vi) or (ix) of this paragraph) and any refinancings of such
new Indebtedness in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the proceeds of which are used to refinance or refund the Notes
or Indebtedness that is pari passu in right of payment with, or subordinated
in right of payment to, the Notes shall only be permitted under this clause
(iii) if (A) in case the Notes are refinanced in part or the Indebtedness to
be refinanced is pari passu in right of payment with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu in right of payment with, or subordinate in right of payment to, the
remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated
in right of payment to the Notes, such new Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made subordinate
in right of payment to the Notes at least to the extent that the Indebtedness
to be refinanced is subordinated to the Notes and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to
the remaining Average Life of the Indebtedness to be refinanced or refunded;
and provided further that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant
to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety
or appeal bonds provided in the ordinary course of business, (B) under
Currency Agreements and Interest Rate Agreements; provided that such
agreements (a) are designed solely to protect the Company or its Subsidiaries
against fluctuations in foreign currency exchange rates or interest rates and
(b) do not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder or (C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any obligations
of the Company or any of its Restricted Subsidiaries pursuant to such
agreements, in each case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition), in a principal amount not to exceed the gross proceeds actually
received by the Company or any Restricted Subsidiary in connection with such
disposition; (v) Indebtedness of the Company, to the extent the net proceeds
thereof are promptly (A) used to purchase Notes tendered in an Offer to
Purchase made as a result of a Change of Control or (B) deposited to defease
all of the Notes as described below under "Defeasance"; (vi) Guarantees of the
Notes and Guarantees of Indebtedness of the Company by any Restricted
Subsidiary, provided the Guarantee of such Indebtedness is permitted by and
made in accordance with the "Limitation on Issuance of Guarantees by
Restricted Subsidiaries" covenant described below; (vii) Indebtedness
(including Acquired Indebtedness) Incurred to finance the cost (including the
cost of design, development, acquisition, construction, installation,
improvement, transportation or integration) for the Company or a Restricted
Subsidiary to acquire equipment, inventory or other assets (tangible
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or intangible) used or useful in a Telecommunications Business after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one
time outstanding, two times (A) the Net Cash Proceeds received by the Company
after the Closing Date as a capital contribution or from the issuance and sale
of its Capital Stock (other than Redeemable Stock) to a Person that is not a
Subsidiary of the Company, to the extent such Net Cash Proceeds have not been
used pursuant to clause (C)(2) of the first paragraph or clause (iii), (iv) or
(vi) of the second paragraph of the "Limitation on Restricted Payments"
covenant described below to make a Restricted Payment and (B) 80% of the fair
market value of property (other than cash and cash equivalents) received by
the Company after the Closing Date from a contribution of capital or the sale
of its Capital Stock (other than Redeemable Stock) to a Person that is not a
Subsidiary of the Company, to the extent such capital contribution or sale of
Capital Stock has not been used pursuant to clause (iii), (iv) or (ix) of the
second paragraph of the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment; provided that such Indebtedness does not
mature prior to the Stated Maturity of the Notes and has an Average Life
longer than the Notes; and (ix) Strategic Subordinated Indebtedness.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded due solely to the result of fluctuations in
the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included and (2) any Liens granted pursuant to the equal and ratable
provisions referred to in the "Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with this "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Company, in its sole discretion, shall
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any
distribution on or with respect to its Capital Stock (other than (x) dividends
or distributions payable solely in shares of its Capital Stock (other than
Redeemable Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders, provided that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by
Persons other than the Company or any of its Restricted Subsidiaries, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of (A) the Company or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or (B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of 5% or more of the Capital Stock of the
Company, (iii) make any voluntary or optional principal payment, or voluntary
or optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes (other than, in each case, the purchase,
repurchase or acquisition of Indebtedness in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in any case
due within one year after the date of such purchase, repurchase or
acquisition) or (iv) make any Investment, other than a Permitted Investment,
in any Person (such payments or any other actions described in clauses (i)
through (iv) above being collectively "Restricted Payments") if, at the time
of, and after giving effect to, the proposed Restricted Payment: (A) a Default
or Event of Default shall have occurred and be continuing, (B) the Company
could not Incur at least $1.00 of Indebtedness under the first paragraph of
the "Limitation on Indebtedness" covenant or (C) the aggregate amount of all
Restricted Payments
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(the amount, if other than in cash, to be determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) made after the Closing Date shall exceed the sum of (1) 50%
of the aggregate amount of the Adjusted Consolidated Net Income (or, if the
Adjusted Consolidated Net Income is a loss, minus 100% of the amount of such
loss) (excluding, for purposes of such computation, income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the fiscal
quarter immediately following the Closing Date and ending on the last day of
the last fiscal quarter preceding the Transaction Date for which reports have
been filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant plus (2) the aggregate
Net Cash Proceeds received by the Company after the Closing Date from a
capital contribution or the issuance and sale permitted by the Indenture to a
Person who is not a Subsidiary of the Company of (a) its Capital Stock (other
than Redeemable Stock), (b) any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Redeemable Stock
or any options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated Maturity of
the Notes) and (c) Indebtedness of the Company that has been exchanged for or
converted into Capital Stock of the Company (other than Redeemable Stock), in
each case except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (viii) of the second paragraph under the
"Limitation on Indebtedness" covenant, plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments and
reductions in Investments made pursuant to clause (vi) of the second paragraph
of this "Limitation on Restricted Payments" covenant) in any Person resulting
from payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or proceeds
is included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed,
in each case, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at
such date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes, including premium, if any, and accrued and unpaid interest, with
the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii)
of the second paragraph of part (a) of the "Limitation on Indebtedness"
covenant; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Redeemable Stock)
of the Company (or options, warrants or other rights to acquire such Capital
Stock); (iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of, a substantially concurrent
offering of shares of the Capital Stock (other than Redeemable Stock) of the
Company (or options, warrants or other rights to acquire such Capital Stock);
(v) payments or distributions to dissenting stockholders pursuant to
applicable law in connection with a consolidation, merger or transfer of
assets that complies with the provisions of the Indenture applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company; (vi) Investments in any Person the primary
business of which is related, ancillary or complementary to the business of
the Company and its Restricted Subsidiaries on the date of such Investments;
provided that the aggregate amount of Investments made pursuant to this clause
(vi) does not exceed the sum of (x) $25 million plus (y) the amount of Net
Cash Proceeds received by the Company after the Closing Date as a capital
contribution or from the sale of its Capital Stock (other than Redeemable
Stock) to a Person who is not a Subsidiary of the Company, except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or
clauses (iii) or (iv) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (z) the net reduction in Investments made pursuant to
this clause (vi) resulting from distributions on or
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repayments of such Investments or from the Net Cash Proceeds from the sale of
any such Investment (except in each case to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net Income)
or from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"), provided that the net reduction
in any Investment shall not exceed the amount of such Investment; (vii) the
purchase, redemption, acquisition, cancellation or other retirement for value
of shares of Capital Stock of the Company to the extent necessary, in the
judgment of the Board of Directors, to prevent the loss or secure the renewal
or reinstatement of any license or franchise held by the Company or any
Restricted Subsidiary from any governmental agency; (viii) the purchase,
redemption, retirement or other acquisition for value of shares of Capital
Stock of the Company, or options to purchase such shares, held by directors,
employees, or former directors or employees of the Company or any Restricted
Subsidiary (or their estates or beneficiaries under their estates) upon their
death, disability, retirement, termination of employment or pursuant to the
terms of any agreement under which such shares of Capital Stock or options
were issued; provided that the aggregate consideration paid for such purchase,
redemption, retirement or other acquisition for value of such shares of
Capital Stock or options after the Closing Date does not exceed $2 million in
any calendar year, or $5 million in the aggregate; or (ix) Investments
acquired as a capital contribution to the Company or in exchange for Capital
Stock (other than Redeemable Stock) of the Company; provided that, except in
the case of clauses (i), (iii) and (iv), no Default or Event of Default shall
have occurred and be continuing, or occur as a consequence of the actions or
payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof and an Investment referred to in clause (ix) thereof), and the
Net Cash Proceeds from any issuance of Capital Stock referred to in clauses
(iii), (iv) and (vi) thereof, shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu in right of payment with the
Notes, then the Net Cash Proceeds of such issuance shall be included in clause
(C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions
permitted by applicable law on any Capital Stock of such Restricted Subsidiary
owned by the Company or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (iii)
make loans or advances to the Company or any other Restricted Subsidiary or
(iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances
and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the Holders than
those encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced; (ii) existing under or by reason of
applicable law; (iii) existing with respect to any Person or the property or
assets of such Person acquired by the Company or any Restricted Subsidiary and
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person
or the property or assets of any Person other than such Person or the property
or assets of such Person so acquired; (iv) in the case of clause (iv) of the
first paragraph of this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary
manner the subletting, assignment or transfer of any property or asset that is
a lease, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or right
with
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respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that
has been entered into for the sale or disposition of all or substantially all
of the Capital Stock of, or property and assets of, such Restricted
Subsidiary; or (vi) contained in the terms of any Indebtedness or any
agreement pursuant to which such Indebtedness was issued if (A) the
encumbrance or restriction applies only in the event of a payment default or a
default with respect to a financial covenant contained in such Indebtedness or
agreement; provided that in the case of the Credit Agreement the encumbrance
or restriction may apply if an event of default (other than an event of
default resulting solely from the breach of a representation or warranty)
occurs and is continuing under the Credit Agreement; provided that, with
respect to any event of default (other than a payment default, a bankruptcy
event with respect to the Company, Interstate FiberNet, Inc. or any
Significant Subsidiary or the loss of a material license or fiber network)
under the Credit Agreement, such encumbrance or restriction may not prohibit
dividends to the Company to pay scheduled interest on the Notes for more than
180 days in any consecutive 360-day period, (B) the encumbrance or restriction
is not materially more disadvantageous to the Holders of the Notes than is
customary in comparable financings (as determined by the Company) and (C) the
Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest payments
on the Notes.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant described below or (2) restricting the sale or other disposition of
property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary, (ii) issuances of director's qualifying shares, or
sales to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant if
made on the date of such issuance or sale or (iv) issuances or sales of Common
Stock of a Restricted Subsidiary, provided that the Company or such Restricted
Subsidiary applies the Net Cash Proceeds, if any, of any such sale in
accordance with clause (A) or (B) of the "Limitation on Asset Sales" covenant
described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
in right of payment with, or subordinate in right of payment to, the Notes
("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes
by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives, and
will not in any manner whatsoever claim or take the benefit or advantage of,
any rights of reimbursement, indemnity or subrogation or any other rights
against the Company or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided
that this paragraph shall not be applicable to (x) any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary or (y) any Guarantee of any
Restricted Subsidiary of Indebtedness Incurred (I) under Credit
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Facilities pursuant to clause (i) of the second paragraph of the "Limitation
on Indebtedness" covenant or (II) pursuant to clause (vii) of the second
paragraph of the "Limitation on Indebtedness" covenant. If the Guaranteed
Indebtedness is (A) pari passu in right of payment with the Notes, then the
Guarantee of such Guaranteed Indebtedness shall be pari passu in right of
payment with, or subordinated in right of payment to, the Subsidiary Guarantee
or (B) subordinated in right of payment to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated in right of payment to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness
is subordinated in right of payment to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release
or discharge of the Guarantee which resulted in the creation of such
Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such Guarantee.
Limitation on Transactions with Stockholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Company or with any Affiliate of the Company or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable in any material
respect to the Company or such Restricted Subsidiary than could be obtained,
at the time of such transaction or, if such transaction is pursuant to a
written agreement, at the time of the execution of the agreement providing
therefor, in a comparable arm's-length transaction with a Person that is not
such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to: (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to the Company or
such Restricted Subsidiary from a financial point of view; (ii) any
transaction solely between the Company and any of its Wholly Owned Restricted
Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the
payment of reasonable and customary regular fees to directors of the Company
who are not employees of the Company; (iv) any payments or other transactions
pursuant to any tax-sharing agreement between the Company and any other Person
with which the Company files a consolidated tax return or with which the
Company is part of a consolidated group for tax purposes; or (v) any
Restricted Payments not prohibited by the "Limitation on Restricted Payments"
covenant. Notwithstanding the foregoing, any transaction covered by the first
paragraph of this "Limitation on Transactions with Stockholders and
Affiliates" covenant and not covered by clauses (ii) through (v) of this
paragraph, the aggregate amount of which exceeds $5 million in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A)
or (B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to: (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or
Capital Stock of the Company or its Restricted Subsidiaries created in favor
of
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the Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such
other Restricted Subsidiary; (iv) Liens securing Indebtedness which is
Incurred to refinance secured Indebtedness which is permitted to be Incurred
under clause (iii) of the second paragraph of the "Limitation on Indebtedness"
covenant; provided that such Liens do not extend to or cover any property or
assets of the Company or any Restricted Subsidiary other than the property or
assets securing the Indebtedness being refinanced; (v) Liens securing
obligations under Credit Facilities Incurred under clause (i) of the second
paragraph of the "Limitation on Indebtedness" covenant; or (vi) Permitted
Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess
of three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company
and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary,
within 12 months after the sale or transfer of any assets or properties is
completed, applies an amount not less than the net proceeds received from such
sale in accordance with clause (A) or (B) of the first paragraph of the
"Limitation on Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the
Company or such Restricted Subsidiary is at least equal to the fair market
value of the assets sold or disposed of and (ii) at least 75% of the
consideration received consists of cash or Temporary Cash Investments. In the
event and to the extent that the Net Cash Proceeds received by the Company or
any of its Restricted Subsidiaries from one or more Asset Sales occurring on
or after the Closing Date in any period of 12 consecutive months exceed 10% of
Adjusted Consolidated Net Tangible Assets (determined as of the date closest
to the commencement of such 12-month period for which a consolidated balance
sheet of the Company and its Subsidiaries has been filed with the Commission
or provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant), then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply
an amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case owing to a
Person other than the Company or any of its Subsidiaries, or (B) invest an
amount equal to such excess Net Cash Proceeds, or the amount of such Net Cash
Proceeds not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in capital assets of a nature or type or that are used in a
business (or in a Person having capital assets of a nature or type, or engaged
in a business) similar or related to the nature or type of the property and
assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) apply (no later than the end of the 12-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed
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to be applied) during such 12-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $5 million, the
Company must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders on a pro rata
basis an aggregate principal amount of Notes equal to the Excess Proceeds on
such date, at a purchase price equal to 100% of the principal amount of the
Notes plus, in each case, accrued interest to the Payment Date.
Commission Reports and Reports to Holders
The Company shall file with the Commission the annual, quarterly and other
reports and other information required by Section 13(a) or 15(d) of the
Exchange Act, regardless of whether such sections of the Exchange Act are
applicable to the Company (unless the Commission will not accept such a
filing). The Company shall mail or cause to be mailed copies of such reports
and information to Holders and the Trustee within 15 days after the date it
files such reports and information with the Commission or after the date it
would have been required to file such reports and information with the
Commission had it been subject to such sections of the Exchange Act; provided,
however, that the copies of such reports and information mailed to Holders may
omit exhibits, which the Company will supply to any Holder at such Holder's
request.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company shall commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding,
at a purchase price equal to 101% of the principal amount thereof, plus
accrued interest to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities of the Company which might be
outstanding at the time). The foregoing covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company
to repay all indebtedness then outstanding which by its terms would prohibit
such Note repurchase, either prior to or concurrently with such Note
repurchase.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) defaults in the payment of principal of (or premium, if any,
on) any Note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise; (b) defaults in the payment of interest
on any Note when the same becomes due and payable, which defaults continue for
a period of 30 days; (c) defaults in the performance or breach of the
provisions of the Indenture applicable to mergers, consolidations and
transfers of all or substantially all of the assets of the Company, or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or the "Repurchase of Notes upon a Change of
Control" covenant described above; (d) defaults in the performance or breach
of any covenant or agreement of the Company in the Indenture or under the
Notes (other than a default specified in clause (a), (b) or (c) above), which
default or breach continues for a period of 30 consecutive days after written
notice by the Trustee or the Holders of at least 25% in aggregate principal
amount of the Notes then outstanding; (e) there occurs with respect to any
issue or issues of Indebtedness of the Company or any Significant Subsidiary
having an outstanding principal amount of $5 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now exists
or shall hereafter be created, (I) an event of default that has caused the
holder thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not
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have been made, waived or extended within 30 days of such payment default; (f)
any final judgment or order (not covered by insurance) for the payment of
money in excess of $5 million in the aggregate for all such final judgments or
orders against all such Persons (treating any deductibles, self-insurance or
retention as not so covered) shall be rendered against the Company or any
Significant Subsidiary and shall not be paid or discharged, and there shall be
any period of 30 consecutive days following entry of the final judgment or
order that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against all such Persons to exceed $5
million during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; (g) a court
having jurisdiction in the premises enters a decree or order for (A) relief in
respect of the Company or any Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or (h) the Company or any Significant
Subsidiary (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company
or any Significant Subsidiary or for all or substantially all of the property
and assets of the Company or any Significant Subsidiary or (C) effects any
general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal
of, premium, if any, and accrued interest on the Notes to be immediately due
and payable. Upon a declaration of acceleration, such principal, premium, if
any, and accrued interest shall be immediately due and payable. In the event
of a declaration of acceleration because an Event of Default set forth in
clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by the Company or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (g) or (h) above occurs with respect to the Company, the
principal of, premium, if any, and accrued interest on the Notes then
outstanding shall ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder. The
Holders of at least a majority in principal amount of the outstanding Notes,
by written notice to the Company and to the Trustee, may waive all past
defaults and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment
of the principal of, premium, if any, and interest on the Notes that have
become due solely by such declaration of acceleration, have been cured or
waived and (ii) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or
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expense; (iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and (v) during such
60-day period, the Holders of a majority in aggregate principal amount of the
outstanding Notes do not give the Trustee a direction that is inconsistent
with the request. However, such limitations do not apply to the right of any
Holder of a Note to receive payment of the principal of, premium, if any, or
interest on, such Note or to bring suit for the enforcement of any such
payment, on or after the due date expressed in the Notes, which right shall
not be impaired or affected without the consent of the Holder.
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the performance of the Company and its Restricted
Subsidiaries under the Indenture and that the Company has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under
the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof, and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company
on all of the Notes and under the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; (iii) immediately after giving effect to such transaction
on a pro forma basis, the Company or any Person becoming the successor obligor
of the Notes shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction;
(iv) immediately after giving effect to such transaction on a pro forma basis,
the Company, or any Person becoming the successor obligor of the Notes, as the
case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant described above;
provided, however, that this clause (iv) shall not apply to a consolidation or
merger with or into a Wholly Owned Restricted Subsidiary with a positive net
worth, provided that in connection with any such merger or consolidation, no
consideration (except Capital Stock (other than Redeemable Stock) in the
surviving Person or the Company (or a Person that owns directly or indirectly
all of the Capital Stock of the surviving Person or the Company immediately
following such transaction)) shall be issued or distributed to the
stockholders of the Company; and (v) the Company delivers to the Trustee an
Officers' Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv) above) and an Opinion of Counsel, in
each case stating that such consolidation, merger or transfer and such
supplemental indenture comply with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose
of such transaction is to change the state of incorporation of the Company and
any such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to
the Notes (except for, among other matters, certain obligations to register
the transfer or exchange of the Notes, to replace stolen, lost or mutilated
Notes, to maintain paying agencies and to hold monies for payment in trust)
if, among other
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things, (A) the Company has deposited with the Trustee, in trust, money and/or
U.S. Government Obligations that through the payment of interest and principal
in respect thereof in accordance with their terms will provide money in an
amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance
with the terms of the Indenture and the Notes, (B) the Company has delivered
to the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of the Company's exercise of its option under this "Defeasance"
provision and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, which Opinion of Counsel
must be based upon (and accompanied by a copy of) a ruling of the Internal
Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after
giving effect to such deposit on a pro forma basis, no Event of Default, or
event that after the giving of notice or lapse of time or both would become an
Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound, and (D) if at such time the Notes are listed on
a national securities exchange, the Company has delivered to the Trustee an
Opinion of Counsel to the effect that the Notes will not be delisted as a
result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The Indenture
further will provide that the provisions of the Indenture will no longer be in
effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants,"
clause (d) under "Events of Default" with respect to such covenants and
clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and
that clauses (e) and (f) under "Events of Default" shall be deemed not to be
Events of Default, upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the Notes on the Stated Maturity of such payments
in accordance with the terms of the Indenture and the Notes, the satisfaction
of the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance of certain covenants and Events of Default and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of each Holder
affected
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thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal of, or
premium, if any, or interest on, any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium,
if any, or interest on the Notes or (vii) reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will initially be
represented by one or more permanent global Notes in definitive, fully
registered form without interest coupons (each a "Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of, a
nominee of DTC. Except in the limited circumstances described below under
"Certified Notes," owners of beneficial interests in a Global Note will not be
entitled to receive physical delivery of Certificated Notes (as defined
below).
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner
of an interest in a Global Note will be able to transfer that interest except
in accordance with DTC's applicable procedures, in addition to those provided
for under the Indenture.
Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
to owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by a
holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in a Global Note is credited and only in
respect of such portion of the aggregate principal amount of Exchange Notes as
to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Exchange Notes, DTC will
exchange the applicable Global Note for Certificated Exchange Notes, which it
will distribute to its participants.
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The Company understands that DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a clearing corporation within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC,
it is under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor
the Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective
obligation under the rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as depositary, and a
successor depositary is not appointed by the Company within 90 days or, if an
Event of Default under the Indenture has occurred and is continuing, the
Company will issue Certificated Notes in exchange for the Global Notes
representing such Notes. Holders of an interest in a Global Note may receive
Certificated Notes in accordance with the DTC's rules and procedures in
addition to those provided for under the Indenture.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any
of the Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer,
director, employee or controlling person of the Company or of any successor
Person thereof. Each Holder, by accepting the Notes, waives and releases all
such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise of the rights and powers vested in it under the Indenture as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
The Trustee, United States Trust Company of New York, also serves as trustee
under the 1997 Senior Notes Indenture.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Senior
Notes where such Senior Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period not to exceed 180 days after the Expiration Date, it will furnish
additional copies of this Prospectus, as amended or supplemented, to any
broker-dealer that reasonably requests such documents for use in connection
with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or to seek approval for quotation
through any automated quotation system. The Company has been advised by the
Placement Agents that following completion of the Exchange Offer, the
Placement Agents intend to make a market in the Exchange Notes. However, the
Placement Agents are not obligated to do so and any market-making activities
with respect to the Exchange Notes may be discontinued at any time without
notice. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes. If a trading market does not develop or
is not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may cease at any time. If a
public trading market develops for the Exchange Notes, future trading prices
of the Exchange Notes will depend on many factors, including, among other
things, prevailing interest rates, the market for similar securities, the
financial conditions and results of operations of the Company and other
factors beyond the control of the Company, including general economic
conditions. Notwithstanding the registration of the Exchange Notes in the
Exchange Offer, holders who are "affiliates" of the Company (within the
meaning of Rule 405 under the Securities Act) may publicly offer for sale or
resell the Exchange Notes only in compliance with the provisions of Rule 144
under the Securities Act or any other available exemptions under the
Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers, and will
indemnify the holders of the Senior Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences of the acquisition, ownership and disposition of the Notes. The
summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial decisions as of the date
hereof, all of which may be repealed, revoked or modified so as to result in
federal income tax consequences different from those described below. Such
changes could be applied retroactively in a manner that could adversely affect
holders of the Notes. In addition, the authorities on which this summary is
based are subject to various interpretations. It is therefore possible that
the consequences of the acquisition, ownership and disposition of the Notes
may differ from the treatment described below.
The tax treatment of a holder of the Notes may vary depending upon the
particular situation of the holder. This summary is limited to investors who
will hold the Notes as capital assets within the meaning of Section 1221 of
the Code and does not deal with holders that may be subject to special tax
rules (including, but not limited to, insurance companies, tax-exempt
organizations, financial institutions, dealers in securities or currencies,
holders whose functional currency is not the U.S. dollar or holders who will
hold the Notes as a hedge against currency risks or as part of a straddle,
synthetic security, conversion transaction or other integrated investment
comprised of the Notes and one or more other investments). The summary is
applicable only to purchasers of Notes in the Senior Notes Offering and does
not address other purchasers.
This summary is for general information only and does not constitute, nor
should it be considered as, legal or tax advice to prospective holders of the
Notes. Moreover, the summary does not address all aspects of federal income
taxation that may be relevant to holders of the Notes in light of their
particular circumstances, and it does not address any tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction. Prospective
holders should consult their own tax advisors as to the particular tax
consequences to them of acquiring, holding or disposing of the Notes.
STATED INTEREST ON NOTES
Except as set forth below, interest on a Note will generally be taxable to a
United States Holder as ordinary income from domestic sources at the time it
is paid or accrued in accordance with the United States Holder's method of
accounting for tax purposes. As used herein, a "United States Holder" of a
Note means an individual that is a citizen or resident of the United States
(including certain former citizens and former long-time residents), a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate the
income of which is subject to United States federal income taxation regardless
of its source, or a trust if (i) a U.S. court is able to exercise primary
supervision over the administration of the trust and (ii) one or more U.S.
trustees or fiduciaries have the authority to control all substantial
decisions of the trust. A "Non-United States Holder" is a holder that is not a
United States Holder.
Failure of the Company to consummate the Exchange Offer or to file or cause
to be declared effective the Shelf Registration Statement as described under
"Description of the Exchange Notes--Exchange Offer; Registration Rights" will
cause additional interest to accrue on the Notes in the manner described
therein. According to U.S. Treasury regulations, the possibility of a change
in the interest rate will not affect the amount of interest income recognized
by a United States Holder (or the timing of such recognition) if the
likelihood of the change, as of the date the Notes are issued, is remote. The
Company believes that the likelihood of a change in the interest rate on the
Notes is remote and does not intend to treat the possibility of a change in
the interest rate as affecting the yield to maturity of any Note. In the
unlikely event that the interest rate on the Notes is increased, then such
increased interest may be treated as original issue discount, includable by a
United States Holder in income as such interest accrues, in advance of receipt
of any cash payment thereof. If, as anticipated, the issue price of the Notes
will equal their stated principal amount, and based on the Company's belief
that the likelihood of a change in the interest rate is remote, the Notes will
not be issued with original issue discount.
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MARKET DISCOUNT
If a United States Holder purchases a Note for an amount that is less than
its principal amount, the amount of the difference will be treated as "market
discount" for U.S. federal income tax purposes, unless such difference is less
than a specified de minimis amount. Under the market discount rules, a United
States Holder will be required to treat any partial principal payment on, or
any gain on the sale, exchange, retirement or other disposition of, a Note as
ordinary income to the extent of the market discount which has not previously
been included in income and is treated as having accrued on such Note at the
time of such payment or disposition. In addition, the United States Holder may
be required to defer, until the maturity of the Note or its earlier
disposition in a taxable transaction, the deduction of all or a portion of the
interest expense on any indebtedness incurred or continued to purchase or
carry such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the
United States Holder elects to accrue on a constant interest method. A United
States Holder may elect to include market discount in income currently as it
accrues (on either the ratable or constant interest method), in which case the
rules described above regarding (i) ordinary income recognition resulting from
a partial principal payment or a sale or other disposition and (ii) deferral
of interest deductions will not apply. This election to include market
discount in income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies and may not be revoked without the consent of the Internal Revenue
Service (the "IRS").
AMORTIZABLE BOND PREMIUM
A United States Holder that purchases a Note for an amount in excess of the
principal amount will be considered to have purchased the Note at a "premium."
A United States Holder generally may elect to amortize the premium over the
remaining term of the Note on a constant yield method. However, if the Note is
purchased at a time when the Note may be optionally redeemed for an amount
that is in excess of the principal amount, special rules would apply that
could result in a deferral of the amortization of bond premium until later in
the term of the Note. The amount amortized in any year will be treated as a
reduction of the United States Holder's interest income from the Note. Bond
premium on a Note held by a United States Holder that does not make such an
election will decrease the gain or increase the loss otherwise recognized on
disposition of the Note. The election to amortize premium on a constant yield
method, once made, applies to all debt obligations held or subsequently
acquired by the electing United States Holder on or after the first day of the
first taxable year to which the election applies and may not be revoked
without the consent of the IRS.
SALE, EXCHANGE AND RETIREMENT OF NOTES
Upon the sale, exchange, redemption, retirement or other disposition of a
Note, a United States Holder generally will recognize gain or loss equal to
the difference between the amount realized upon the sale, exchange,
redemption, retirement or other disposition and such holder's adjusted tax
basis of the Note. A United States Holder's adjusted tax basis in a Note will,
in general, be the United States Holder's cost therefor, increased by market
discount previously included in income by the United States Holder and reduced
by any principal payments received by the United States Holder and any
amortized premium previously deducted from income by the United States Holder.
Except as described above with respect to market discount or except to the
extent the gain or loss is attributable to accrued but unpaid stated interest,
such gain or loss will be capital gain or loss. For certain noncorporate
taxpayers (including individuals), the rate of taxation of capital gains will
depend upon (i) the taxpayer's holding period in the capital asset (with the
preferential rates available for capital assets held more than 12 months or 18
months) and (ii) the taxpayer's marginal tax rate for ordinary income. The
deductibility of capital losses is subject to limitations.
The exchange of a Note by a United States Holder for an Exchange Note should
not constitute a taxable exchange. A United States Holder will have the same
tax basis and holding period in the Exchange Note as it did in the Note.
115
<PAGE>
NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no United States federal withholding tax will be imposed with respect
to the payment by the Company or its paying agent of principal, premium, if
any, or interest on a Note owned by a Non-United States Holder (the
"Portfolio Interest Exception"), provided (i) that such Non-United States
Holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to
vote within the meaning of section 871(h)(3) of the Code and the
regulations thereunder, (ii) such Non-United States Holder is not a
controlled foreign corporation that is related, directly or indirectly, to
the Company through stock ownership, (iii) such Non-United States Holder is
not a bank whose receipt of interest on a Note is described in section
881(c)(3)(A) of the Code and (iv) such Non-United States Holder satisfies
the statement requirement (described generally below) set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder;
(b) no United States federal withholding tax will be imposed generally
with respect to any gain or income realized by a Non-United States Holder
upon the sale, exchange, redemption, retirement or other disposition of a
Note; and
(c) a Note beneficially owned by an individual who at the time of death
is a Non-United States Holder will not be subject to United States federal
estate tax as a result of such individual's death, provided that such
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to
vote within the meaning of section 871(h)(3) of the Code and provided that
the interest payments with respect to such Note would not have been, if
received at the time of such individual's death, effectively connected with
the conduct of a United States trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner
is not a United States Holder. Pursuant to current temporary U.S. Treasury
regulations, these requirements will be met if (1) the beneficial owner
provides his name and address, and certifies, under penalties of perjury, that
he is not a United States Holder (which certification may be made on an IRS
Form W-8 (or substitute form)) or (2) a financial institution holding the Note
on behalf of the beneficial owner certifies, under penalties of perjury, that
such statement has been received by it and furnishes a paying agent with a
copy thereof.
If a Non-United States Holder cannot satisfy the requirements of the
Portfolio Interest Exception described in (a) above, payments on a Note made
to such Non-United States Holder will be subject to a 30% withholding tax
unless the beneficial owner of the Note provides the Company or its paying
agent, as the case may be, with a properly executed (1) IRS Form 1001 (or
substitute form) claiming an exemption from or reduction of withholding under
the benefit of a tax treaty or (2) IRS Form 4224 (or substitute form) stating
that interest paid on the Note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or
business in the United States.
Recently issued Treasury regulations modify certain of the certification
requirements described above. These modifications will become generally
effective January 1, 1999. It is possible that the Company and other
withholding agents may request new withholding exemption forms from holders in
order to qualify for continued exemption from withholding under the Treasury
regulations when they become effective.
If a Non-United States Holder is engaged in a trade or business in the
United States and payment on a Note is effectively connected with the conduct
of such trade or business, the Non-United States Holder, although exempt from
United States federal withholding tax as discussed above, will be subject to
United States federal income tax on such payment on a net income basis in the
same manner as if it were a United States Holder. In addition, if such Holder
is a foreign corporation, it may be subject to a branch profits tax equal to
30% of its
116
<PAGE>
effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, such payment on a Note will be included in such
foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with a
trade or business in the United States of the Non-United States Holder or (ii)
in the case of a Non-United States Holder who is an individual, such
individual is present in the United States for 183 days or more in the taxable
year of such sale, exchange, retirement or other disposition, and certain
other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments on a
Note and to the proceeds of the sale of a Note made to United States Holders
other than certain exempt recipients (such as corporations). A 31% backup
withholding tax will apply to such payments if the United States Holder fails
to provide a taxpayer identification number or certification of other exempt
status or fails to report in full dividend and interest income.
No information reporting or backup withholding will be required with respect
to payments made by the Company or any paying agent to Non-United States
Holders if a statement described in (a)(iv) under "--Non-United States
Holders" has been received and the payor does not have actual knowledge that
the beneficial owner is a United States person.
In addition, backup withholding and information reporting will not apply if
payments on a Note are paid or collected by a foreign office of a custodian,
nominee or other foreign agent on behalf of the beneficial owner of such Note,
or if a foreign office of a broker (as defined in applicable U.S. Treasury
regulations) pays the proceeds of the sale of a Note to the owner thereof. If,
however, such nominee, custodian, agent or broker is, for United States
federal income tax purposes, a United States person, a controlled foreign
corporation or a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, such payments will be subject to information reporting (but not backup
withholding), unless (1) such custodian, nominee, agent or broker has
documentary evidence in its records that the beneficial owner is not a United
States person and certain other conditions are met or (2) the beneficial owner
otherwise establishes an exemption.
Payments on a Note paid to the beneficial owner of a Note that is a Non-
United States Holder by a United States office of a custodian, nominee or
agent, or the payment to a Non-United States Holder by the United States
office of a broker of the proceeds of sale of a Note, will be subject to both
backup withholding and information reporting unless the beneficial owner
provides the statement referred to in (a)(iv) above under "--Non-United States
Holders" and the payor does not have actual knowledge that the beneficial
owner is a United States person or otherwise establishes an exemption.
Recently issued Treasury regulations modify certain of the certification
requirements for backup withholding. These modifications will become generally
effective January 1, 1999. It is possible that the Company and other
withholding agents may request a new withholding exemption form from holders
in order to qualify for continued exemption from backup withholding under
Treasury regulations when they become effective.
Any amounts withheld under the backup withholding rules will be credited
toward such Holder's United States federal income tax liability, if any. To
the extent that the amounts withheld exceed the Holder's tax liability, the
excess may be refunded to the Holder provided the required information is
furnished to the IRS. In addition to providing the necessary information, the
Holder must file a United States tax return in order to obtain a refund of the
excess withholding.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
117
<PAGE>
HOLDER'S PARTICULAR SITUATION. PROSPECTIVE UNITED STATES HOLDERS AND NON-
UNITED STATES HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE ACQUISITION. OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE EFFECTS OF CHANGES IN SUCH LAWS.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes offered hereby
are being passed upon for the Company by Hogan & Hartson L.L.P., Washington,
D.C., special counsel for the Company. Hogan & Hartson L.L.P. also provides
legal services to affiliated companies and Campbell B. Lanier, III. Anthony S.
Harrington, a partner of the firm, beneficially owns 79,872 shares of Common
Stock of the Company.
EXPERTS
The consolidated balance sheets of ITC/\DeltaCom, Inc. and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1997, included in this Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their report appearing herein.
The statements of operations, stockholders' equity and cash flows of
DeltaCom, Inc. for the year ended December 31, 1995, included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report appearing herein.
The statements of operations, partners' capital, and cash flows of Gulf
States FiberNet for the years ended December 31, 1996 and 1995 included in
this Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report appearing herein.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such reports, proxy statements
and other information can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of prescribed rates, or in certain cases by accessing the Commission's
World Wide Web side at http://www.sec.gov. The Company's Common Stock is
quoted on The Nasdaq National Market under the symbol "ITCD," and such
reports, proxy statements and other information concerning the Company also
can be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company is required by the terms of the Indentures to furnish the
Trustee with annual reports containing consolidated financial statements
audited by their independent public accountants and with quarterly reports
containing audited condensed consolidated financial statements for each of the
first three quarters of each fiscal year.
118
<PAGE>
GLOSSARY
Access--Telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
Access charges--The fees paid by long distance carriers to local exchange
carriers for originating and terminating long distance calls on their local
network.
AT&T--AT&T Corp.
Cable & Wireless--Cable & Wireless Communications Inc.
Central offices--The switching centers or central switching facilities of
the local exchange companies.
CLEC--Competitive Local Exchange Carrier.
Collocation--The ability of a competitor carrier to connect its network to
the local exchange carriers' central offices. Physical collocation occurs when
a competitor carrier places its network connection equipment inside the local
exchange company's central offices. Virtual collocation is an alternative to
physical collocation pursuant to which the local exchange company permits a
competitor carrier to connect its network to the local exchange company's
central offices on comparable terms, even through the competitor carrier's
network connection equipment is not physically located inside the central
offices.
Dedicated--Local telecommunications lines reserved for use by particular
customers, generally for connection between the customer's location and an
interexchange carrier POP.
DeltaCom--ITC/\DeltaCom Communications, Inc. (formerly DeltaCom, Inc.), an
Alabama corporation which provides long distance telephone services in the
southeastern United States. DeltaCom became a wholly owned subsidiary of the
Company as part of the Reorganization.
Dialing Parity--The ability of a competing local or toll service provider to
provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation.
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ
a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. The precise digital numbers minimize
distortion (such as graininess or snow in the case of video transmission, or
static or other background distortion in the case of audio transmission).
DS-1, DS-3--Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-1 service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 45 megabits per second.
EBITDA--Earnings before interest, taxes, depreciation and amortization.
Frontier--Allnet Communications Services, Inc. d/b/a Frontier Communications
Services.
GTE--GTE Corporation.
Gulf States FiberNet--A Georgia general partnership, prior to the
Reorganization, that operates a fiber-optic telecommunications network between
Atlanta, Georgia and Longview, Texas. Gulf States FiberNet's assets and
operations now are 100% owned by Gulf States Transmission Systems, Inc.
G-1
<PAGE>
Gulf States Transmission--Gulf States Transmission Systems, Inc., a Delaware
corporation, formed in 1994 by ITC Holding to be the 36% managing general
partner in Gulf States FiberNet and which now owns 100% of Gulf States
FiberNet's assets and its operations. Gulf States Transmission Systems, Inc.
became a wholly owned subsidiary of the Company as part of the Reorganization.
ILEC--Incumbent Local Exchange Carrier.
Interconnection--Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
Interconnection Decision--The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act.
Portions of this order have been stayed by the U.S. Eighth Circuit Court of
Appeals.
InterLATA--Telecommunications services originating in a LATA and terminating
outside of that LATA.
InterQuest--Eastern Telecom, Inc., a Georgia corporation, d/b/a InterQuest,
engaged solely in the provision of operator and other directory assistance
services. Eastern Telecom merged into Interstate FiberNet, Inc. as part of the
Reorganization.
Interstate FiberNet--A Georgia general partnership which operates a fiber-
optic telecommunications network between Georgia and Alabama. Interstate
FiberNet became part of Interstate FiberNet, Inc. following the
Reorganization.
Interstate FiberNet, Inc.--The wholly owned subsidiary of the Company that
currently holds the businesses that were held by ITC Transmission Systems,
Inc., ITC Transmission Systems II, Inc., InterQuest and Interstate FiberNet
prior to the Reorganization.
IntraLATA--Telecommunications services originating and terminating in the
same LATA.
ITC Holding--ITC Holding Company, Inc. was a diversified telecommunications
company based in West Point, Georgia, with substantial holdings in
telecommunications companies operating in the southern United States. ITC
Holding Company, Inc. merged with and into the Company on October 20, 1997
after transferring substantially all of its assets and liabilities (other than
its stock in the Company) to another company, which has since been renamed ITC
Holding Company, Inc. and which continues to operate the other businesses of
the former ITC Holding Company, Inc.
ITC Transmission Systems II, Inc.--A Delaware corporation formed by ITC
Holding to hold a 51 percent interest in InterState FiberNet. ITC Transmission
Systems II merged into Interstate FiberNet, Inc. as part of the
Reorganization.
IXC--IXC Communications Inc.
LATA (local access and transport area)--A geographic area composed of
contiguous local exchanges, usually but not always within a single state.
There are approximately 200 LATAs in the United States.
LCI--LCI International Telecom Corp.
Local exchange--A geographic area determined by the local exchange carrier
in which calls generally are transmitted without toll charges to the calling
or called party.
Local exchange carrier--A company providing local telephone services.
Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities.
G-2
<PAGE>
MCI--MCI Communications Corporation.
Nortel Access Node--A remote multi-purpose vehicle for local switched access
transport services. Used to extend Nortel DMS-500 local access lines to remote
cities along the long-haul network.
Number portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
OC-N--Standard telecommunications industry measurements for optical
transmission capacity distinguishable by bit rate transmitted per second and
the number of voice or data transmissions that can be simultaneously
transmitted through fiber optic cable. "N" represents the number of DS-3s
involved. For example, an OC-3 is generally equivalent to three DS-3s and has
a bit rate of 155.52 megabits per second and can transmit 2,016 simultaneous
voice or data transmissions. An OC-12 has a bit rate of 622.08 megabits per
second and can transmit 8,064 simultaneous voice or data transmissions. An OC-
48 has a bit rate of 2488.32 megabits per second and can transmit 32,256
simultaneous voice or data transmissions.
POPs (points of presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
Private line--A dedicated telecommunications connection between end user
locations.
"PUC" or "Public utilities commission"--A state regulatory body, established
in most states, which regulates utilities, including telephone companies
providing intrastate services.
Reciprocal compensation--The same compensation of a new competitive local
exchange carrier for termination of a local call by the local exchange carrier
on its network as the new competitor pays the local exchange carrier for
termination of local calls on the local exchange carrier network.
Reorganization--The contribution to the Company by ITC Holding of the
businesses of Interstate FiberNet, Gulf States FiberNet, DeltaCom and
InterQuest.
Resale--Resale by a provider of telecommunications services (such as a local
exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Route miles--The number of miles of the telecommunications path in which
fiber optic cables are installed.
SCANA--SCANA Communications, Inc.
Self-healing ring--A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub
facility with one or more network nodes. Traffic is routed between the hub and
each of the nodes simultaneously in both a clockwise and a counterclockwise
direction. In the event of a cable cut or component failure along one of these
paths, traffic will continue to flow along the alternate path so no traffic is
lost. In the event of a catastrophic node failure, other nodes will be
unaffected because traffic will continue to flow along whichever path (primary
or alternate) does not pass through the affected node. The switch from the
primary to the alternate path will be imperceptible to most users.
Sprint--Sprint Corporation.
"SS7" or "Signaling System 7" services--Signaling System 7 network services
utilize common channel signaling, which reduces connect time delays and
directs calls.
Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
G-3
<PAGE>
Switched access transport services--Transportation of switched traffic along
dedicated lines between the local exchange company central offices and long
distance carrier POPs.
Switched traffic--Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
Transmission--ITC Transmission Systems, Inc., a Delaware corporation formed
by ITC Holding to hold a 49% managing interest in InterState FiberNet.
Transmission became a wholly owned subsidiary of the Company as part of the
Reorganization and changed its name to Interstate FiberNet, Inc.
Unbundled Access--Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment,
features, functions and capabilities, at any technically feasible point within
such network.
WorldCom--WorldCom, Inc.
G-4
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
ITC/\DELTACOM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996, and 1995..................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996,
and 1995................................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996, and 1995..................................................... F-7
Notes to Consolidated Financial Statements................................ F-9
DELTACOM, INC.
Report of Independent Public Accountants.................................. F-28
Statements of Operations for the Year Ended December 31, 1995 and for the
One Month Ended January 29, 1996......................................... F-29
Statements of Stockholder's Equity for the Year Ended December 31, 1995
and for the One Month Ended January 29, 1996............................. F-30
Statements of Cash Flows for the Year Ended December 31, 1995 and for the
One Month Ended
January 29, 1996......................................................... F-31
Notes to Financial Statements............................................. F-32
GULFSTATES FIBERNET
Report of Independent Public Accountants.................................. F-35
Statements of Operations for the Years Ended December 31, 1995 and 1996... F-36
Statements of Partners' Capital for the Years Ended December 31, 1995 and
1996..................................................................... F-37
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996... F-38
Notes to Financial Statements............................................. F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITC^DELTACOM, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of
ITC^DELTACOM, INC. (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ITC^DeltaCom, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 23, 1998 (except with
respect to Note 17, as to which the date
is March 18, 1998)
F-2
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 94,373,610 $ 1,301,415
Restricted assets.................................. 22,000,000 0
Accounts receivable:
Customer, net of allowance for uncollectible
accounts of $1,060,842 and $856,858 in 1997 and
1996, respectively.............................. 21,439,365 11,029,037
Affiliate........................................ 2,011,822 1,227,661
Inventory.......................................... 1,018,212 543,447
Prepaid expenses................................... 534,909 1,191,287
Federal income tax receivables from ITC Holding
(Note 8).......................................... 2,448,297 2,546,534
Deferred income taxes (Note 8)..................... 589,799 525,660
------------ ------------
Total current assets............................. 144,416,014 18,365,041
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 3).......... 141,534,626 31,880,556
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization
of $3,634,152 and $1,431,753 in 1997 and 1996,
respectively (Note 4)............................. 61,347,786 55,517,575
Restricted assets.................................. 28,495,831 0
Investments (Note 5)............................... 0 7,424,797
Other long-term assets............................. 10,310,220 20,010
------------ ------------
Total assets..................................... $386,104,477 $113,207,979
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable:
Trade................................................ $ 7,714,878 $ 4,192,927
Construction......................................... 6,770,923 972,215
Affiliate (Note 12).................................. 534,461 658,990
Accrued interest....................................... 1,867,208 5,830,716
Accrued compensation................................... 1,875,663 1,189,395
Unearned revenue....................................... 4,778,819 762,829
Other accrued liabilities.............................. 3,516,510 983,270
Current portion of long-term debt and capital lease
obligations
(Note 6).............................................. 912,037 359,611
------------ ------------
Total current liabilities.......................... 27,970,499 14,949,953
------------ ------------
LONG-TERM LIABILITIES:
Advance from ITC Holding (Note 7)...................... 0 74,227,827
Deferred income taxes (Note 8)......................... 6,890,952 3,918,140
Long-term debt and capital lease obligations (Note 6).. 202,977,499 855,533
------------ ------------
Total long-term liabilities........................ 209,868,451 79,001,500
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 10, AND 17)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; $7.40 liquidation
preference; 5,000,000 shares authorized; 1,480,771 and
0 shares issued and outstanding in 1997 and 1996,
respectively.......................................... 14,808 0
Common stock, $.01 par value; 90,000,000 shares
authorized; 24,817,556 and 15,000,000 shares issued
and outstanding in 1997 and 1996, respectively........ 248,176 150,000
Additional paid-in capital............................. 163,011,879 23,492,988
Contributions receivable............................... 0 (150,000)
Accumulated deficit.................................... (15,009,336) (4,236,462)
------------ ------------
Total stockholders' equity......................... 148,265,527 19,256,526
------------ ------------
Total liabilities and stockholders' equity......... $386,104,477 $113,207,979
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
OPERATING REVENUES...................... $114,589,998 $66,518,585 $5,750,587
COST OF SERVICES........................ 54,550,348 38,756,287 3,149,231
------------ ----------- ----------
GROSS MARGIN............................ 60,039,650 27,762,298 2,601,356
------------ ----------- ----------
OPERATING EXPENSES:
Selling, operations, and
administration....................... 38,254,893 18,876,572 1,626,678
Depreciation and amortization......... 18,332,451 6,438,074 1,267,882
------------ ----------- ----------
Total operating expenses............ 56,587,344 25,314,646 2,894,560
------------ ----------- ----------
OPERATING INCOME (LOSS)................. 3,452,306 2,447,652 (293,204)
------------ ----------- ----------
OTHER INCOME (EXPENSE):
Equity in losses of unconsolidated
subsidiary (Note 5).................. 0 (1,589,812) (258,242)
Interest expense...................... (21,367,351) (6,172,421) (297,228)
Interest and other income............. 4,251,088 171,514 41,734
------------ ----------- ----------
Total other expense................. (17,116,263) (7,590,719) (513,736)
------------ ----------- ----------
LOSS BEFORE INCOME TAXES, PREACQUISITION
LOSSES AND EXTRAORDINARY ITEM.......... (13,663,957) (5,143,067) (806,940)
INCOME TAX BENEFIT...................... (3,324,466) (1,233,318) (302,567)
------------ ----------- ----------
LOSS BEFORE PREACQUISITION LOSSES AND
EXTRAORDINARY ITEM..................... (10,339,491) (3,909,749) (504,373)
PREACQUISITION LOSSES (NOTE 1).......... 74,132 0 0
------------ ----------- ----------
LOSS BEFORE EXTRAORDINARY ITEM.......... (10,265,359) (3,909,749) (504,373)
EXTRAORDINARY ITEM--LOSS ON
EXTINGUISHMENT OF DEBT (LESS RELATED
INCOME TAX BENEFITS OF $311,057)....... (507,515) 0 0
------------ ----------- ----------
NET LOSS................................ $(10,772,874) $(3,909,749) $ (504,373)
============ =========== ==========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE:
Before extraordinary loss............. $ (0.51) $ (0.20) $ (0.03)
Extraordinary loss.................... (0.03) 0.0 0.0
------------ ----------- ----------
Net loss.............................. $ (0.54) $ (0.20) $ (0.03)
============ =========== ==========
Basic weighted average common shares
outstanding.......................... 20,124,908 19,053,675 19,053,675
============ =========== ==========
Diluted weighted average common shares
outstanding.......................... 20,124,908 19,101,926 19,101,926
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
----------------- ------------------- EARNINGS TOTAL
PAID- CONTRIBUTIONS (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT IN CAPITAL RECEIVABLE DEFICIT) EQUITY
--------- ------- ---------- -------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... 0 $ 0 15,000,000 $150,000 $ 13,583,749 $(150,000) $ 177,660 $ 13,761,409
Capital contributions
from ITC Holding, net. 0 0 0 0 1,050,000 0 0 1,050,000
Net loss............... 0 0 0 0 0 0 (504,373) (504,373)
--------- ------- ---------- -------- ------------ --------- ------------ ------------
BALANCE, DECEMBER 31,
1995................... 0 0 15,000,000 150,000 14,633,749 (150,000) (326,713) 14,307,036
Acquisition of
DeltaCom, Inc. (Note
13)................... 0 0 0 0 6,000,000 0 0 6,000,000
Capital contributions
from ITC Holding, net. 0 0 0 0 2,859,239 0 0 2,859,239
Net loss............... 0 0 0 0 0 0 (3,909,749) (3,909,749)
--------- ------- ---------- -------- ------------ --------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 0 0 15,000,000 150,000 23,492,988 (150,000) (4,236,462) 19,256,526
Initial capitalization
of ITC^DeltaCom....... 0 0 0 0 0 150,000 0 150,000
Capital contributions
from ITC Holding, net. 0 0 0 0 52,070,363 0 0 52,070,363
Issuance of stock in
connection with merger
with ITC Holding...... 1,480,771 14,808 4,053,675 40,537 (55,345) 0 0 0
Sale of common stock,
net of offering
expenses.............. 0 0 5,750,000 57,500 87,442,500 0 0 87,500,000
Issuance of stock
options............... 0 0 0 0 579,494 0 0 579,494
Deferred compensation.. 0 0 0 0 (555,348) 0 0 (555,348)
Exercise of stock
options............... 0 0 13,881 139 37,227 0 0 37,366
Net loss............... 0 0 0 0 0 0 (10,772,874) (10,772,874)
--------- ------- ---------- -------- ------------ --------- ------------ ------------
BALANCE, DECEMBER 31,
1997................... 1,480,771 $14,808 24,817,556 $248,176 $163,011,879 $ 0 $(15,009,336) $148,265,527
========= ======= ========== ======== ============ ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $(10,772,874) $( 3,909,749) $ (504,373)
------------ ------------ -----------
Adjustments to reconcile net loss to
net cash provided by operating
activities (excluding the effects of
acquisitions):
Depreciation and amortization....... 18,332,451 6,438,074 1,267,882
Amortization of bond issue costs.... 720,796 0 0
Deferred income taxes............... 2,056,218 611,530 368,998
Equity in losses of investee........ 0 1,589,812 258,242
Extraordinary item--loss on
extinguishment of debt............. 818,572 0 0
Other............................... 186,582 13,853 88,293
Changes in current operating assets
and liabilities:
Accounts receivable................ (9,027,582) (2,646,760) 471,988
Other current assets............... 335,648 (2,451,764) (565,182)
Accounts payable................... 552,253 1,506,728 15,083
Accrued interest................... (4,054,065) 5,830,716 0
Unearned revenue................... 4,015,990 514,370 4,225
Accrued compensation and other
accrued liabilities............... 3,138,134 691,808 32,161
------------ ------------ -----------
Total adjustments................. 17,074,997 12,098,367 1,941,690
------------ ------------ -----------
Net cash provided by operating
activities....................... 6,302,123 8,188,618 1,437,317
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................. (48,692,156) (6,003,971) (2,526,646)
Change in accrued construction costs. 4,818,166 (168,689) 720,904
Investment in Gulf States FiberNet... 0 (2,361,530) 0
Purchase of DeltaCom, net of cash
received (Note 13).................. 0 (63,534,092) 0
Purchase of assets of Viper Computer
Systems, Inc.
(Note 14)........................... 0 (625,000) 0
Purchase of Gulf States FiberNet, net
of cash received
(Note 15)........................... 574,600 0 0
</TABLE>
F-7
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
Purchase of restricted assets, net of
investments released from restriction. $(50,495,831) $ 0 $ 0
Other.................................. (59,615) 0 326,984
------------ ------------ ----------
Net cash used in investing
activities......................... (93,854,836) (72,693,282) (1,478,758)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Notes, net of
issuance costs....................... 192,112,875 0 0
Proceeds from other long-term debt.... 41,290,000 0 0
Payment of debt issuance costs........ (2,718,957) 0 0
Repayment of other long-term debt and
capital lease obligations............ (93,894,088) (10,619,682) (675,000)
Proceeds from advance from ITC
Holding.............................. 0 74,005,598 0
Repayment of advance from ITC Holding. (43,227,827) (1,234,248) (195,000)
Capital contributions from ITC
Holding, net......................... (624,461) 2,859,239 1,050,000
Proceeds from issuance of common
stock, net of offering expenses...... 87,650,000 0 0
Other................................. 37,366 139,076 0
------------ ------------ ----------
Net cash provided by financing
activities........................... 180,624,908 65,149,983 180,000
------------ ------------ ----------
INCREASE IN CASH AND CASH EQUIVALENTS.. 93,072,195 645,319 138,559
------------ ------------ ----------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 1,301,415 656,096 517,537
------------ ------------ ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 94,373,610 $ 1,301,415 $ 656,096
============ ============ ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest................ $ 24,390,910 $ 280,791 $ 174,513
============ ============ ==========
Cash paid (refunds received) for
income taxes, net.................... $ (6,287,448) $ 546,501 $ 11,558
============ ============ ==========
NONCASH TRANSACTIONS:
Equity portion of acquisition of
DeltaCom (Note 13)................... $ 0 $ 6,000,000 $ 0
============ ============ ==========
Assumption of capital leases related
to acquisition of assets of Viper
Computer Systems, Inc. (Note 14)..... $ 0 $ 171,683 $ 0
============ ============ ==========
Equity portion of acquisition of 64%
interest in Gulf State FiberNet and
Georgia Fiber Assets................. $ 21,694,931 $ 0 $ 0
============ ============ ==========
Assumption of long-term debt related
to acquisition of Georgia Fiber
Assets............................... $ 9,964,091 $ 0 $ 0
============ ============ ==========
Forgiveness of long-term advances by
ITC Holding.......................... $ 31,000,000 $ 0 $ 0
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION, AND NATURE OF BUSINESS
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:
a. InterQuest and Transmission II were merged with and into FiberNet.
b. ITC Holding contributed all of the outstanding capital stock of
FiberNet, DeltaCom and GSTS to the Company.
c. The Company contributed all of the outstanding capital stock of DeltaCom
and GSTS to FiberNet.
At December 31, 1996, FiberNet and Transmission II together held 100% of the
ownership interests in Interstate FiberNet ("Interstate"), a Georgia general
partnership. Effective with the Reorganization, Interstate was absorbed by law
into FiberNet. GSTS held a 36% ownership in and was the managing partner of
Gulf States FiberNet ("Gulf States"), a Georgia general partnership (Note 5).
On March 27, 1997, ITC Holding purchased the remaining 64% interest in Gulf
States (Note 15) and contributed this interest to GSTS upon the
Reorganization. On December 29, 1997, GSTS 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 its stock in
the Company, and all of its liabilities to another entity and then merged with
and into the Company (the "Merger"). The Company was the surviving corporation
in the Merger.
Basis of Accounting and Financial Statement Presentation
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting. The consolidated financial statements reflect the
Reorganization in a manner similar to a pooling of interests and include the
accounts of the Company and its wholly owned subsidiaries. Investments in
affiliated entities in which the Company has at least 20% ownership and does
not have management control are accounted for using the equity method. All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
the current year presentation.
On January 29, 1996, ITC Holding acquired 100% of the common stock of
DeltaCom (Note 13). The acquisition was accounted for using the purchase
method of accounting. The results of operations of DeltaCom have been included
in the accompanying consolidated statements of operations since the date of
acquisition.
Prior to 1997, GSTS accounted for its 36% investment in Gulf States using
the equity method. To reflect the acquisition of the remaining 64% of Gulf
States, the revenues and expenses of Gulf States have been included in the
consolidated statement of operations for the year ended December 31, 1997,
with the preacquisition losses attributable to the previous owner deducted to
determine the consolidated net loss of the Company.
F-9
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Nature of Business
The Company operates primarily in two business segments. DeltaCom is a
regional long-distance company operating primarily in the southern United
States. DeltaCom is engaged in the retail sale of long-distance services such
as traditional switched and dedicated long-distance; 800/888 calling; calling
card and operator services; ATM and frame relay; high-capacity broadband
private line services, as well as Intranet, Internet, and Web page hosting and
development services; and customer premises equipment installation and repair.
DeltaCom primarily serves midsized and major regional businesses in the
southern United States (the "Retail Services").
The Fiber Companies are engaged in the sale of long-haul private-line
services on a wholesale basis to other telecommunications companies using
their owned and managed fiber optic network which extends throughout ten
southern states (Arkansas, Texas, Tennessee, Mississippi, Louisiana, Alabama,
Georgia, North Carolina, South Carolina, and Florida) (the "Carriers' Carrier
Services").
The Company has experienced operating losses as a result of efforts to build
its network infrastructure and internal staffing, develop its systems, and
expand into new markets. Assuming financing is available, the Company expects
to continue to focus on increasing its customer base and expanding its network
operations. Accordingly, the Company expects that its cost of services,
selling, operations, and administration expenses and capital expenditures will
continue to increase significantly, all of which will have a negative impact
on short-term operating results. In addition, the Company may change its
pricing policies to respond to a changing competitive environment. FiberNet
has obtained a five-year, secured credit facility with NationsBank of Texas,
N.A. (Note 6), and the Company has issued senior notes and equity (Notes 9 and
17). In the opinion of management, the Company's current cash position and
available line of credit will be sufficient to meet the capital and operating
needs of the Company through at least 1998. However, there can be no assurance
that growth in the Company's revenue or customer base will continue or that
the Company will be able to achieve or sustain profitability and/or positive
cash flow.
Sources of Supplies
The Company voluntarily uses a single vendor for transmission equipment used
in its network. However, if this vendor were unable to meet the Company's
needs, management believes that other sources for this equipment exist on
commensurate terms and that operating results would not be adversely affected.
Credit Risk and Significant Customers
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to certain customers for services and the
ability to terminate access on delinquent accounts. The concentration of
credit risk is mitigated by the large number of customers comprising the
customer base. In 1997 and 1996, no customer represented more than 10% of the
Company's consolidated operating revenues. However, in 1995, one customer
represented approximately 30% of the Company's consolidated operating
revenues.
Regulation
The Company is subject to certain regulations and requirements of the
Federal Communications Commission and various state public service
commissions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-10
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with an
original maturity date of three months or less to be cash equivalents.
Inventory
Inventory consists primarily of customer premise equipment held for resale
and is valued at the lower of cost or market, using the first-in, first-out
method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided using the composite or straight line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Buildings and towers................................................. 30
Office furniture, fixtures, and equipment............................ 3 to 15
Vehicles............................................................. 5
Telecommunications equipment......................................... 5 to 20
</TABLE>
Intangible Assets
Intangible assets include the excess of the purchase price of acquisitions
over the fair value of net assets acquired as well as various other acquired
intangibles. Intangible assets are amortized over the following estimated
useful lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Goodwill............................................................. 40
Trademark............................................................ 40
Customer base........................................................ 5 to 12
Noncompete agreements................................................ 5
</TABLE>
Restricted Assets
Restricted assets include investments in U.S. government treasury notes that
are classified as held-to-maturity and are reported at amortized costs. These
investments represent a portion of the proceeds from the Company's 1997 senior
notes offering (Note 6) that are held by a Trustee as security for and to fund
the next five interest payments on these notes.
Other Long-Term Assets
Other long-term assets primarily include debt issuance costs which are
amortized using the effective interest rate method over the life of the
related debt.
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," on January 1, 1996. SFAS
F-11
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No. 121 establishes accounting standards for the impairment of long lived
assets and goodwill related to those assets to be held and used and for long-
lived assets and certain identifiable intangible assets to be disposed of. The
effect of adopting SFAS No. 121 was not material to the Company's consolidated
financial statements.
The Company reviews its intangible assets for impairment at each balance
sheet date or whenever events or changes in circumstances indicate that the
carrying amount of an asset should be assessed. Management evaluates the
intangible assets related to each acquisition individually to determine
whether an impairment has occurred. An impairment is recognized when the
discounted future cash flows estimated to be generated by the acquired
business are insufficient to recover the current unamortized balance of the
intangible asset, with the amount of any such deficiency charged to income in
the current year. Estimates of future cash flows are based on many factors,
including current operating results, expected market trends, and competitive
influences.
Unearned Revenue
Unearned revenue represents the liability for advanced billings to customers
for use of the Company's fiber-optic network. Customers are billed in advance
for fixed monthly charges.
Unbilled Revenue
DeltaCom records unbilled revenue for long-distance services provided to
customers but not yet billed. Approximately $3.8 million and $3.4 million in
unbilled revenue are included in accounts receivable in the accompanying
consolidated balance sheets at December 31, 1997 and 1996, respectively.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
The Internal Revenue Code and applicable state statutes provide that the
income and expenses of a partnership are not separately taxable to the
partnership but rather accrue directly to the partners. Accordingly, the
accompanying financial statements include provisions for federal and state
income taxes related to partnership interests in Interstate and Gulf States
held by FiberNet, Transmission II, and GSTS prior to the Reorganization.
The Company was included in the consolidated federal income tax return of
ITC Holding through 1996. As a result of the Merger (Note 1), ITC Holding's
consolidated results of operations through October 20, 1997 will be included
in the Company's 1997 consolidated federal income tax return. The Company and
its subsidiaries file separate state income tax returns. Under a tax-sharing
arrangement, the Company was paid for the utilization of net operating losses
included in the consolidated tax return, even if such losses could not have
been used if the Company were to have filed on a separate return basis.
Revenue Recognition
Revenues are recognized as services are provided and consist primarily of
charges for use of long-distance services and for use of the Company's fiber-
optic network.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments approximate their
fair values, except for the Company's $200 million Senior Notes (Note 6).
Based on their quoted market price, such notes have a fair value of $220
million at December 31, 1997.
F-12
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Costs
The Company expenses all advertising costs as incurred.
Net Loss Per Share
The Company adopted SFAS No. 128, "Earnings per Share," effective December
31, 1997. Basic net loss per common share was computed by dividing net loss by
the weighted average number of common shares outstanding for the year then
ended.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
98, for periods prior to the Company's initial public offering (Note 9), 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
periods prior to 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.
3. PROPERTY AND EQUIPMENT
Balances of major classes of assets and the related accumulated depreciation
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Land.................................................. $ 143,195 $ 140,695
Buildings and towers.................................. 2,325,850 1,293,495
Furniture and fixtures................................ 8,333,303 4,140,188
Vehicles.............................................. 1,009,403 287,219
Telecommunications equipment.......................... 143,460,560 32,321,553
------------ -----------
155,272,311 38,183,150
Less accumulated depreciation......................... 25,825,447 6,569,908
------------ -----------
Net property, plant, and equipment in service......... 129,446,864 31,613,242
Assets under construction............................. 12,087,762 267,314
------------ -----------
Property, plant, and equipment, net................... $141,534,626 $31,880,556
============ ===========
</TABLE>
4. INTANGIBLE ASSETS
Goodwill and other intangible assets and the related amortization as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Goodwill.............................................. $58,993,733 $50,961,123
Customer Base......................................... 5,846,371 5,846,371
Noncompete agreements................................. 102,000 102,000
Trademark............................................. 39,834 39,834
----------- -----------
64,981,938 56,949,328
Less accumulated amortization......................... (3,634,152) (1,431,753)
----------- -----------
Intangibles, net...................................... $61,347,786 $55,517,575
=========== ===========
</TABLE>
F-13
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
See Note 15 for discussion of intangible assets recorded in 1997 related to
acquisition of the Gulf States and Notes 13 and 14 for a discussion of
intangible assets recorded in 1996 related to the acquisitions of DeltaCom and
the assets of Viper Computer Systems, Inc. ("ViperNet"), respectively.
5. INVESTMENTS
Gulf States
At December 31, 1996, investments represent GSTS's 36% ownership interest in
Gulf States, which was formed as a partnership in 1994. Gulf States provides
digital communications transport services to communications common carriers in
the states of Georgia, Texas, Alabama, Mississippi, and Louisiana. GSTS was
the managing partner and was responsible for managing and operating Gulf
States. On March 27, 1997, ITC Holding purchased the remaining 64% interest in
Gulf States and contributed this interest to GSTS (Note 1).
The following table summarizes various financial data of Gulf States for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Operating revenues..................................... $10,056,544 $7,587,713
Operating (loss) income................................ (216,992) 1,214,409
Net loss............................................... (4,416,142) (717,340)
Current assets......................................... 2,751,101 6,557,741
Noncurrent assets...................................... 63,820,143 64,206,522
Current liabilities.................................... 9,432,588 9,831,768
Noncurrent liabilities................................. 35,625,000 41,562,500
</TABLE>
6. FINANCING OBLIGATIONS
Long-Term Debt
Long-term debt and capital lease obligations at December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ---------
<S> <C> <C>
11% Senior Notes due 2007.............................. $200,000,000 $ 0
Other.................................................. 640,112 930,252
------------ ---------
200,640,112 930,252
Less current maturities................................ (306,882) (290,140)
------------ ---------
Long-term debt, net of current portion................. $200,333,230 $ 640,112
============ =========
</TABLE>
Maturities of long term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................... $ 306,882
1999............................................................... 333,230
2000............................................................... 0
2001............................................................... 0
2002............................................................... 0
Thereafter......................................................... 200,000,000
------------
$200,640,112
============
</TABLE>
F-14
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lease Obligations
The Company has entered into various operating and capital leases for
facilities and equipment used in its operations. Aggregate future minimum
rental commitments under noncancelable operating leases with original or
remaining periods in excess of one year and maturities of capital lease
obligations as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- -----------
<S> <C> <C>
1998.................................................. $ 4,327,156 $ 942,974
1999.................................................. 4,043,070 927,984
2000.................................................. 3,331,535 919,994
2001.................................................. 3,109,796 369,004
2002.................................................. 2,698,768 318,014
Thereafter............................................ 15,983,866 1,006,784
----------- -----------
$33,494,191 4,484,754
===========
Less amounts representing interest.................... (1,235,330)
-----------
Present value of net minimum lease payments........... 3,249,424
Less current portion.................................. (605,155)
-----------
Obligations under capital leases, net of current
portion.............................................. $ 2,644,269
===========
</TABLE>
Rental expense charged to operations for the years ended December 31, 1997,
1996, and 1995 was $6,160,579, $1,272,389, and $74,534, respectively.
1997 Senior Notes Offering
On June 3, 1997, the Company completed the issuance of $200 million
principal amount of 11% Senior Notes due 2007 (the "1997 Senior Notes
Offering"). Interest is payable semiannually on June 1 and December 1. The
note indenture contains certain restrictive covenants. See Note 17 where the
Company's planned redemption of up to $70 million of these notes is discussed.
Proceeds from the 1997 Senior Notes Offering were held by the trustee until
all regulatory approvals related to the Reorganization described in Note 1
were received. Upon their release, a portion of the proceeds was used to repay
approximately $48 million of the Company's advances from ITC Holding and
approximately $41.6 million under the GSTS Bridge Facility discussed below, as
well as accrued interest. At December 31, 1997, approximately $50.5 million of
such proceeds are held by the Trustee as security for and to fund the next
five interest payments on these notes.
GSTS Bridge Facility
In connection with the acquisition of the remaining 64% interest in Gulf
States (Note 15), GSTS refinanced Gulf States' outstanding indebtedness of
approximately $41.6 million with a bridge facility (the "GSTS Bridge
Facility"). In connection with the refinancing, GSTS wrote off $818,572
($507,515 net of tax benefits) in unamortized debt issuance costs, which is
reflected in the accompanying statement of operations as an extraordinary loss
on extinguishment of debt. The GSTS Bridge Facility, which bore interest at
LIBOR plus 2.25%, matured on the date the proceeds from the Company's 1997
Senior Notes Offering were released (July 25, 1997).
GSTS did not retire a forward starting interest rate swap agreement, which
swapped the variable interest rate with a fixed rate of 8.25%, held by Gulf
States in connection with this refinancing. At December 31, 1997,
F-15
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the forward starting interest rate swap agreement has a notional amount of
approximately $35.6 million. At December 31, 1997, the Company would be
required to pay approximately $2.4 million to terminate the interest rate
swap. The Company made payments totaling approximately $990,000 during 1997,
in connection with this interest rate swap which are included in interest
expense in the accompanying consolidated statements of operations.
The Company planned to continue accounting for this agreement as a hedge of
an anticipated transaction, in connection with planned borrowings under a
variable rate credit agreement. The interest rate swap agreement expires in
December 2002. (See " Debt Offering and Modification to Credit Agreement" in
Note 17 for further discussion of this interest rate swap.)
Credit Agreement
On September 17, 1997, FiberNet entered into a credit agreement with
NationsBank of Texas, N.A., as administrative lender (the "Credit Agreement").
The Credit Agreement provides for a term and revolving credit facility of up
to $100 million to be used for working capital and other purposes, including
refinancing existing indebtedness, capital expenditures, and permitted
acquisitions. The Credit Agreement matures on September 15, 2002 and includes
a $50 million multidraw term loan facility and a $50 million revolving credit
facility. Amounts may be drawn under the term loan facility until September
15, 1999. All $50 million of the term loan facility must be utilized before
any amount over $10 million may be drawn down under the revolving credit
facility. Amounts drawn under the Credit Agreement will bear interest, at
FiberNet's option, at either the Base Rate or the LIBOR Rate, plus an
applicable margin.
Borrowings under the Credit Agreement are guaranteed by the Company and are
secured by a first priority lien on substantially all current and future
assets and properties of FiberNet and its subsidiaries and a first priority
pledge of the stock of FiberNet and its subsidiaries. The Credit Agreement
contains covenants limiting the Company's ability to incur debt or make
guaranties, create liens, pay dividends, make distributions or stock
repurchases, make investments or capital expenditures, issue capital stock,
engage in transactions with affiliates, sell assets, and engage in mergers and
acquisitions. The Credit Agreement also requires the Company to comply with
certain financial tests and to maintain certain financial ratios on a
consolidated basis. See Note 17 where a modification to the Credit Agreement
made subsequent to year-end is discussed.
7. ADVANCE FROM ITC HOLDING
The advance from ITC Holding reflected on the Company's consolidated balance
sheets included the following at December 31, 1996.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Advance from ITC Holding related to the DeltaCom acquisition........ $74,005,598
Other cash advances from ITC Holding, net........................... 222,229
-----------
Total advance from ITC Holding...................................... $74,227,827
===========
</TABLE>
Advance From ITC Holding Related to DeltaCom Acquisition
As discussed in Note 13, ITC Holding funded the acquisition of DeltaCom and
the related refinancing of DeltaCom's outstanding debt through borrowings of
$74,005,598 on its own credit facility (the "ITC Holding Credit Facility").
These borrowings were pushed down to the accounts of the Company through the
advance from ITC Holding account under terms substantially identical to those
of ITC Holding Credit Facility. The advance from ITC Holding accrued interest
at a rate of 8.595%. At December 31, 1996, the accompanying
F-16
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consolidated balance sheet reflected approximately $5.8 million of accrued
interest related to this advance. Approximately $48 million of the advance
from ITC Holding was repaid with proceeds from the 1997 Senior Notes Offering
(Note 6). The remaining $31 million was forgiven by ITC Holding and
contributed to the Company as additional equity.
Cash Advances From (To) ITC Holding
Amounts reflected as other cash advances from (to) ITC Holding represented
excess funds from operations which were borrowed from (loaned to) ITC Holding
prior to the Reorganization. All such advances from (to) ITC Holding were
repaid in connection with the Reorganization. During 1997 and 1996, the
Company recorded interest income of $7,423 and $77,868, respectively, and
interest expense of $51,126, $96,665, and $122,696 in 1997, 1996 and 1995,
respectively, related to these transactions.
8. INCOME TAXES
Details of the income tax benefit for the years ended December 31, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Current:
Federal................................... $(6,140,815) $(1,804,786) $(628,795)
State..................................... 11,501 (48,829) (42,770)
----------- ----------- ---------
Total current............................ (6,129,314) (1,853,615) (671,565)
----------- ----------- ---------
Deferred:
Federal................................... 2,678,448 660,033 385,742
State..................................... 126,400 (39,736) (16,744)
----------- ----------- ---------
Total deferred........................... 2,804,848 620,297 368,998
----------- ----------- ---------
Total benefit............................ $(3,324,466) $(1,233,318) $(302,567)
=========== =========== =========
</TABLE>
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the consolidated financial statements and their
respective tax bases, which give rise to deferred tax assets and liabilities,
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Noncurrent deferred tax (liabilities) assets:
Property, plant, and equipment....................... $(7,038,071) $(3,903,605)
Intangible assets.................................... 55,446 (57,849)
State net operating loss carryforwards............... 389,724 0
Valuation allowance.................................. (389,724) 0
Other................................................ 91,673 43,314
----------- -----------
(6,890,952) (3,918,140)
Current deferred tax assets:
Accrued expenses..................................... 209,337 80,245
Reserves for uncollectible accounts.................. 380,462 314,503
Other................................................ 0 130,912
----------- -----------
589,799 525,660
----------- -----------
Net deferred income tax liabilities................... $(6,301,153) $(3,392,480)
=========== ===========
</TABLE>
F-17
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1997, the Company received payment for net operating losses
generated for federal income tax purposes and used by ITC Holding in ITC
Holding's consolidated federal income tax return. Through the date of the
Merger, ITC Holding's results of operations will be included in the Company's
1997 consolidated federal income tax return. Amounts receivable from ITC
Holding under these tax-sharing agreement are $2,448,297 and $2,546,534 at
December 31, 1997 and 1996, respectively.
The Company and its subsidiaries file individual State income tax returns.
The Company has generated state net operating loss carryforwards which will
expire in 2012 unless utilized. Due to limitations on utilization, it is not
more likely than not that these net operating loss carryforwards will be
realized; therefore, management has provided a 100% valuation reserve against
these assets.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the periods presented is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.................................. (34.0)% (34.0)% (34.0)%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit............. (3.3) (2.0) (5.2)
Permanent differences.................................. 5.8 9.0 0.0
Increase in valuation allowance........................ 2.9 0.0 0.0
Other.................................................. 4.3 3.0 1.7
----- ----- -----
Effective income tax rate............................... (24.3)% (24.0)% (37.5)%
===== ===== =====
</TABLE>
9. EQUITY INTERESTS
Merger With ITC Holding
In connection with the Merger (Note 1), holders of ITC Holding's common
stock and convertible preferred stock received 2.295225 shares of the
Company's Common Stock and Series A Convertible Preferred Stock. Fractional
shares were paid in cash.
Initial Public Offering
During October 1997, the Company completed the sale of 5,750,000 shares of
its Common Stock to the public at an offering price of $16.50 a share.
Employee Stock Option Plan
Upon the Reorganization, all employees of the Company became eligible to
receive stock options under the Company's 1997 Stock Option Plan, as amended
(the "Stock Option Plan"), which was adopted by the Company and approved by
ITC Holding on March 24, 1997.
The Stock Option Plan provides for the grant of options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") to employees of the Company, its
subsidiaries, and ITC Holding, as well as the grant of non-qualifying options
to any other individual whose participation in the Stock Option Plan is
determined to be in the best interests of the Company. The Stock Option Plan
authorizes the issuance of up to 2,407,500 shares of the Company's Common
Stock pursuant to options granted under the Stock Option Plan (subject to
antidilution adjustments in the event of a stock split, recapitalization, or
similar transaction). The maximum number of shares subject to options that can
be awarded under the Stock Option Plan to any person is 802,500 shares. The
Compensation Committee of the Company's board of directors will administer the
Stock Option Plan and will grant options to purchase Common Stock.
F-18
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The option exercise price for incentive stock options granted under the
Stock Option Plan may not be less than 100% of the fair market value of the
Common Stock on the date of grant of the option (or 110% in the case of an
incentive stock option granted to an optionee beneficially owning more than
10% of the outstanding Common Stock). The option exercise price for non-
incentive stock options granted under the Stock Option Plan may not be less
than the par value of the Common Stock on the date of grant of the option. The
maximum option term is 10 years (or five years in the case of an incentive
stock option granted to an optionee beneficially owning more than 10% of the
outstanding Common Stock). There is also a $100,000 limit on the value of
Common Stock (determined at the time of grant) covered by incentive stock
options that become exercisable by an optionee in any year. Options granted
will become exercisable with respect to 50% of the shares subject to the
options on the second anniversary of the date of grant and with respect to 25%
of the shares subject to the options on each of the third and fourth
anniversaries of the date of grant.
The Company's board of directors may amend or terminate the Stock Option
Plan with respect to shares of Common Stock as to which options have not been
granted.
On March 24, 1997 and July 29, 1997, the Company granted options to purchase
1,266,345 shares and 168,933 shares, respectively, of Common Stock under the
Stock Option Plan. All options were granted at a price at least equal to the
estimated fair value of the common stock on the date of grant ($4.49) as
determined by the Company's board of directors based on equity transactions
and other analyses. Options to purchase an additional 48,251 shares of Common
Stock at $4.49 per share were granted on October 1, 1997. At December 31,
1997, unamortized compensation expense of $555,348 is recorded as an offset to
equity in the accompanying balance sheet related to this option grant since
the price of the options was below fair market value. Compensation expense
will be recognized over the vesting period.
Following the Company's initial public offering, options to purchase an
additional 61,915 shares of Common Stock at $17.25 per share were granted on
October 28, 1997. The $17.25 per share represents the closing value of the
Company's stock on the date of grant.
Director Stock Option Plan
On March 24, 1997, the Company adopted and its stockholders approved the
Director Stock Option Plan (the "Director Plan"). The Director Plan provides
for the "formula" grant of options that are not intended to qualify as
"incentive stock options" under Section 422 of the Code to directors of the
Company who are not officers or employees of the Company or ITC Holding, (each
an "Eligible Director"). The Director Plan authorizes the issuance of up to
240,750 shares of Common Stock pursuant to options granted under the Director
Plan (subject to antidilution adjustments in the event of a stock split,
recapitalization, or similar transaction). The option exercise price for
options granted under the Director Plan will be at least 100% of the fair
market value of the shares of Common Stock on the date of grant of the option.
Under the Director Plan, each Eligible Director will be granted an option to
purchase 16,050 shares of Common Stock upon such person's initial election or
appointment to serve as director. Options granted will become exercisable with
respect to 50% of the shares subject to the options on the second anniversary
of the date of grant and with respect to 25% of the shares subject to the
options on each of the third and fourth anniversaries of the date of grant.
The options will expire ten years and 30 days after the date of grant.
On March 24, 1997, the Company granted options to purchase 16,050 shares of
its Common Stock to each of its six nonemployee directors. All options were
granted at a price equal to the estimated fair value of the common stock on
the date of grant ($4.49) as determined by the Company's board of directors
based on equity transactions and other analyses.
F-19
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ITC Holding Stock Option Plan
Prior to the Merger, ITC Holding sponsored a stock option plan which
provided for the granting of stock options to substantially all employees of
ITC Holding and its wholly owned and majority owned subsidiaries, including
the Company. Options were generally granted at a price (established by ITC
Holding's board of directors based on equity transactions and other analyses)
equal to at least 100% of the fair market value of ITC Holding's common stock
on the option grant date. Options granted generally became exercisable 40%
after two years and 20% per annum for the next three years and remained
exercisable for ten years after the option grant date. At December 31, 1996,
employees of the Company held outstanding options for a total of 314,768 of
ITC Holding's shares at option prices ranging from $7.60 to $30.50 per share.
In connection with the Merger and the related spinoff of ITC Holding's other
subsidiaries, stock options outstanding under ITC Holding's stock option plan
were adjusted. Each ITC Holding option holder received an option in the
spinoff entity and 2.295225 options in the Company (the "Replacement
Options"). All Replacement Options were at exercise prices that preserved the
economic benefit of the ITC Holding options at the spinoff and merger date. As
a result, options for 3,540,088 shares of the Company's Common Stock were
issued under the Stock Option Plan at exercise prices ranging from $0.31 per
share to $8.87 per share.
Statement of Financial Accounting Standards No. 123
The Company accounts for its stock based compensation plans under APB
Opinion No. 25, under which no compensation cost is recognized for options
granted with a strike price equal to the fair market value of the Company's
common stock at the grant date. The Company has computed, for pro forma
disclosure purposes, the value of all options for shares of common stock
granted to employees of the Company using the Black-Scholes option pricing
model and the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate..................... 6.0% 6.29% 5.33%
Expected dividend yield..................... 0% 0% 0%
Expected lives.............................. Ten years Ten years Ten years
Expected volatility......................... 60% 50% 50%
</TABLE>
The weighted average fair value of options and Replacement Options granted
to employees of the Company in 1995, 1996 and 1997 was $16.14, $19.65 and
$14.67 per share, respectively. The total value of options and Replacement
Options for common stock granted to employees of the Company during 1995, 1996
and 1997 was computed as approximately $257,000, $4,116,000 and $14,150,000
(including approximately $7,700,000 related to the Replacement Options),
respectively, which would be amortized on a pro forma basis over the five-year
vesting period of the options. If the Company had accounted for these plans in
accordance with SFAS No. 123 ("Accounting for Stock Based Compensation"), the
Company's net loss for the years ended December 31, 1995, 1996 and 1997 would
have increased as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ---------
<S> <C> <C> <C> <C>
Net loss As Reported $(10,772,874) $(3,909,749) $(504,373)
Pro Forma $(20,414,911) $(5,469,440) $(595,987)
Basic and diluted net
loss per share As Reported $ (0.54) $ (0.20) $ (0.03)
Pro Forma $ (1.01) $ (0.29) $ (0.03)
</TABLE>
F-20
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's portion of ITC Holding's stock
option plan through the date of the Merger is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
PRICE
SHARES PER SHARE
------- ----------------
<S> <C> <C>
Outstanding at December 31, 1994...................... 94,925 $13.92
Granted.............................................. 14,252 21.17
Forfeited............................................ (750) 14.35
-------
Outstanding at December 31, 1995...................... 108,427 14.87
Granted.............................................. 223,081 25.87
Exercised............................................ (840) 16.86
Forfeited............................................ (15,900) 24.55
-------
Outstanding at December 31, 1996...................... 314,768 22.17
Granted.............................................. 43,840 31.75
Exercised............................................ (6,500) 9.49
Forfeited............................................ (18,178) 25.81
-------
Outstanding at October 20, 1997....................... 333,930 23.48
=======
</TABLE>
F-21
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's stock option plans at December 31,
1997 and changes during the period from inception on March 24, 1997 through
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Assumed in the Merger.......................... 3,540,088 $4.36
Granted........................................ 1,641,642 4.94
Exercised...................................... (13,881) 2.69
Forfeited...................................... (37,738) 4.82
---------
Outstanding at December 31, 1997................. 5,130,111 4.66
=========
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF OUSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
PRICES DEC. 31, 1997 LIFE PRICE DEC. 31, 1997 PRICE
----------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.31-$1.08 692,658 3.38 $ 1.42 1,015,487 $1.04
$1.84-$2.78 416,112 5.10 2.09 351,896 2.05
$3.48-$4.88 2,420,133 8.52 4.34 193,321 3.97
$6.02-$6.65 642,238 8.11 6.06 18,863 6.04
$7.30-$8.87 897,055 9.19 7.81 -0- --
$17.25 61,915 9.82 17.25 -0- --
</TABLE>
At December 31, 1997, 1,579,567 options for the Company's stock with a
weighted average price of $2.99 per share were exercisable by employees of the
Company. At December 31, 1996, 51,750 options for ITC Holding's stock with a
weighted average exercise price of $12.06 per share were exercisable by
employees of the Company. At December 31, 1995, 26,260 options for ITC
Holding's stock with a weighted average exercise price of $9.27 per share were
exercisable by employees of the Company.
10. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
At December 31, 1997, the Company had entered into agreements with vendors
to purchase approximately $9.8 million of equipment related to the improvement
and installation of switches, other network expansion efforts and certain
services.
Legal Proceedings
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion and the opinion of counsel, there
are no legal proceedings pending against the Company which would have a
material adverse effect on the financial position, results of operations, or
liquidity of the Company.
11. EMPLOYEE BENEFIT PLANS
Employees of the Fiber Companies participated in ITC Holding's 401(k)
defined contribution plan. This plan covered all employees of the
participating entities who had one year of service and were at least 18 years
of age. ITC Holding contributed a discretionary amount of the employees'
earnings based on the plan's earnings.
F-22
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The discretionary contribution percentages per employee for the years ended
December 31, 1996 and 1995 were 2.66% and 2.53% (limited to a total for all
participants of $150,000 and $100,000 for 1996 and 1995, respectively),
respectively, and were fully funded by ITC Holding. No discretionary
contributions were made for 1997. In addition, the Fiber Companies offer a
partial matching of employee contributions at a rate of 1/2% for each 1% of
the employee earnings contributed to a maximum match of 4% of employee
earnings. Total matching contributions made to the plan and charged to expense
by the Fiber Companies for the years ended December 31, 1997, 1996 and 1995
were $84,014, $54,098, and $26,520, respectively.
Employees of DeltaCom participated in a separately administered 401(k)
defined contribution plan. The plan covers substantially all DeltaCom
employees with at least one year of service. Participants may elect to defer
15% of compensation up to a maximum amount determined annually pursuant to
Internal Revenue Service regulations. DeltaCom has elected to provide matching
employer contributions equal to the lesser of 3% of compensation or the
maximum amount annually for each participant. DeltaCom's policy is to fund
contributions as earned. Company contributions made to the plan and charged to
expense by DeltaCom for the year ended December 31, 1997 were $199,104 and for
the 11 months ended December 31, 1996 were $123,854.
Following the Merger, ITC Holding's 401(k) defined contribution plan became
the Company's plan. Effective January 1, 1998, the DeltaCom 401(k) plan was
merged into the Company's plan.
12. RELATED PARTY TRANSACTIONS
Certain affiliates provide the Company with various services and/or receive
services provided by the Company. These entities include ITC Holding;
Interstate Telephone Company and Valley Telephone Company, which provide local
and long-distance telephone services; InterCall, Inc. ("InterCall"), which
provides conference calling services; and InterServ Services Corporation,
which provides operator services for "800" customer service numbers and full-
service marketing research in the telecommunications industry and other
industries; Powertel, Inc., formerly InterCel, Inc., which provides cellular
services; KNOLOGY, which provides cable television services; and MindSpring,
which is a regional provider of Internet access. In management's opinion, the
Company's transactions with these affiliated entities are generally
representative of arm's-length transactions.
For the years ended December 31, 1997, 1996, and 1995, the Company received
services from these affiliated entities in the amounts of $206,000, $243,162,
and $470,437, respectively, which are reflected in selling, operations, and
administration expenses in the Company's consolidated statements of
operations. In addition, in 1997 and 1996, the Company received services from
these affiliated entities in the amount of $238,000 and $762,173,
respectively, which are reflected in cost of services in the Company's
consolidated statements of operations.
The Fiber Companies provide operator and directory assistance services and
lease capacity on certain of their fiber routes to affiliated entities.
Beginning in 1996, DeltaCom also provided long-distance and related services
to ITC Holding and all of its wholly owned and majority-owned subsidiaries.
Also beginning in 1996, DeltaCom acted as an agent for InterCall and
MindSpring in contracting with major interexchange carriers to provide
origination and termination services. Under these agreements, DeltaCom
contracts with the interexchange carrier and rebills the appropriate access
charges plus a margin to InterCall and MindSpring, such that only the margin
impacts the Company's consolidated revenues. Total affiliated revenues
included in the Company's consolidated statements of operations for the years
ended December 31, 1997, 1996, and 1995 were $7,995,000, $2,863,389, and
$486,246, respectively.
DeltaCom had a contract with a former stockholder to provide management
services to DeltaCom in 1997 for $300,000 annually. In addition, DeltaCom
leases real properties from a former stockholder and entities controlled by
the former stockholder. Total rental expense related to these leases was
approximately $174,000
F-23
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and $235,000 in 1997 and 1996, respectively. DeltaCom is obligated to pay
rentals to a former stockholder totaling approximately $180,000 annually from
1998 through 2005 under leases which are cancelable by either of the parties
with 24 months' notice. DeltaCom is also obligated through 1999 to pay annual
rentals ranging from approximately $74,000 to $81,000 to an officer of a
former stockholder.
13. ACQUISITION OF DELTACOM
On January 29, 1996 (the "Acquisition Date"), DeltaCom was purchased by ITC
Holding for total consideration of $71,362,213, including cash acquired of
$1,828,121 (the "Acquisition"). The consideration included $65,362,213 in cash
and $6,000,000 in common stock of ITC Holding. Simultaneously, ITC Holding
refinanced $8,643,384 of DeltaCom's outstanding debt by borrowing against its
own line of credit and contributing the proceeds to DeltaCom, which then
repaid all of its outstanding debt. The Acquisition was accounted for under
the purchase method of accounting, and the purchase accounting entries have
been "pushed down" to the Company's financial statements. The purchase price
was allocated to the underlying assets purchased and liabilities assumed based
on their estimated fair values at the Acquisition Date. The acquisition costs
exceeded the fair market value of net tangible assets acquired by $54,645,063,
of which $5,464,506 has been allocated to identifiable intangible assets and
the remainder has been recorded as goodwill in the accompanying consolidated
balance sheets. Amounts recorded in connection with the "pushdown" include the
$49,180,557 in goodwill, $5,464,506 in customer base, $74,005,598 in debt
related to the Acquisition and debt refinancing, and $6,000,000 in paid-in
capital. The operating results of DeltaCom have been included in the Company's
financial statements since the Acquisition Date.
The following table summarizes the net assets purchased in connection with
the Acquisition and the amount attributable to cost in excess of net assets
acquired:
<TABLE>
<S> <C>
Working capital, net of $1,828,121 cash acquired............... $ 5,155,221
Property, plant, and equipment................................. 21,357,357
Other assets................................................... 198,920
Noncurrent liabilities......................................... (11,822,469)
Customer base.................................................. 5,464,506
Goodwill....................................................... 49,180,557
------------
Purchase price, net of cash acquired........................... $ 69,534,092
============
</TABLE>
The common stock portion of the Acquisition has been accounted for as a
noncash transaction for purposes of the consolidated statements of cash flows.
The following pro forma information has been prepared assuming the
Acquisition occurred at the beginning of the respective periods. This
information includes pro forma adjustments related to the amortization of
goodwill resulting from the excess of the purchase price over the fair value
of the net assets acquired and interest expense related to the debt financing
used to acquire DeltaCom. The pro forma information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been had the Acquisition occurred at the
beginning of the respective periods, nor is the information necessarily
indicative of the results of operations which may occur in the future.
F-24
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
UNAUDITED
<S> <C> <C>
Consolidated operating revenues.................... $71,775,516 $62,021,598
Consolidated net loss.............................. (4,024,866) (1,826,756)
</TABLE>
14. ACQUISITION OF VIPERNET
In July 1996, the Company purchased certain assets of ViperNet, which
provides business Internet services, for cash of $625,000 and assumption of
capital lease obligations in the amount of $171,683.
The following table summarizes the net assets purchased by the Company in
connection with its acquisition of ViperNet:
<TABLE>
<S> <C>
Working capital................................................... $ 121,500
Property and equipment............................................ 191,318
Noncompete agreement.............................................. 102,000
Customer base..................................................... 381,865
Liabilities assumed............................................... (171,683)
---------
Cash paid for ViperNet net assets................................. $ 625,000
=========
</TABLE>
The assumption of the capital lease obligations has been treated as a
noncash transaction for purposes of the consolidated statements of cash flows.
15. ACQUISITION OF GULF STATES
On March 27, 1997, ITC Holding purchased the remaining 64% interest in Gulf
States not previously owned, along with certain other fiber and fiber-related
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 is due no later than April 30, 1998, at which time the Company
will be 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 exceed $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. In connection with the Merger, these shares were
converted into 130,236 shares of the Company's Series A Convertible Preferred
Stock. The Company recorded goodwill totaling approximately $7.5 million in
connection with this acquisition. No further payments under the contingent
consideration provision are currently expected.
Upon the 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 note was repaid
in full in November 1997.
16. SEGMENT REPORTING
Upon the acquisition of DeltaCom in January 1996 (Note 13), the Company
began operating in two business segments: Carriers' Carrier Services and
Retail Services. Retail Services are provided by DeltaCom and include the
retail sale of long-distance, data, and Internet services, including the sale
and installation of customer
F-25
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
premises equipment primarily to midsized and major regional business
customers. Carriers' Carrier Services are provided by the Fiber Companies.
Carriers' Carrier Services include the sale of long-haul private line services
on a wholesale basis using the Fiber Companies' owned and managed fiber-optic
network. Summarized financial data by business segment for the years ended
December 31, 1997 and 1996 and as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
CARRIERS'
CARRIER RETAIL CORPORATE
SEGMENT SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED
------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external
customers.............. $ 31,024,054 $ 83,565,944 $ 0 $ 0 $114,589,998
Intersegment sales...... 3,673,008 2,727,894 0 (6,400,902) 0
------------ ------------ ----------- ----------- ------------
Total operating
revenues............. 34,697,062 86,293,838 0 (6,400,902) 114,589,998
------------ ------------ ----------- ----------- ------------
Gross margin............ 28,060,966 32,303,617 0 (324,933) 60,039,650
Selling, operations, and
administration expense. 8,401,158 30,178,668 0 (324,933) 38,254,893
Depreciation and
amortization........... 12,077,349 6,255,102 0 0 18,332,451
Other income (expense),
net.................... 4,251,088
Interest expense........ (21,367,351)
------------
Loss before income
taxes, preacquisition
losses and
extraordinary item..... $(13,663,957)
============
Identifiable assets..... $192,820,282 $106,674,319 $87,062,726 $ (452,850) $386,104,477
============ ============ =========== =========== ============
Capital expenditures.... $ 27,463,550 $ 16,410,440 $ 0 $ 0 $ 43,873,990
============ ============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------
CARRIERS'
CARRIER RETAIL
SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Sales to external
customers................ $ 6,598,709 $59,919,876 $ 0 $ 66,518,585
Intersegment sales........ 558,312 1,553,445 (2,111,757) 0
----------- ----------- ----------- ------------
Total operating
revenues............... 7,157,021 61,473,321 (2,111,757) 66,518,585
----------- ----------- ----------- ------------
Gross margin.............. 3,256,596 24,325,559 180,143 27,762,298
Selling, operations, and
administration expense... 1,646,277 17,050,152 180,143 18,876,572
Depreciation and
amortization............. 1,656,685 4,781,389 0 6,438,074
Equity in losses of Gulf
States................... (1,589,812) 0 0 (1,589,812)
Other income (expense),
net...................... 171,514
Interest expense.......... (6,172,421)
------------
Loss before income taxes.. $ (5,143,067)
============
Identifiable assets....... $14,597,073 $91,592,697 $ (406,588) $105,783,182
Investment in net assets
of Gulf States........... 7,424,797 0 0 7,424,797
----------- ----------- ----------- ------------
Total assets.............. $22,021,870 $91,592,697 $ (406,588) $113,207,979
=========== =========== =========== ============
Capital expenditures...... $ 1,101,181 $ 5,071,479 $ 0 $ 6,172,660
=========== =========== =========== ============
</TABLE>
F-26
<PAGE>
ITC^DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS
Debt Offering and Modification to Credit Agreement
The Company issued $160 million principal amount of senior notes due 2008 at
99.9% during the first quarter of 1998 (the "1998 Senior Notes Offering").
These notes have an interest rate of 8-7/8% and pay interest semiannually on
March 1 and September 1.
Proceeds from the 1998 Senior Notes Offering will be used for additional
network facilities, and for other general corporate purposes.
In connection with the 1998 Senior Notes Offering, the Company modified its
Credit Agreement to reduce the available credit to $50 million and to amend
and/or delete various covenants. Due to the proceeds to be received from the
1998 Senior Notes Offering, the Company's interest rate swap agreement (Note
6) no longer may be accounted for as a hedge of an anticipated transaction,
but rather becomes 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 the
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 will be marked to market at each subsequent balance sheet date, with
periodic payments (receipts) included in interest expense.
Planned Redemption
On March 2, 1998, the Company announced its intention to redeem $70 million
principal amount of its 11% Senior Notes due 2007, at a redemption price of
111% of the principal amount thereof, plus accrued and unpaid interest, with
the proceeds from the Company's initial public offering (Note 9). The Company
estimates that it will record an extraordinary loss of approximately $10.7
million related to the early redemption of this debt.
Acquisition
On March 18, 1998, the Company announced the signing of a definitive
agreement to acquire certain assets and liabilities of IT Group, a Jackson,
Mississippi-based interexchange carrier. The Company will issue an estimated
110,000 shares of common stock and assume liabilities of approximately $1.0
million to consummate the transaction. Closing of the acquisition is subject
to customary conditions, including the receipt of required regulatory
approvals, and is expected by May 1998.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DeltaCom, Inc.:
We have audited the accompanying statements of operations, stockholders'
equity, and cash flows of DELTACOM, INC. (an Alabama corporation) for the year
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
DeltaCom, Inc. for the year ended December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 27, 1997
F-28
<PAGE>
DELTACOM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE ONE MONTH ENDED JANUARY 29, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUES.................................... $56,271,011 $5,256,931
COST OF SERVICES...................................... 32,355,358 2,963,383
----------- ----------
Gross margin...................................... 23,915,653 2,293,548
----------- ----------
OPERATING EXPENSES:
Selling, general, and administrative................ 13,845,867 1,343,761
Depreciation and amortization....................... 3,241,869 290,226
----------- ----------
Total operating expenses.......................... 17,087,736 1,633,987
----------- ----------
OPERATING INCOME...................................... 6,827,917 659,561
OTHER INCOME (EXPENSE):
Interest income..................................... 105,477 12,334
Interest expense.................................... (1,025,571) (143,883)
----------- ----------
INCOME BEFORE INCOME TAXES............................ 5,907,823 528,012
PROVISION FOR INCOME TAXES............................ 2,211,115 200,645
----------- ----------
NET INCOME............................................ $ 3,696,708 $ 327,367
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
DELTACOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE ONE MONTH ENDED JANUARY 29, 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.... 80,000 $800 $5,145,715 $ 7,546,560 $12,693,075
Net income.................. 0 0 0 3,696,708 3,696,708
------ ---- ---------- ----------- -----------
BALANCE, December 31, 1995.... 80,000 800 5,145,715 11,243,268 16,389,783
Net income (unaudited)...... 0 0 0 327,367 327,367
------ ---- ---------- ----------- -----------
BALANCE, January 29, 1996 (Un-
audited)..................... 80,000 $800 $5,145,715 $11,570,635 $16,717,150
====== ==== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
DELTACOM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE ONE MONTH ENDED JANUARY 29, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 3,696,708 $ 327,367
----------- -----------
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization...................... 3,241,869 290,226
Deferred income taxes.............................. 37,185 (8,767)
Changes in current operating assets and liabili-
ties:
Accounts receivable............................... (832,551) (360,594)
Due from related parties.......................... (26,397) 26,397
Prepayments....................................... (137,876) 748,471
Inventories....................................... (55,333) (82,217)
Notes receivable.................................. (167,481) 8,395
Accounts payable.................................. (863,902) 174,476
Accrued liabilities............................... (20,027) 298,047
Income taxes payable.............................. 249,670 189,956
Other, net........................................ 1,075 89,278
----------- -----------
Total adjustments................................ 1,426,232 1,373,668
----------- -----------
Net cash provided by operating activities........ 5,122,940 1,701,035
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................. (4,431,552) (171,036)
Proceeds from sale of equipment..................... 175,389 0
Increase in accrued construction payables........... 144,720 (144,720)
----------- -----------
Net cash used in investing activities............ (4,111,443) (315,756)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt................ $(2,127,651) $(1,244,759)
Proceeds from financing agreement................... 1,388,859 0
----------- -----------
Net cash used in financing activities............ (738,792) (1,244,759)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 272,705 140,520
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 1,414,896 1,687,601
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 1,687,601 $ 1,828,121
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................... $ 1,005,827 $ 17,210
=========== ===========
Income taxes....................................... $ 2,016,860 $ 0
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
DELTACOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JANUARY 29, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DeltaCom, Inc. (the "Company") was incorporated in the state of Alabama on
April 7, 1982. The Company is a provider of telecommunications services and
products in Alabama and surrounding states. Prior to January 29, 1996, the
Company's common stock was owned 50% by SCI Systems (Alabama), Inc., 14% by
Brindlee Mountain Telephone Company ("BMTC"), and 36% by the majority
stockholder of BMTC. ITC Holding Company, Inc. acquired all of the stock of
the Company on January 29, 1996 (Note 7).
Basis of Accounting
The accompanying financial statements are prepared on the accrual basis of
accounting. Revenues are recognized as services are performed. Costs and
expenses are recognized when incurred. The financial statements are prepared
in conformity with generally accepted accounting principles, which require the
use of estimates. Actual results may differ from those estimates.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Depreciation
Depreciation of property and equipment is generally provided on a composite
or straight-line basis over the assets' estimated useful lives, which are 40
years for buildings, 5 to 20 years for telecommunications equipment, 3 to 15
years for office furniture and equipment, and 5 years for vehicles.
Expenditures for maintenance and repairs are expensed currently, while
renewals and betterments that materially extend the life of an asset are
capitalized. The cost of assets sold, retired, or otherwise disposed of and
the related accumulated depreciation are eliminated from the accounts, and any
resulting gain or loss is included in the results of operations.
Income Taxes
Deferred income taxes are determined in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
approach results in the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the book
carrying amounts and the tax basis of assets and liabilities.
Advertising Costs
The Company expenses all advertising costs as incurred.
F-32
<PAGE>
DELTACOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INCOME TAXES
The components of the provision for income taxes for the year ended December
31, 1995 and the one month ended January 29, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
Current:
Federal............................................. $1,970,891 $190,360
State............................................... 203,039 19,052
<CAPTION>
<S> <C> <C>
Deferred.............................................. 37,185 (8,767)
---------- --------
$2,211,115 $200,645
========== ========
</TABLE>
A reconciliation of the federal statutory rate to the effective income tax
rate for the year ended December 31, 1995 and the one month ended January 29,
1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
---- -----------
(UNAUDITED)
<S> <C> <C>
Federal statutory rate..................................... 34.0% 34.0%
State income taxes......................................... 3.6 4.0
Other...................................................... (0.2) 0.0
---- ----
Effective income tax rate.................................. 37.4% 38.0%
==== ====
</TABLE>
3. RELATED-PARTY TRANSACTIONS
During 1995, the Company recorded revenues of approximately $88,000 in the
accompanying statements of operations for long distance services provided to
BMTC. These services were discontinued in March 1995. The Company also
recorded revenues of approximately $168,000 during the year ended December 31,
1995 for long-distance services provided to Marshall Cellular, an affiliate of
BMTC.
During January 1996, the Company recorded revenues from BMTC, Marshall
Cellular, and another affiliate, SCI, of approximately $27,500, $13,200, and
$33,400, respectively. The Company also recorded expenses of $30,200 and
$2,000 for telephone services provided by BMTC and Marshall Cellular,
respectively.
The Company paid approximately $770,000 to BMTC for electronic data
information services, including billing and rating services, through July
1995. In August 1995, the Company terminated its contract for such services,
hired the information services personnel from BMTC, and assumed BMTC's
operating lease obligations, totaling approximately $419,000 annually, for
electronic data processing equipment. The Company contracted to furnish
electronic data processing services to BMTC annually for $300,000. The Company
recorded revenues of $125,000 in the accompanying statements of operations
related to these services for the year ended December 31, 1995 and $27,500 for
the one month ended January 29, 1996.
The Company paid $405,000 to BMTC for management services in 1995. These
services were terminated in January 1996. During 1995, the Company also paid
$600,000 in management fees to its stockholders. The
F-33
<PAGE>
DELTACOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company has a contract with a former stockholder to provide management
services to the Company through 1997 for $300,000 annually. The Company
recorded expenses of $25,000 in the accompanying statements of operations
related to those services for the one month ended January 29, 1996.
The Company leases real properties from stockholders and other related
parties. Total rental expense related to these leases was approximately
$145,000 and $30,000 for the year ended December 31, 1995 and the month ended
January 29, 1996, respectively. The Company is obligated to pay rentals
totaling approximately $150,000 to BMTC in 1996 and future years under leases
which are cancelable by either of the parties with 24 months' notice. The
Company is also obligated through 1999 to pay annual rentals ranging from
approximately $74,000 to $81,000 to an officer of a former stockholder.
4. DEFERRED COMPENSATION PLAN
The Company has a 401(k) deferred compensation plan covering substantially
all employees with at least one year of service. Participants may elect to
defer 15% of compensation up to a maximum amount determined annually pursuant
to IRS regulations. The Company has elected to provide matching employer
contributions equal to the lesser of 3% of compensation or the maximum amount
annually for each participant. The Company's policy is to fund contributions
as earned. Company contributions made to the plan and charged to expense for
the year ended December 31, 1995 and the one month ended January 29, 1996 were
$138,697 and $12,588, respectively.
5. COMMITMENTS
Minimum future rental commitments under noncancelable operating leases
having an initial or remaining term in excess of one year as of December 31,
1995 are as follows:
<TABLE>
<S> <C>
December 31:
1996............................................................ $ 988,523
1997............................................................ 831,657
1998............................................................ 754,481
1999............................................................ 407,300
2000............................................................ 279,755
Thereafter...................................................... 726,330
----------
$3,988,046
==========
</TABLE>
Total rental expense charged to operations for the year ended December 31,
1995 and the one month ended January 29, 1996 was $615,734 and $105,578,
respectively.
At January 29, 1996, the Company had agreed to purchase telecommunications
equipment at a price totaling approximately $365,000.
6. CONTINGENT MATTERS
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount or ultimate liability with respect to these actions will not materially
affect the Company's financial position or results of operations.
7. ACQUISITION OF THE COMPANY
On January 29, 1996, the Company was purchased by ITC Holding Company, Inc.
for total consideration of $71,362,213.
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gulf States FiberNet:
We have audited the accompanying statements of operations, partners'
capital, and cash flows of GULF STATES FIBERNET (a Georgia general
partnership) and for the years ended December 31, 1995 and 1996. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Gulf
States FiberNet for the years ended December 31, 1995 and 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 27, 1997 (except with
respect to Note 8, as to which the date
is July 25, 1997)
F-35
<PAGE>
GULF STATES FIBERNET
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996AND FOR THE PERIODS ENDED MARCH
31, 1996 AND MARCH 27, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ March 31, March 27,
1995 1996 1996 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES................... $ 7,587,713 $10,056,544 $ 1,832,487 $ 4,085,039
COST OF SERVICES........... 82,680 867,558 47,368 418,472
----------- ----------- ----------- -----------
Gross margin........... 7,505,033 9,188,986 1,785,119 3,666,567
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, general, and
administrative.......... 2,455,159 2,785,596 733,135 871,566
Depreciation and
amortization............ 3,835,465 6,620,382 1,574,627 1,897,826
----------- ----------- ----------- -----------
Total operating
expenses.............. 6,290,624 9,405,978 2,307,762 2,769,392
----------- ----------- ----------- -----------
OPERATING (LOSS) INCOME.... 1,214,409 (216,992) (522,643) 897,175
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense......... (2,172,373) (4,345,001) (1,085,287) (1,031,546)
Other.................... 240,624 145,851 62,834 18,540
----------- ----------- ----------- -----------
Total other income
(expense)............. (1,931,749) (4,199,150) (1,022,453) (1,013,006)
----------- ----------- ----------- -----------
NET LOSS................... $ (717,340) $(4,416,142) $(1,545,096) $ (115,831)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
GULF STATES FIBERNET
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE PERIOD ENDED MARCH 27, 1997
<TABLE>
<CAPTION>
PARTNERS' CAPITAL TOTAL
------------------------ PARTNERS'
SCANA GSTS CAPITAL
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............... $13,184,255 $ 6,903,080 $20,087,335
Net loss............................... (459,098) (258,242) (717,340)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1995............... 12,725,157 6,644,838 19,369,995
Partnership contributions.............. 4,198,274 2,361,529 6,559,803
Net loss............................... (2,826,331) (1,589,811) (4,416,142)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996............... 14,097,100 7,416,556 21,513,656
Net loss............................... (74,132) (41,699) (115,831)
----------- ----------- -----------
BALANCE, MARCH 27, 1997 (UNAUDITED)...... $14,022,968 $ 7,374,857 $21,397,825
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
GULF STATES FIBERNET
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE PERIODS ENDED MARCH 31, 1996 AND MARCH 27, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31, MARCH 27,
1995 1996 1996 1997
------------ ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............... $ (717,340) $(4,416,142) $ (1,545,096) $ (115,831)
------------ ----------- ------------ -----------
Adjustments to recon-
cile net loss to net
cash provided
by oper ating activi-
ties:
Depreciation and
amortization........ 3,835,465 6,620,382 1,574,627 1,897,826
Changes in operating
assets and liabili-
ties:
Accounts
receivable........ (861,057) (678,829) (157,231) (600,569)
Other current as-
sets.............. (58,343) 54,400 (33,821) 49,215
Accounts payable... (269,004) (57,659) (131,172) 1,188,426
Accrued liabili-
ties.............. 753,492 (179,536) (117,742) (140,671)
Unearned revenue... 171,005 789,794 38,419 99,068
------------ ----------- ------------ -----------
Total adjust-
ments........... 3,571,558 6,548,552 1,173,080 2,493,295
------------ ----------- ------------ -----------
Net cash provided
by (used in)
operating
activities...... 2,854,218 2,132,410 (372,016) 2,377,464
------------ ----------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures... (24,105,172) (6,153,618) (1,216,962) (2,062,470)
Accrued construction
costs................. (7,514,569) (951,779) (1,921,170) (731,730)
------------ ----------- ------------ -----------
Net cash used in
investing
activities...... (31,619,741) (7,105,397) (3,138,132) (2,794,200)
------------ ----------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from interim
construction loan..... 24,000,000 0 0 0
Payments on interim
construction loan..... (36,700,000) 0 0 0
Proceeds from long-term
note.................. 47,500,000 0 0 0
Payments on long-term
note.................. 0 (5,937,500) 0 0
Payment of debt issu-
ance costs............ (986,176) (80,385) (22,072) (139,332)
Capital contributions.. 0 6,559,803 1,393,320 0
------------ ----------- ------------ -----------
Net cash provided
by (used in)
financing
activities...... 33,813,824 541,918 1,371,248 (139,332)
------------ ----------- ------------ -----------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............. 5,048,301 (4,431,069) (2,138,900) (556,068)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD.. 513,436 5,561,737 5,561,737 1,130,668
------------ ----------- ------------ -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD........ $ 5,561,737 $ 1,130,668 $ 3,422,837 $ 574,600
============ =========== ============ ===========
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Cash paid for inter-
est................... $ 2,909,056 $ 4,689,477 $ 991,318 $ 1,410,816
============ =========== ============ ===========
Noncash financing
activities:
Assets contributed by
SCANA................. $ 0 $ 0 $ 0 $ 0
============ =========== ============ ===========
Capital lease
obligation for fiber
route................. $ 0 $ 0 $ 0 $ 3,457,345
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
GULF STATES FIBERNET
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. ORGANIZATION AND BUSINESS OPERATIONS
General
Gulf States FiberNet (the "Partnership") was formed on August 17, 1994
pursuant to the provisions of the Georgia Uniform Partnership Act. The
Partnership provides digital communications transport to communications common
carriers in the states of Georgia, Texas, Alabama, Mississippi, and Louisiana.
The Partnership is a facilities-based entity with an existing fiber optic
transmission facility between Atlanta, Georgia, and Birmingham, Alabama. The
Partnership has also constructed a redundant route from Atlanta to Birmingham
which continues on to Longview, Texas, through such cities as Tuscaloosa,
Alabama; Meridian, Jackson, and Vicksburg, Mississippi; and Monroe and
Shreveport, Louisiana. The Partnership has also constructed a spur from
Meridian to Gulfport, Mississippi. These additional routes became operational
during May 1995. In September 1996, an extension to Longview, Texas, was
completed. The Partnership has also constructed a route from Atlanta to
Gainesville, Georgia, where it connects to the network of another
nonaffiliated entity that provides transit into the networks of several other
nonaffiliated entities in the states of North Carolina and South Carolina. The
Atlanta to Gainesville route was completed in January 1996.
The general partners and their respective ownership percentages as of
December 31, 1996 were as follows:
<TABLE>
<S> <C>
SCANA Communications, Inc. ("SCANA").......... 64%
Gulf States Transmission Systems, Inc.
("GSTS")..................................... 36
</TABLE>
GSTS is the managing partner and is responsible for managing and operating
the Partnership. The partners make capital contributions to share in the
operating results of, and receive distributions from, the Partnership in
accordance with their respective ownership percentages.
The Partnership's revenues are derived from sales to a relatively small
number of customers. The loss of a major customer would have a significant
impact on the partnership's results of operations and financial position. This
risk is mitigated by take-or-pay contracts whereby the customers are
contractually obligated to pay periodic specified amounts, even if they do not
take delivery of the contracted services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Presentation
The Partnership's financial statements are prepared on the accrual basis of
accounting. The statements of operations and cash flows for the periods ending
March 31, 1996 and March 27, 1997 are unaudited and, in the opinion of
management, contain all adjustments (consisting of only normal recurring
items) necessary for the fair presentation of the financial position and
results of operations for the interim periods. The results of operations for
the period ended March 27, 1997 are not necessarily indicative of the results
to be expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, temporary investments
represent securities with maturities of 90 days or less and are considered
cash equivalents.
F-39
<PAGE>
GULF STATES FIBERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenues are recognized as the Partnership performs services in accordance
with contract or tariff terms.
Depreciation
Property and equipment are carried at cost or fair market value of
contributed property at the time of the contribution. Depreciation and
amortization of property and equipment are provided using the straight-line
method over estimated useful lives (3 to 20 years).
Long-Lived Assets
In 1995, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The effect of adopting SFAS No.
121 was not material.
The Partnership periodically reviews the values assigned to long-lived
assets, such as property and equipment, and cost in excess of net assets
acquired to determine whether any impairments are other than temporary.
Management believes that the long-lived assets in the accompanying balance
sheets are appropriately valued.
Income Taxes
The Internal Revenue Code and applicable state statutes provide that the
income and expenses of a partnership are not separately taxable to the
partnership but rather accrue directly to the partners. Accordingly, no
provision for federal or state income taxes has been made in the accompanying
financial statements.
Interest Expense
All interest incurred during 1995 and 1996 is attributable to the
construction of the routes detailed in Note 1. Interest was capitalized until
the completion of the construction of a specific route segment. The amount of
interest capitalized in 1995 and 1996 totaled $1,020,204 and $40,365,
respectively.
Other Noncurrent Assets
The excess of cost over the fair market value of assets acquired
("goodwill") is being amortized to income on a straight-line basis over a
period of 40 years.
In connection with the issuance of its long-term debt, the Partnership
incurred debt issuance costs of approximately $986,000 and $80,000 in 1995 and
1996, respectively. These costs were recorded as other assets and are being
amortized on a straight-line basis over 7 to 8.5 years, the term of the
related debt facilities.
Presentation
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. SCANA ASSET CONTRIBUTION
Effective November 1, 1994, SCANA contributed an existing Atlanta to
Birmingham fiber optic route to the Partnership as part of its capital
contribution. The tangible assets associated with this route were recorded at
their estimated appraised value of $4,924,410. This route was valued at
$5,449,670 for purposes of determining a portion of SCANA's capital
contribution. The $525,260 difference between the estimated appraised value of
the tangible assets and the fair market value of the route is reflected as
goodwill.
F-40
<PAGE>
GULF STATES FIBERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INTERIM CONSTRUCTION LOAN AND LONG-TERM DEBT
Interim Construction Loan
On December 8, 1994, the Partnership completed a $40,000,000 construction
loan commitment ("Loan") with NationsBank of North Carolina ("NationsBank").
The Loan provided the Partnership the ability to draw amounts as needed to
finance the construction of a new route. The interest rates paid on amounts
outstanding under the Loan ranged from 6.75% to 7.25% in 1995. Any unused
portion of the Loan was subject to a commitment fee equal to .25% per annum.
The Partnership borrowed $36,700,000 under the Loan prior to its repayment in
full in August 1995. The Partnership utilized funds realized from the
$47,500,000 nonrecourse project financing discussed below to repay the Loan.
On July 25, 1995, the Partnership completed a $47,500,000 nonrecourse
project financing (the "Financing") with NationsBank. The Financing is to be
repaid in 16 equal semiannual installments of $2,968,750 beginning on June 30,
1996 and ending on December 31, 2003. The Financing bears interest on
outstanding amounts at various floating rate options plus an applicable credit
spread, which varies throughout the term of the Financing. The Partnership is
contractually obligated to select the three-month LIBOR option as a direct
result of the interest rate swap agreement discussed below. The Financing is
secured by substantially all of the Partnership's assets.
Concurrently with the closing of the Financing, the parent companies of GSTS
and SCANA, ITC Holding Company, Inc. ("ITC") and SCANA, Inc., respectively,
have entered into the Telecommunications System Capacity Agreement ("TSCA")
with NationsBank. The TSCA requires ITC and SCANA to make additional equity
contributions to the Partnership. These required equity contributions are
calculated on a quarterly basis throughout the term of the Financing based on
a contractually determined amount, less the Partnership's quarterly revenue,
excluding the nonrecurring revenue discussed in Note 7. The contractually
determined amounts discussed above are fixed amounts and are not contingent
upon the results of operations of the Partnership.
On January 24, 1995, the Partnership entered into a forward starting
interest rate swap agreement with a $47,500,000 principal amount with
NationsBank. This agreement is accounted for as a hedge of an anticipated
transaction. The agreement swaps the applicable three-month LIBOR selected
under the Financing with a fixed rate of 8.25%. As of December 31, 1996, the
Partnership would be required to pay $2,962,000 to terminate the interest rate
swap with NationsBank. The Partnership made payments totaling $1,261,000 and
$553,320 to NationsBank in 1995 and 1996, respectively, in connection with
this interest rate swap. These payments are included in interest expense in
the accompanying statements of operations.
As a result of this interest rate swap, the Financing will bear an effective
interest rate as follows:
<TABLE>
<S> <C>
Years 1-3......................................................... 9.375%
Years 4-6......................................................... 9.500
Years 7-8.5....................................................... 9.625
</TABLE>
Maturities of long-term debt as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997......................................................... $ 5,937,500
1998......................................................... 5,937,500
1999......................................................... 5,937,500
2000......................................................... 5,937,500
2001......................................................... 5,937,500
Thereafter................................................... 11,875,000
-----------
$41,562,500
===========
</TABLE>
F-41
<PAGE>
GULF STATES FIBERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LEASE OBLIGATIONS
The Partnership has entered into various operating leases for facilities and
equipment used in its operations. Aggregate future minimum rental commitments
under noncancelable operating leases as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 682,902
1998.......................................................... 636,037
1999.......................................................... 620,405
2000.......................................................... 601,135
2001.......................................................... 580,585
Thereafter.................................................... 2,310,260
----------
$5,431,324
==========
</TABLE>
Rent expense charged to operations for the years ended December 31, 1995 and
1996 was $153,003, and $953,713, respectively.
6. RELATED-PARTY TRANSACTIONS
ITC provides certain administrative services and leases office space to the
Partnership. In addition, certain of ITC's other wholly owned or majority-
owned subsidiaries provide the Partnership with various services and/or
receive services provided by the Partnership. These entities include
Interstate Telephone Company and Valley Telephone Company, which provide local
and long distance telephone services; Interstate FiberNet, which provides
digital communications transport; and InterQuest, which provides operator
assistance services. ITC also holds equity investments in the following
entities which do business with the Partnership: Powertel, Inc., formerly
InterCel, Inc., which provides cellular services, and MindSpring Enterprises,
Inc., which is a regional provider of Internet access.
The Company received services from ITC and other affiliated entities of
approximately $1,162,000 and $1,477,000, for the years ended December 31, 1995
and 1996, respectively, which are reflected in selling, general, and
administrative expenses in the Partnership's statements of operations. In
addition, the Partnership received services from ITC and other affiliated
entities of approximately $70,000 for the year ended December 31, 1996, which
is reflected in cost of services in the Partnership's statement of operations.
In management's opinion, the Partnership's transactions with these affiliated
entities are representative of arm's-length transactions.
Relatives of stockholders of ITC are stockholders and employees of the
Partnership's insurance provider. The costs charged to the Partnership for
insurance services were approximately $33,000 and $54,000 for the years ended
December 31, 1995 and 1996, respectively.
7. SIGNIFICANT CUSTOMERS
Two customers made up greater than 10% of the Partnership's revenues for the
years ended December 31, 1995 and 1996, as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Customer A................................................... 82.5% 43.2%
Customer B................................................... 8.6 21.0
</TABLE>
During 1995, the Partnership received nonrecurring revenue of $3,250,000, or
approximately 43% of net sales to Customer A, related to the cancellation of
an existing lease agreement.
F-42
<PAGE>
GULF STATES FIBERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership entered into an agreement with Customer A to lease certain
fiber optic lines whereby Customer A is contractually obligated to pay
$4,338,996 per annum for 11 years beginning June 1995.
8. SUBSEQUENT EVENTS
Capital Lease
In January 1997, the Partnership entered into a capital lease agreement with
Southern Telecom 1, Inc. ("STI") to construct and lease a fiber optic facility
and related equipment from Birmingham to Montgomery, Alabama. In total, STI
constructed a 24 fiber optic strand facility, 12 strands of which it leased to
the Partnership and 12 strands of which it granted the Partnership a revocable
right to use. STI has the option to lease to the Partnership any of the
additional 12 licensed fibers for a monthly payment of $2,000 per fiber after
the ninth anniversary of the lease. To the extent STI does not lease the
Partnership at least six of the licensed fibers under its option, the
Partnership will have the right to lease from STI up to a total of six of the
licensed fibers. Construction was completed and lease payments began in
February 1997. Payments under the lease are as follows:
<TABLE>
<CAPTION>
MONTHS MONTHLY
OF TERM PAYMENT
------- -------
<S> <C>
1 through 48.................................................... $75,000
49 through 108.................................................. 25,000
109 through 240................................................. 1,000
</TABLE>
Dissolution of the Partnership
On March 27, 1997, GSTS's parent, ITC, purchased the 64% interest in the
Partnership owned by SCANA for approximately $17 million, payable at closing
in shares of ITC's nonvoting convertible preferred stock, plus certain
contingent consideration. The contingent consideration is due no later than
April 30, 1998, at which time ITC must deliver additional nonvoting
convertible preferred stock to SCANA equal to 35.7% of (a) 64%, multiplied by
(b) (i) 6, multiplied by (ii) the amount, if any, by which the earnings before
interest, taxes, depreciation, and amortization of the Partnership for the
year ended December 31, 1997 exceed $11,265,696. Upon the closing of the
acquisition and in connection with the Reorganization described below, ITC
contributed the 64% ownership interest in the Partnership to GSTS and the
Partnership was dissolved.
Debt Refinancing
In connection with the acquisition of the remaining 64% interest in the
Partnership, GSTS signed an agreement with NationsBank of Texas, N.A. for a
$41.6 million bridge financing facility (the "Bridge Facility"). The Bridge
Facility finances the Partnership's existing Financing described in Note 4 and
is secured by the assets of the Partnership. The Bridge Facility bore interest
on outstanding amounts at various floating rate options plus an applicable
credit margin. The Bridge Facility matured and was repaid on the date the
proceeds from ITC/\DeltaCom's debt offering discussed below were released.
F-43
<PAGE>
GULF STATES FIBERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Parent's Reorganization of Subsidiaries
In March 1997, ITC formed a new wholly owned subsidiary, ITC/\DeltaCom, Inc.
("ITC/\DeltaCom"). On July 25, 1997, ITC reorganized several of its wholly
owned subsidiaries as follows:
. Eastern Telecom, Inc. (d.b.a. InterQuest) and ITC Transmission Systems
II, Inc. merged with and into Interstate FiberNet, Inc., formerly ITC
Transmission Systems, Inc. ("FiberNet").
. ITC contributed all of the outstanding capital stock of FiberNet,
DeltaCom, Inc. and GSTS to ITC/\DeltaCom.
. ITC/\DeltaCom contributed all of the outstanding capital stock of
DeltaCom and GSTS to FiberNet.
These transactions are collectively referred to as the "Reorganization."
ITC/\DeltaCom Debt Offering
On June 3, 1997, ITC/\DeltaCom issued senior notes with a principal value of
$200 million (the "Offering"). Proceeds from the Offering were held by the
trustee until all required regulatory approvals related to the Reorganization
were received. Upon consummation of the Reorganization on July 25, 1997, a
portion of the proceeds was used to repay the Bridge Facility described above as
well as certain advances from the Parent outstanding at DeltaCom, Inc.
F-44
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
UNTIL AUGUST 9, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
---------------
$160,000,000
ITC/\DELTACOM, INC.
8 7/8% SENIOR NOTES DUE 2008
PROSPECTUS
DATED MAY 11, 1998
