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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1999
Registration No. __________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________
ITC DELTACOM, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 4813 58-2301135
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
_______________
1791 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
(706) 385-8000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_______________
Andrew M. Walker
CHIEF EXECUTIVE OFFICER
ITC DELTACOM, INC.
1791 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
(706) 385-8000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_______________
Copies to:
CHARLES D. GANZ, ESQ. NANCY J. KELLNER, ESQ.
ROBERT H. RIGSBY, JR., ESQ. STEVEN M. KAUFMAN, ESQ.
SUTHERLAND, ASBILL & BRENNAN L.L.P. HOGAN & HARTSON L.L.P.
999 PEACHTREE STREET, N.E. 555 13TH STREET, N.W.
ATLANTA, GEORGIA 30309 WASHINGTON, D.C. 20004
(404) 853-8000 (202) 637-5600
_______________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.[_]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, please check
the following box and list the Securities Act of 1933 registration statement
number of the earlier effective registration statement for the same offering.[_]
__________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering.[_]
_____________________
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of each class of Proposed maximum Proposed maximum Amount of
securities to be registered Amount to be registered offering price per share aggregate offering price registration fee
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Common Stock, $.01 par value (1) 1,544,000 $5.28 (2) $8,153,212 (2) $2,267
===================================================================================================================================
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(1) The Registration Statement relates to the securities of the registrant
issuable to holders of common stock of AvData Systems, Inc. in the proposed
merger of AvData Systems, Inc. with and into a wholly-owned subsidiary of
the registrant.
(2) Pursuant to Rule 457(f)(2), because there is currently no public trading
market for AvData Systems, Inc. common stock, the registration fee was
computed on the basis of the book value of the shares of common stock of
AvData Systems, Inc. computed as of December 31, 1998. Such book value
equaled $8,153,212 in the aggregate and, based on 30,639,502 shares of
AvData Systems, Inc. common stock outstanding on December 31, 1998, equaled
$0.27 per share.
_______________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
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ITC DELTACOM, INC. AVDATA SYSTEMS, INC.
1791 O.G. SKINNER DRIVE 55 MARIETTA STREET
WEST POINT, GA 31833 18th FLOOR
(706) 385-8000 ATLANTA, GA 30303
(404) 479-4800
PROSPECTUS PROXY STATEMENT
_____________ SHARES OF COMMON STOCK
_________ __, 1999
DEAR FELLOW STOCKHOLDER,
AvData Systems, Inc. and ITC DeltaCom, Inc. have entered into an Agreement
and Plan of Merger, dated as of April 15, 1999, which provides for AvData to
merge into a wholly-owned subsidiary of ITC DeltaCom, subject to, among other
things, approval of AvData's stockholders. If the merger takes place, your
AvData common stock will be converted into ITC DeltaCom common stock, as
described in this prospectus and proxy statement.
AvData's board of directors have scheduled a special meeting of
stockholders to vote on the merger agreement on ____________ ___, 1999 at 10:00
a.m., local time, at AvData's offices located at 55 Marietta Street, 18th Floor,
Atlanta, Georgia 30303. The merger agreement must be approved by a majority of
AvData's outstanding shares of common stock issued as of ____ __, 1999. If the
merger agreement is approved, we expect the merger to take place during the
summer of 1999.
ITC DeltaCom's common stock is traded on the Nasdaq Stock Market's National
Market under the symbol ITCD. On April 14, 1999, which was the last trading day
before the public announcement of the merger, the closing price for a share of
ITC DeltaCom's common stock was $35.00.
This prospectus and proxy statement contains important information
concerning ITC DeltaCom, Inc., AvData Systems, Inc., the terms of the merger and
the conditions which must be satisfied before the merger can occur. YOU SHOULD
CAREFULLY CONSIDER THE RISK FACTORS RELATING TO THE MERGER AND TO OWNERSHIP OF
ITC DELTACOM COMMON STOCK THAT ARE DESCRIBED STARTING ON PAGE ___.
The required vote to approve the merger agreement is based on the total
number of outstanding shares of AvData common stock and not on the number of
shares which are actually voted. NOT VOTING AT THE MEETING, FAILING TO SUBMIT A
PROXY CARD, OR ABSTAINING FROM VOTING AT THE MEETING HAS THE SAME EFFECT AS
VOTING AGAINST THE MERGER. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY
CARD. THE AVDATA BOARD URGES YOU TO VOTE IN FAVOR OF THE MERGER.
Sincerely,
James H. Black, Jr.
Chairman and Chief Executive Officer
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE MERGER.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS AND PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROSPECTUS AND PROXY STATEMENT DATED ________________, 1999
FIRST MAILED OR DELIVERED TO STOCKHOLDERS ON OR ABOUT ______________, 1999
SUBJECT TO COMPLETION, DATED _____ __, 1999
<PAGE>
[LOGO OF AVDATA]
AVDATA SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Atlanta, Georgia
_____________, 1999
TO THE STOCKHOLDERS OF
AVDATA SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of AvData Systems,
Inc., a Delaware corporation, will be held on _______ __, 1999, at 10:00 a.m.,
local time, at AvData's offices located at 55 Marietta Street, 18th Floor,
Atlanta, Georgia 30303, for the following purposes:
1. To consider and vote on a proposal to adopt the Agreement and Plan of
Merger, dated as of April 15, 1999 (the "Merger Agreement"), by and among
ITC DeltaCom, Inc., a Delaware corporation, Interstate FiberNet, Inc., a
Delaware corporation and a wholly-owned subsidiary of ITC DeltaCom, and
AvData Systems, Inc., as a result of which, among other things, AvData
will merge with and into Interstate FiberNet (the "Merger"), and to
approve the Merger and the other transactions contemplated by the Merger
Agreement, as more fully described in the prospectus and proxy statement;
and
2. To transact such other business as may properly be brought before the
special meeting.
Only holders of record of AvData common stock at the close of business on _____
__, 1999 are entitled to notice of, and will be entitled to vote at, the special
meeting and any adjournments or postponements of the special meeting. A list of
stockholders entitled to receive notice of and vote at the special meeting will
be available for examination by AvData stockholders at the office of AvData
located at 55 Marietta Street, 18th Floor, Atlanta, Georgia, 30303, during
ordinary business hours for the 10-day period before the special meeting.
Stockholders of AvData have the right to dissent from the Merger and demand that
if the Merger is consummated, they be paid the "fair value" for their shares of
AvData common stock. The right of any stockholder to receive such "fair value"
payment is contingent on strict compliance with the requirements of the
applicable provisions of Delaware law, which are attached as Appendix B to the
prospectus and proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS
James H. Black, Jr.
Chairman and Chief Executive Officer
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
<PAGE>
TABLE OF CONTENTS
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Page
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SUMMARY..................................................................... 1
RISK FACTORS................................................................ 12
INFORMATION IN THIS DOCUMENT................................................ 14
THE SPECIAL MEETING......................................................... 15
Date, Time and Place; Matters to Be Considered........................ 15
Proxies............................................................... 15
Solicitation of Proxies............................................... 15
Record Date and Voting Rights......................................... 16
Recommendation of AvData's Board of Directors......................... 16
THE MERGER.................................................................. 17
General............................................................... 17
Background of the Merger.............................................. 17
Recommendation of AvData's Board of Directors and Reasons for the
Merger.............................................................. 20
Opinion of AvData's Financial Advisor................................. 21
Interests of AvData Directors and Management in the Merger............ 25
Certain AvData Stockholders have Relationships with ITC DeltaCom...... 26
Business Relationship................................................. 26
Accounting Treatment.................................................. 26
Listing on The Nasdaq National Market................................. 26
Governmental and Regulatory Approvals................................. 26
Federal Income Tax Consequences....................................... 27
Restrictions on Resales by Affiliates................................. 28
Appraisal Rights of Dissenting Stockholders........................... 29
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS...................... 32
General............................................................... 32
Structure of the Merger............................................... 32
Management After the Merger........................................... 32
Conversion of AvData Common Stock..................................... 33
Conversion of AvData Stock Options.................................... 37
Exchange of Certificates.............................................. 37
Effective Time........................................................ 38
Representations and Warranties........................................ 39
Business of AvData Pending the Merger; Other Agreements............... 41
No Solicitation by AvData............................................. 44
Indemnification....................................................... 45
Stockholders'Representative........................................... 47
Conditions to Consummation of the Merger.............................. 47
Termination of the Merger Agreement................................... 50
Waiver and Amendment of the Merger Agreement.......................... 52
Expenses.............................................................. 52
INFORMATION ABOUT ITC DELTACOM.............................................. 53
INFORMATION ABOUT AVDATA.................................................... 61
AVDATA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 73
Overview.............................................................. 73
Results of Operations................................................. 73
Liquidity and Capital Resources....................................... 76
Forward Looking Statements............................................ 77
Market Risks Associated with Financial Instruments.................... 77
Inflation............................................................. 77
Year 2000 Issues...................................................... 77
Legal Contingencies................................................... 79
New Accounting Standards.............................................. 79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF AVDATA.... 80
AVDATA EXECUTIVE COMPENSATION............................................... 82
ITC DELTACOM CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS............. 83
Description of ITC DeltaCom Capital Stock............................. 83
Comparison of ITC DeltaCom Common Stock and AvData Common Stock....... 86
OTHER MATTERS............................................................... 91
Legal Matters......................................................... 91
Experts............................................................... 91
Other Matters......................................................... 91
Where You Can Find More Information................................... 91
INDEX TO FINANCIAL STATEMENTS............................................... F-1
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APPENDICES
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Appendix A - Agreement and Plan
of Merger............................................................. A-1
Appendix B - Section 262 of The Delaware General Corporation
Law................................................................... B-1
Appendix C - Opinion of Bowles
Hollowell Conner & Co................................................. C-1
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SUMMARY
This document is a prospectus of ITC DeltaCom and a proxy statement of
AvData. This summary highlights selected information from the prospectus and
proxy statement. It does not contain all of the information that is important to
you. You should carefully read the entire prospectus and proxy statement and the
other documents to which this document refers you to fully understand the
merger. See "Where You Can Find More Information" on page __.
ITC DELTACOM, INC.
1791 O.G. Skinner Drive
West Point, Georgia 31833
(706) 385-8000
ITC DeltaCom provides integrated voice and data telecommunications services on a
retail basis to mid-sized and major regional businesses in the southern United
States. We are also a leading regional provider of wholesale long-haul services
to other telecommunications companies. In connection with these businesses, we
own, operate and manage an extensive fiber optic network in the southern United
States.
We provide integrated retail telecommunications services to mid-sized and major
regional businesses in a bundled package tailored to the business customer's
specific needs. These services include:
. local exchange services;
. long distance services;
. toll free calling, calling card and operator services;
. Asynchronous Transfer Mode, or "ATM", frame relay, high capacity
broad band private line services;
. primary rate interface connectivity and collocation services to
Internet service providers;
. Internet, intranet and Web page hosting and development services;
and
. customer premise equipment sales, installation and repair.
As of December 31, 1998, we provided retail services to approximately 10,700
business customers in 22 metropolitan areas. Over the next two years, we intend
to provide a full range of retail services in a total of approximately 42
metropolitan areas throughout the southern United States.
We provide wholesale long-haul services to several other telecommunications
carriers. Our fiber optic network reaches over 80 points of presence, or POPs,
in ten southern states. This network extends approximately 7,800 route miles, of
which approximately 4,150 miles are owned by ITC DeltaCom. The remaining
approximately 3,650 miles are owned and operated principally by public utilities
but are managed and marketed by us.
In connection with offering local exchange services, we have entered into
interconnection agreements with the following incumbent local exchange carriers:
. BellSouth Telecommunications, Inc., for all of its markets;
. Southwestern Bell Telephone Company for its Arkansas markets;
. GTE Corporation, for its Alabama markets; and
. Sprint Corporation, for its Florida markets.
The interconnection agreements allow us to resell the local exchange services of
the incumbent carrier and to interconnect our network with their networks. This
allows us to offer local exchange services to our current customer base and to
enter new markets with minimal capital expenditures. We intend to complete
additional interconnection agreements with GTE, Sprint and Southwestern Bell
Telephone Company for other markets that we serve or intend to serve.
AVDATA SYSTEMS, INC.
55 Marietta Street
18th Floor
Atlanta, Georgia 30303
(404) 479-4800
AvData is a provider of satellite and terrestrial-based digital network
solutions, primarily to mid-size companies based in the southeastern United
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States and to wireless messaging and cellular operators nationwide. AvData
designs, implements and operates private communications networks that carry high
speed one-way and two-way data, Internet, intranet and other digital
transmissions. AvData delivers high reliability for these networks based upon
its continuous network monitoring (24 hours a day, every day) and its ability to
quickly identify and correct network outages.
As of March 31, 1999, AvData had an installed base of approximately 3,500
revenue-producing sites in North America and the Caribbean. AvData's revenues
have grown from less than $7 million for 1994 to more than $30 million for 1998
(although AvData's revenues are expected to decline in 1999 following
substantial completion of the buildout under a large customer contract). AvData
has achieved this growth by increasing its base of revenue-producing sites,
adding terrestrial network solutions to the satellite technology solutions
offered since its founding and through a large, multi-year contract obtained in
September 1995 with PageMart Wireless, Inc., which represents its single largest
network to date. AvData's recurring revenues have been increasing at the rate of
greater than 20% per year and AvData believes its recurring revenues will
continue to increase in the future (although AvData's non-recurring revenues are
expected to decline in 1999 following substantial completion of the buildout
under the PageMart contract).
AvData believes that the complexity of data networks and network operations and
demand for network solutions will continue to increase. To capitalize on these
trends, AvData offers network operations and management services that it
believes are attractive for customers seeking to outsource network operations,
especially those for whom network failure is extremely costly. AvData believes
this service is also attractive for systems integrators seeking to offer a
"one-stop shopping" network solution to their end customers.
AvData uses both satellite and terrestrial capacity to implement networks for
its customers. AvData acquires capacity from multiple vendors when needed to
satisfy customer demand. AvData believes that the use of multiple vendors and
diverse routing reduces exposure from failure of a single communications
facility provider, since at least critical portions of customer traffic often
can be relocated from a failed facility to the functioning facility of another
vendor. AvData believes that a strategic relationship with a facilities owner
such as ITC DeltaCom will reduce its facilities cost and make its network
solutions more cost competitive.
AvData's principal customers in recent years include PageMart Wireless, Inc. (a
national paging network with over 1,800 sites on-line), and Motion Industries (a
wholly-owned subsidiary of Genuine Parts Company with over 300 sites). AvData is
largely dependent upon these customers, particularly PageMart, and its recurring
and non-recurring revenues would be adversely affected if AvData lost these
accounts.
SPECIAL MEETING OF AVDATA STOCKHOLDERS (PAGE __)
The special meeting will be held on ____________, 1999 at 10:00 a.m. at AvData's
offices located at 55 Marietta Street, 18th Floor, Atlanta, Georgia 30303. At
the special meeting, you will be asked to vote to adopt the merger agreement
and to approve the merger and the transactions contemplated by the merger
agreement.
You can vote, or submit a proxy to vote, at the special meeting if you were a
record holder of AvData common stock at the close of business on ___________,
1999. You can vote your shares by attending the meeting and voting in person or
you can mark the enclosed proxy card with your vote, sign it and mail it in the
enclosed return envelope. You can revoke your proxy at any time before it is
exercised.
VOTE REQUIRED (PAGE ___)
For the merger to occur, a majority of the shares of AvData common stock that
were issued and outstanding on ___________, 1999 must approve the merger
agreement and the related transactions. Please remember that, unlike routine
matters presented to the stockholders, the vote required to approve the merger
agreement is based on the total number of outstanding shares, and not on the
number of shares which are actually voted.
THE MERGER (PAGE __)
The merger agreement provides that ITC DeltaCom will acquire AvData by merger,
with
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AvData being merged into Interstate FiberNet, a wholly-owned subsidiary of ITC
DeltaCom. ITC DeltaCom and AvData hope to complete the merger during the summer
of 1999.
The merger agreement is included as Appendix A to this prospectus and proxy
statement. It is the legal document that governs the merger.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE ___)
As a consequence of the merger, unless you exercise appraisal rights under
Delaware law, the shares of AvData common stock that you own will convert into
the right to receive the following:
. shares of ITC DeltaCom common stock -- a portion of which will be withheld
and placed in escrow as security for your and the other AvData
stockholders' performance of certain indemnity obligations
. additional shares of ITC DeltaCom common stock which it may issue in the
future based upon certain types of revenues generated in 1999 by AvData,
or, after the merger, the surviving corporation.
If, immediately before the effective time of the merger, you own an outstanding,
unexpired and unexercised option to purchase shares of AvData common stock and
you become an employee of ITC DeltaCom or any of its subsidiaries at the
effective time of the merger, you are entitled to the following:
. your option will automatically convert into an option to purchase
proportionate shares of ITC DeltaCom common stock
. you will also receive an additional option to purchase proportionate shares
of ITC DeltaCom common stock upon the release of the escrow shares
described above
. you will also receive an additional option to purchase proportionate shares
of ITC DeltaCom common stock if ITC DeltaCom issues additional shares of
its common stock to the former AvData stockholders based upon certain types
of revenues generated during certain periods of 1999 by AvData, or, after
the merger, the surviving corporation.
The formulas for calculating the amount of ITC DeltaCom common stock that you
will receive in the merger are complex, and they can be found in the merger
agreement. You can see a description of how these formulas work, as well as some
of the possible values of the stock that you could receive on pages ___ to ___.
EXCHANGE OF STOCK CERTIFICATES (PAGE ___)
Before the merger occurs, you will receive a letter of transmittal that will
provide instructions on the procedure for exchanging your stock certificates.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS (PAGE __)
IF YOU OBJECT TO THE MERGER, DELAWARE LAW PERMITS YOU TO SEEK RELIEF AS A
DISSENTING STOCKHOLDER AND HAVE THE FAIR VALUE OF YOUR SHARES OF AVDATA COMMON
STOCK DETERMINED BY A COURT AND PAID TO YOU IN CASH.
If you are an AvData stockholder and wish to dissent, you must deliver to
AvData, prior to the vote on the merger at the special meeting, a written demand
for appraisal of your shares. You also must not vote in favor of the merger.
If you own shares of AvData common stock that are held in the name of another
person, such as a broker, bank or nominee, and you wish to seek appraisal, you
must instruct that person to follow the appraisal procedures of Delaware law.
The relevant provisions of Delaware law are technical and complex. If you wish
to exercise your rights to obtain appraisal of the fair value of your shares,
you are advised to consult, at your expense, with your legal counsel, since the
failure to comply strictly with these provisions may result in waiver or
forfeiture of your appraisal rights.
A copy of the relevant section of Delaware law governing this process is
attached as Appendix B to this prospectus and proxy statement.
WHAT IS NEEDED TO COMPLETE THE MERGER (PAGE __)
Several conditions must be satisfied before the merger will be completed. These
include:
. adoption of the merger agreement and approval of the merger by the
AvData stockholders
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. approval of the merger agreement by ITC DeltaCom's board of directors
. receipt of all required consents and approvals by the Federal
Communications Commission ("FCC")
. receipt by AvData of an opinion of ITC DeltaCom's counsel in form and
substance reasonably satisfactory
. receipt by ITC DeltaCom of an opinion of AvData's counsel in form and
substance reasonably satisfactory
. other customary contractual conditions set forth in the merger
agreement.
If the law permits, ITC DeltaCom or AvData may each waive conditions for the
benefit of their company and stockholders and complete the merger even though
one or more of these conditions has not been met. They cannot assure you that
the conditions will be satisfied or waived or that the merger will occur.
INDEMNIFICATION (PAGE ___)
If you own AvData common stock and you do not perfect your appraisal rights
under Delaware law, ITC DeltaCom will place a pro rata portion of the
ITC DeltaCom common stock you will receive into escrow where it will be
available to indemnify ITC DeltaCom, the surviving corporation of the merger
and their officers, directors and significant stockholders against losses due to
AvData's breach of its representations, warranties or agreements in the merger
agreement, as well as certain other matters described in the merger agreement.
This means that after the merger, ITC DeltaCom, or any of these other parties
could require that the escrowed stock be delivered to them to pay them for any
harm they suffer, up to $5,000,000, as a result of the above matters or AvData's
failure to perform its agreements or misrepresentation of its condition. Any
such payment would be made from the stock that is held in escrow.
AVDATA STOCKHOLDERS' REPRESENTATIVE (PAGE __)
If the merger is approved, the merger agreement provides that Mr. Kenneth F.
Leddick will be appointed attorney-in-fact for AvData's Stockholders and will
be authorized to act on behalf of AvData's stockholders in connection with the
indemnity provisions of the merger agreement and the agreement covering the
common stock that ITC DeltaCom will hold in escrow pending the AvData
stockholders' performance of their indemnity obligations. Each AvData
stockholder who votes in favor of the merger confirms such appointment and
authority.
FEDERAL INCOME TAX CONSEQUENCES (PAGE __)
If you exchange shares of AvData common stock for shares of ITC DeltaCom common
stock in the merger, AvData expects that you will not recognize gain or loss on
the exchange for United States federal income tax purposes, except to the extent
you receive cash in lieu of fractional shares. However, different tax
consequences may apply to you because of your individual circumstances or
because special tax rules apply to you.
DETERMINING THE ACTUAL TAX CONSEQUENCES OF THE MERGER TO YOU CAN BE COMPLICATED.
THEY WILL DEPEND ON YOUR SPECIFIC SITUATION AND ON VARIABLES NOT WITHIN THE
CONTROL OF AVDATA OR ITC DELTACOM. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR FOR A
FULL UNDERSTANDING OF THE MERGER'S TAX CONSEQUENCES TO YOU.
ACCOUNTING TREATMENT (PAGE __)
The merger is expected to be accounted for using the purchase method of
accounting.
GOVERNMENTAL AND REGULATORY APPROVALS (PAGE __)
Before the merger can occur, U.S. antitrust authorities must determine not to
seek to prevent the merger and the applicable premerger waiting period must
expire. In addition, the FCC will also need to approve the proposed transfer of
certain licenses from AvData to ITC/\DeltaCom Communications, Inc. AvData and
ITC DeltaCom have filed all of the required applications or notices with the FCC
and are in the process of filing the required filings with the U.S. antitrust
authorities. While neither AvData nor ITC DeltaCom knows of any reason why they
would not be able to obtain the necessary approvals in a timely manner, they
cannot be certain when or if they will receive them.
INTERESTS OF AVDATA'S DIRECTORS AND OFFICERS IN THE MERGER (PAGE __)
At the close of business on April 15, 1999, excluding all options to purchase
AvData's
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common stock, the directors and executive officers of AvData and their
affiliates owned a total of 11,208,645 shares of AvData common stock, which was
approximately 36% of the outstanding shares of AvData common stock on that date.
Some of AvData's directors and officers have interests in the merger that are
different from, or in addition to, their interests as AvData stockholders. These
interests exist because certain directors of AvData are also directors of ITC
DeltaCom and/or its affiliates and certain officers of AvData will become
employees of an indirect subsidiary of ITC DeltaCom commencing upon the
effective time of the merger.
TERMINATION OF THE MERGER AGREEMENT; EXPENSES (PAGE __)
The merger agreement specifies a number of situations when the agreement may be
terminated by ITC DeltaCom or AvData, which are described on page __. One of
the instances when ITC DeltaCom can terminate the merger agreement is if the
closing price of ITC DeltaCom common stock is less than $11.50 as of the last
trading day before the date of the merger.
REASONS FOR THE MERGER AND RECOMMENDATION OF AVDATA'S BOARD OF DIRECTORS
(PAGE ___)
A special committee consisting of AvData's independent directors considered a
variety of factors in recommending that the full board of directors approve the
merger agreement and for the full board to recommend to you that you vote your
shares for adoption of the merger agreement. These factors included:
. the business and financial condition of AvData and ITC DeltaCom
. the business advantages of a combination
. the alternatives to the merger
. the historical valuations of AvData common stock and the value offered
by the merger
. the opportunity of AvData stockholders to participate in the potential
future value of ITC DeltaCom.
After considering the recommendation of the special committee and other factors,
AvData's full board of directors concluded that the merger is fair to and in the
best interests of AvData and its stockholders at large, and unanimously
recommends that you vote "FOR" the proposal to adopt the merger agreement.
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE __)
If you own AvData common stock and receive ITC DeltaCom common stock, you would
become a stockholder of ITC DeltaCom upon completion of the merger. Your rights
would then be governed by ITC DeltaCom's certificate of incorporation and
bylaws, rather than AvData's certificate of incorporation and bylaws. Your
rights as a stockholder of ITC DeltaCom would differ from your rights as a
stockholder of AvData.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF ITC DELTACOM
The information in the following table has been derived from the historical
financial statements included in ITC DeltaCom's prior SEC filings. You should
read the following summary financial information in connection with ITC
DeltaCom's historical financial statements and notes thereto. This historical
financial information is considered a part of this document. See "Where You Can
Find More Information" on page ___. The summary historical statement of
operations data for each of the years ended December 31, 1996, 1997 and 1998 and
the summary historical balance sheet data for the years then ended, have been
audited by Arthur Andersen LLP, independent public accountants.
The pro forma statement of operations data and other financial data in the
table give effect to the following transactions as if each had occurred on
January 1, 1998: (1) the issuance of our March 1998 senior notes, (2) the
redemption of $70 million of our 1997 senior notes, (3) the issuance of our
November 1998 senior notes, (4) the issuance of our May 1999 convertible
subordinated notes, (5) the issuance of 6,037,500 shares of our common stock in
May 1999 and (6) the merger with AvData. The pro forma balance sheet data as of
December 31, 1998 presented in the following table give effect to (1) the
issuance of our May 1999 convertible subordinated notes, (2) the issuance of
6,037,500 shares of our common stock in May 1999, and (3) the merger with AvData
as if each occurred on December 31, 1998. The pro forma financial and operating
information does not purport to represent what ITC DeltaCom'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 operations of ITC DeltaCom. The
pro forma adjustments are based on currently available information and certain
assumptions that management believes to be reasonable.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF ITC DELTACOM
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PRO FORMA
1996(A) 1997(B)(C) 1998 1998(D)
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..................................... $ 66,518 $ 114,590 $ 171,838 $ 202,021
----------- ----------- ----------- -----------
Operating expenses:
Cost of services.................................... 38,756 54,550 82,979 101,775
Selling, operations and administration.............. 18,876 38,255 64,901 73,672
Depreciation and amortization....................... 6,438 18,332 30,887 33,223
----------- ----------- ----------- -----------
Total operating expenses.......................... 64,070 111,137 178,767 208,670
----------- ----------- ----------- -----------
Operating income (loss)................................ 2,448 3,453 (6,929) (6,649)
Equity in losses of unconsolidated subsidiary.......... (1,590) -- -- --
Interest expense....................................... (6,173) (21,367) (32,828) (47,761)
Interest income........................................ 172 4,251 9,753 9,511
Other (expense) income................................. -- -- (2,356) 156
----------- ----------- ----------- -----------
Loss before income taxes, preacquisition loss and
extraordinary item.................................. (5,143) (13,663) (32,360) (44,743)
Income tax benefit..................................... (1,233) (3,324) (6,454) (6,454)
Preacquisition loss.................................... -- 74 -- --
----------- ----------- ----------- -----------
Loss before extraordinary item......................... (3,910) (10,265) (25,906) (38,289)
Extraordinary item (net of income tax)................. -- (508) (8,436) --
----------- ----------- ----------- ------------
Net loss............................................... $ (3,910) $ (10,773) $ (34,342) $ (38,289)
=========== =========== =========== ===========
Basic and diluted net loss per common share(e):
Before extraordinary loss........................... $ (0.10) $ (0.26) $ (0.51) $ (0.66)
Extraordinary loss.................................. -- (0.01) (0.16) --
----------- ----------- ----------- -----------
Net loss............................................ $ (0.10) $ (0.27) $ (0.67) $ (0.66)
=========== =========== =========== ===========
Basic weighted average common shares outstanding(e)(f). 38,107,350 40,249,816 50,972,361 58,153,861
Diluted weighted average common shares outstanding(e)(f) 38,203,852 40,249,816 50,972,361 58,153,861
<CAPTION>
DECEMBER 31, PRO FORMA
-----------------------------------------
1996(A) 1997(B)(C) 1998 1998(D)
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 3,415 $ 116,446 $ 190,118 $ 412,030
Total assets........................................... 113,208 386,104 587,517 844,341
Long-term debt, advances from ITC Holding and capital
lease obligations, including current portions....... 75,443 203,889 417,934 517,934
Stockholders' equity................................... 19,257 148,266 118,200 268,957
<CAPTION>
YEAR ENDED DECEMBER 31, PRO FORMA
-----------------------------------------
1996(A) 1997(B)(C) 1998 1998(D)
------------ ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures................................... $ 6,173 $ 43,874 $ 147,842 $ 149,181
Cash flows provided by operating activities............ 8,189 6,302 9,512 11,016
Cash flows used in investing activities................ 72,694 93,854 118,166 119,507
Cash flows provided by financing activities............ 65,150 180,625 198,447 198,501
EBITDA, as adjusted(g)................................. 8,886 21,785 23,958 26,575
Ratio of earnings to fixed charges(h).................. -- -- -- --
</TABLE>
(a) On January 29, 1996, ITC Holding purchased DeltaCom, Inc. (which is now
called ITC DeltaCom Communications, Inc.), an Alabama corporation
("DeltaCom"). DeltaCom's results of operations are included in the
historical statement of operations data since the date of acquisition. See
Note 11 to the consolidated financial statements in ITC DeltaCom's Annual
Report on Form 10-K incorporated herein by reference.
(b) On March 27, 1997, ITC DeltaCom purchased certain fiber and fiber-related
assets, including a significant customer contract for network services in
Georgia (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 11 to the consolidated
financial statements in ITC DeltaCom's Annual Report on Form 10-K
incorporated herein by reference.
(c) On March 27, 1997, ITC DeltaCom purchased the remaining 64% partnership
interest in Gulf States FiberNet, a partnership between ITC Holding and
SCANA Communications, Inc. Gulf States FiberNet's revenues and expenses
have been included in the consolidated statement of operations data
effective January 1, 1997 with the preacquisition loss attributable to the
previous owner deducted to determine the consolidated net loss for the year
ended December 31, 1997. See Note 11 to the consolidated financial
statements in ITC DeltaCom's Annual Report on Form 10-K incorporated herein
by reference.
7
<PAGE>
(d) Adjustments to the statement of operations data and other financial data
reflect our 1998 and 1999 financings and the AvData acquisition as if these
transactions occurred on January 1, 1998. The balance sheet data reflect
the 1999 financing activities and the AvData acquisition as if they
occurred on December 31, 1998.
(e) On July 29, 1998, ITC DeltaCom announced a two-for-one stock split of its
common stock to be effected in the form of a stock dividend. The record
date for the stock split was August 18, 1998 and the payment date was
September 4, 1998. The common stock began trading giving effect to the
stock split on September 8, 1998. All references to number of shares,
except shares authorized, and to per share information in the consolidated
financial statements have been adjusted to reflect the stock split on a
retroactive basis.
(f) Pursuant to Staff Accounting Bulletin 98, for periods prior to the
completion of the initial public offering, basic net loss per share is
computed using the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed using
the weighted average number of shares of common stock outstanding during
the period and nominal issuances of common stock and common stock
equivalents, regardless of whether they are anti-dilutive.
(g) EBITDA, as adjusted, represents earnings before extraordinary item,
preacquisition (earnings) loss, equity in losses of unconsolidated
subsidiaries, net interest, income taxes, depreciation and amortization.
EBITDA, as adjusted, is provided because it is a measure commonly used in
the industry. EBITDA, as adjusted, 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, as adjusted, 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, 1996,
1997, 1998 and pro forma 1998 by $5.1 million, $13.7 million, $32.4 million
and $44.3 million, respectively.
8
<PAGE>
SUMMARY FINANCIAL DATA OF AVDATA
The information in the following table is based on AvData's financial
statements presented later in this prospectus and proxy statement. You should
read the following summary financial information in connection with those
financial statements, including the notes which accompany them. The summary
historical statement of operations data for each of the years ended December 31,
1996, 1997 and 1998 and the summary historical balance sheet data for the years
then ended, have been extracted from those financial statements which have been
audited by Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and service revenue $ 16,247,438 $ 13,529,639 $ 30,182,711
------------- ------------- -------------
Cost of sales and service revenue 8,859,881 6,612,267 18,795,435
------------- ------------- -------------
Operating expenses:
Operations and engineering 1,797,373 2,129,230 2,752,167
Sales and marketing 2,622,972 2,319,025 3,231,050
General and administrative 1,462,074 1,325,614 2,787,306
Depreciation 759,498 887,452 1,085,381
------------- ------------- -------------
Total operating expenses 6,641,917 6,661,321 9,855,904
------------- ------------- -------------
Operating income 745,640 256,051 1,531,372
Interest income, net 148,357 151,824 171,386
------------- ------------- -------------
Net income $ 893,997 $ 407,875 $ 1,702,758
============= ============= =============
DECEMBER 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
BALANCE SHEET DATA:
Current assets $ 7,970,926 $ 7,065,656 $ 9,224,548
Total assets 11,626,245 11,529,125 14,343,165
Current liabilities 5,100,405 3,777,672 5,253,298
Long-term liabilities 749,013 1,409,671 936,655
Stockholders' equity 5,776,827 6,341,782 8,153,212
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
OTHER FINANCIAL DATA:
Cash flows provided by
operating activities $ 1,874,480 $ 1,051,590 $ 1,504,210
Cash flows used in
investing activities 1,768,356 1,606,602 1,340,529
Cash flows provided by
financing activities 126 297,278 53,898
</TABLE>
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table summarizes per share information for ITC DeltaCom and
AvData on a historical, pro forma combined, and equivalent pro forma basis. The
earnings per share were calculated using income (loss) from continuing
operations before extraordinary items. The pro forma earnings per share amounts
do not include any adjustments to reflect potential expense reductions or
revenue enhancements that may result from the merger or the effect of
repurchases of ITC DeltaCom or AvData common stock subsequent to the stated
periods. The pro forma data do not necessarily indicate the results of future
operations or the actual results that would have occurred had the merger
occurred at the beginning of the periods presented. The pro forma financial data
have been included in accordance with the rules of the SEC and are provided for
comparative purposes only.
The ITC DeltaCom pro forma earnings per share data for the year ended
December 31, 1998 include adjustments to reflect the acquisition of AvData and
our 1998 and 1999 financing activities as if these transactions occurred on
January 1, 1998.
The AvData equivalent pro forma amounts are calculated by multiplying the
pro forma combined per share amounts by 0.03734, which is the fraction of a
share of ITC DeltaCom common stock that one share of AvData common stock will
convert into based upon the assumptions of a $25 ITC DeltaCom common stock price
and the number of AvData outstanding common shares at December 31, 1998. See
"Terms of the Merger and Related Transactions--Conversion of AvData Common
Stock."
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C> <C>
ITC DELTACOM COMMON
STOCK AVDATA COMMON STOCK
Income from continuing operations Income from continuing
before extraordinary items operations before extraordinary
items
Basic and diluted net loss Basic and diluted net loss
per share per share
Historical......................... $ (0.51) Historical...................... $ --
Pro forma for the merger(1)........ $ (0.66) Pro forma for the merger................ $ (0.02)
Book value per share at Book value per share at
period end period end
Historical......................... $ 2.30 Historical(2)................... $ 0.27
Pro forma for the merger(1)........ $ 4.60 Pro forma equivalent for
the merger...................... $ 0.17
</TABLE>
- ------------
(1) Also includes pro forma adjustments to reflect ITC DeltaCom's 1998 and 1999
financing activities. See "Pro Forma Financial Data" on page ____.
(2) Calculated by dividing stockholders' equity by the actual number of shares
of AvData common stock outstanding at the end of the period presented.
There were 30,639,502 shares of AvData common stock outstanding as of
December 31, 1998.
DIVIDENDS. Neither ITC DeltaCom nor AvData has ever declared or paid a cash
dividend with respect to its common stock.
10
<PAGE>
COMPARATIVE MARKET DATA
ITC DELTACOM. ITC DeltaCom common stock is, and the shares of ITC DeltaCom
common stock offered to AvData stockholders will be, listed on The Nasdaq
National Market and traded under the symbol "ITCD." ITC DeltaCom common stock
has been quoted on The Nasdaq National Market since ITC DeltaCom's initial
public offering on October 29, 1997. Before October 29, 1997, no established
public trading market for ITC DeltaCom common stock existed. The following table
sets forth for the periods indicated the high and low sales price per share of
ITC DeltaCom common stock as reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH (a) LOW (a)
------- ------
<S> <C> <C>
1997
Fourth Quarter (from October 29, 1997)...... $10.719 $ 6.938
1998
First Quarter............................... $16.625 $ 8.312
Second Quarter.............................. 21.500 13.312
Third Quarter............................... 25.500 14.500
Fourth Quarter ............................. 20.500 8.500
1999
First Quarter............................... $22.000 $12.500
Second Quarter (through _____ _, 1999)...... $______ $______
</TABLE>
(a) Stock prices give effect to the stock split in the form of a stock
dividend paid on September 4, 1998.
On April 14, 1999, the last full trading day before the public announcement
of the proposed merger, the closing price of ITC DeltaCom common stock was
$35.00 per share. On ________, 1999, the closing price reported for ITC DeltaCom
common stock was $_____ per share.
As of _________, 1999, there were ___ holders of record of ITC DeltaCom
common stock.
AVDATA. There is no established public trading market for AvData common stock.
11
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors relating to the
merger and to ownership of ITC DeltaCom common stock before you decide whether
to adopt the merger agreement and approve the merger. You should also consider
the other information in this prospectus and proxy statement (including the
matters addressed in "Information in this Document" on page __) and additional
information in ITC DeltaCom's Annual Report on Form 10-K, as amended on Form 10-
K/A, and Registration Statement on Form S-3, as amended, and the other documents
considered a part of this prospectus and proxy statement. See "Where You Can
Find More Information" on page __.
THE VALUE OF THE ITC DELTACOM COMMON STOCK YOU RECEIVE IN THE MERGER MAY DEPEND
ON ITS MARKET PRICE AT THE TIME OF THE MERGER.
The value of the ITC DeltaCom common stock you receive in the merger will
decline in the event the average market price of ITC DeltaCom common stock
for the five trading days immediately prior to the effective time of the merger
is less than $25.00. If the average market price of ITC DeltaCom common stock
falls within a range of $25.00 to $31.39, then the number of shares of ITC
DeltaCom common stock that you receive in the merger will adjust so that the
value of the stock remains constant. However, if the average market price of ITC
DeltaCom common stock is less than $25.00, the number of shares of ITC DeltaCom
common stock that you receive becomes fixed based upon an assumed stock price of
$25.00. This means that you would receive the same number of shares of ITC
DeltaCom common stock no matter how far below $25.00 the price of the stock is
at the time of the merger, which would reduce the overall value of the
consideration that you receive in the merger.
ITC DELTACOM MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE AVDATA INTO ITS
OPERATIONS.
The integration of AvData into ITC DeltaCom's operations involves a number
of risks, including:
. difficulty integrating AvData's operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel
. inability to successfully incorporate AvData's assets and rights into
ITC DeltaCom's service offerings
. inability to maintain uniform standards, controls, procedures and
policies
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in
connection with the merger or other similar transactions could slow ITC
DeltaCom's growth or lower the quality of its services, which could reduce
customer demand and ultimately the value of the ITC DeltaCom common stock that
you will receive in the merger. As discussed below, difficulties integrating
AvData into ITC DeltaCom's operations may also reduce the value of the earn-out
consideration that you receive, which depends upon the performance of the
surviving corporation after the merger.
12
<PAGE>
UNLESS AVDATA AND THE SURVIVING CORPORATION ACHIEVE SUBSTANTIAL GROWTH IN
RECURRING TERRESTRIAL REVENUES, AVDATA STOCKHOLDERS WILL RECEIVE LITTLE OR NO
EARN-OUT CONSIDERATION.
Part of the consideration that you receive in exchange for your shares of
AvData common stock will be the potential right to receive additional earn-out
shares of ITC DeltaCom common stock. Under the formula for earn-out
consideration, 93% of the earn-out shares depend solely on the level of
recurring terrestrial revenues of the surviving corporation. Recurring
terrestrial revenues have not been a large part of AvData's revenues to date.
You will not receive any of the 93% of the earn-out shares unless the recurring
terrestrial revenues of the surviving corporation in December 1999 exceeds the
figure in AvData management's current plan. You will only receive the full 93%
of the earn-out shares if the recurring terrestrial revenues of the surviving
corporation in December 1999 is approximately double the figure in the AvData
management's current plan. A chart giving the numbers of earn-out shares based
on the percentages of achievement of AvData management's current plan is
included below in "Terms of the Merger Agreement and Related Transactions--
Conversion of AvData Common Stock."
THE MERGER CONSIDERATION HELD IN ESCROW IS SUBJECT TO FORFEITURE IF
REPRESENTATIONS BY AVDATA IN THE MERGER AGREEMENT ARE NOT TRUE OR IF CERTAIN
LIABILITIES MATERIALIZE.
If representations by AvData in the merger agreement are not true and ITC
DeltaCom suffers any loss as a result, or if certain categories of liabilities
specified in the merger agreement materialize, then ITC DeltaCom will deduct its
losses from the portion of the merger consideration that will be held in escrow.
This will reduce the share of the merger consideration received by each AvData
stockholder on a pro rata basis.
SEVERAL MEMBERS OF AVDATA'S BOARD OF DIRECTORS MAY HAVE CONFLICTS OF INTERESTS
IN THE MERGER.
Four directors of AvData also serve as directors of ITC DeltaCom. Because
of this overlap of directors, AvData's board of directors appointed a special
committee of disinterested directors to consider the advisability of the merger
to AvData and its stockholders. However, the merger was approved by AvData's
full board of directors. AvData cannot assure you that the conflicts of interest
that relate to overlapping directors did not influence the AvData board's
consideration of the merger.
A MAJORITY OF THE OUTSTANDING SHARES OF AVDATA COMMON STOCK ARE HELD BY
STOCKHOLDERS WHO ALSO HAVE RELATIONSHIPS WITH ITC DELTACOM AND ITS DIRECTORS.
Seven of the directors of ITC DeltaCom beneficially own approximately 26%
of the outstanding stock of AvData. In addition, eight of the nine directors of
ITC DeltaCom also serve as directors of ITC Holding Company, Inc., which owns
approximately 21% of the outstanding stock of AvData. One director of ITC
DeltaCom serves as the managing general partner of South Atlantic Venture Fund
Limited Partnership, which owns approximately 18% of the outstanding stock of
AvData. The directors of ITC DeltaCom, along with ITC Holding Company and South
Atlantic Venture Fund collectively own or control approximately 65% of the
outstanding AvData common stock. If these persons vote (or cause to be voted)
all of this stock in AvData in favor of the merger, the merger will be legally
approved by the AvData stockholders. In deciding whether to vote these shares in
favor of the merger, the directors of ITC DeltaCom, along with ITC Holding
Company and South Atlantic Venture Fund Limited Partnership are free to consider
the benefits of the merger to ITC DeltaCom and to themselves.
13
<PAGE>
INFORMATION IN THIS DOCUMENT
IMPORTANT INFORMATION IN THE DOCUMENTS REFERRED TO UNDER THE HEADING "WHERE
YOU CAN FIND MORE INFORMATION" IS CONSIDERED A PART OF, BUT NOT INCLUDED
DIRECTLY IN, THIS PROSPECTUS AND PROXY STATEMENT. YOU MAY OBTAIN THIS
INFORMATION WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST TO ITC DELTACOM, INC.,
1791 O.G. SKINNER DRIVE, WEST POINT, GEORGIA 31833, ATTN: INVESTOR RELATIONS,
TELEPHONE (706) 385-8000. TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST SUCH
INFORMATION NO LATER THAN _______________, 1999.
Some of the statements contained in or considered a part of this prospectus
and proxy statement discuss future expectations, contain projections of results
of operations or financial condition or state other forward-looking information.
Those statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. The "forward-looking" information is based on
various factors and was derived using numerous assumptions. In some cases, you
can identify these so-called forward-looking statements by words like "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of those words and other
comparable words. You should be aware that those statements only reflect our
predictions. Actual events or results may differ substantially. Important
factors that could cause our actual results to be materially different from the
forward-looking statements are disclosed under the heading "Risk Factors" and
throughout this prospectus and proxy statement.
14
<PAGE>
THE SPECIAL MEETING
This prospectus and proxy statement is first being mailed or delivered by
AvData to its stockholders on or about __________, 1999, and is accompanied by
the notice of the special meeting and a form of proxy for use at the special
meeting and at any adjournments or postponements thereof.
DATE, TIME AND PLACE; MATTERS TO BE CONSIDERED
The special meeting is scheduled to be held on __________, 1999, at 10:00
a.m. local time, at AvData's offices located at 55 Marietta Street, 18th Floor,
Atlanta, Georgia 30303. At the special meeting, you will be asked to consider
and vote on (1) a proposal to adopt the merger agreement and approve the merger
and the transactions contemplated by the merger agreement, and (2) such other
matters as may properly be submitted to a vote at the special meeting. Under the
merger agreement, AvData would be merged with and into Interstate FiberNet,
which would continue as a wholly-owned subsidiary of ITC DeltaCom.
PROXIES
The accompanying form of proxy is for your use to allow you to vote at the
special meeting if you cannot or do not wish to attend and vote in person. You
may revoke your proxy at any time before it is exercised, by submitting to the
Corporate Secretary of AvData written notice of revocation or a properly
executed proxy with a later date, or by attending the special meeting and voting
in person. Written notices of revocation and other communications with respect
to the revocation of proxies should be addressed to AvData Systems, Inc., 55
Marietta Street, 18th Floor, Atlanta, Georgia 30303, Attention: Corporate
Secretary. All shares represented by valid proxies received and not revoked
before they are exercised will be voted in the manner specified in such proxies.
If no specification is made, such shares will be voted in favor of the adoption
of the merger agreement and approval of the merger and the transactions
contemplated by the merger agreement.
AvData's board of directors is not currently aware of any other matters
which will come before the special meeting. If any other matter should be
presented at the special meeting for action, the persons named in the
accompanying proxy card will vote the proxy in their own discretion.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.
SOLICITATION OF PROXIES
AvData will bear the entire cost of soliciting proxies from you, including
the printing costs of this prospectus and proxy statement and related materials.
In addition to soliciting proxies by mail, AvData will request banks, brokers
and other record holders to send proxies and proxy material to the beneficial
owners of AvData securities and secure their voting instructions. AvData will
reimburse such record holders for their reasonable expenses in so doing. AvData
intends to use several of its officers and regular employees, who will not be
specially compensated, to solicit proxies from stockholders, either personally
or by telephone, telegram, facsimile or electronic or United States mail.
15
<PAGE>
RECORD DATE AND VOTING RIGHTS
AvData's board of directors has selected the close of business on ______,
1999 as the record date for the special meeting. Under the Delaware General
Corporation Law and AvData's bylaws, only holders of record of shares of AvData
common stock on the record date will be entitled to notice of and to vote at the
special meeting. As of the record date, there were __ record holders of a total
of ___________ shares of AvData common stock eligible to be voted at the special
meeting.
Shares of AvData common stock present in person at the special meeting but
not voting, and shares of AvData common stock for which AvData has received
proxies but with respect to which holders of such shares have abstained, will be
counted as present at the special meeting for purposes of determining the
presence of a quorum. Brokers who hold shares of AvData common stock in nominee
or street name for customers who are the beneficial owners of such shares are
prohibited from giving a proxy to vote shares held for such customers with
respect to the matters to be voted upon at the special meeting without specific
instructions from such customers. Shares represented by proxies returned by a
broker holding such shares in street name will be counted for purposes of
determining whether a quorum exists, even if such shares are not voted in
matters where discretionary voting by the broker is not allowed.
THE REQUIRED VOTE OF AVDATA'S STOCKHOLDERS IS BASED ON THE TOTAL NUMBER OF
OUTSTANDING SHARES OF AVDATA'S COMMON STOCK AND NOT ON THE NUMBER OF SHARES
WHICH ARE ACTUALLY VOTED. IF YOU DO NOT SUBMIT A PROXY CARD OR DO NOT VOTE IN
PERSON AT THE STOCKHOLDER MEETING, OR IF YOU ABSTAIN FROM VOTING, YOU
EFFECTIVELY ARE VOTING AGAINST THE MERGER AGREEMENT AND THE MERGER.
For additional information about beneficial ownership of AvData common
stock by stockholders owning more than 5% of the AvData common stock and by
directors and executive officers of AvData, see "Security Ownership of Certain
Beneficial Owners and Management of AvData."
RECOMMENDATION OF AVDATA'S BOARD OF DIRECTORS
AvData's board of directors has determined that the merger is fair to and
in the best interests of AvData and its shareholders at large, and, therefore,
has unanimously approved the merger agreement. AVDATA'S BOARD UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR ADOPTION OF THE MERGER AGREEMENT. See "The Merger--
Recommendation of AvData's Board of Directors and Reasons for the Merger."
16
<PAGE>
THE MERGER
GENERAL
The boards of directors of ITC DeltaCom, AvData and Interstate FiberNet
have each unanimously approved their respective entities entering into the
merger agreement, which provides for the merger of AvData with and into
Interstate FiberNet, with Interstate FiberNet as the surviving corporation of
the merger. The merger is subject to final approval of the ITC DeltaCom and
Interstate FiberNet boards of directors and certain other closing conditions. In
the merger, each AvData stockholder, other than those who exercise their
appraisal rights, will receive shares of ITC DeltaCom common stock in exchange
for his or her shares of AvData common stock. Each of these AvData stockholders
may also receive additional shares of ITC DeltaCom common stock in the future,
to be determined in accordance with formulas specified in the merger agreement
that are based upon specified revenues generated by AvData (or, after the
merger, the surviving corporation) during 1999. See "Terms of the Merger
Agreement and Related Transactions--Conversion of AvData Common Stock." As of
___________, 1999, which is the most recent practicable date prior to the date
of this proxy statement and prospectus, an AvData stockholder would receive
$__________ in the form of ITC DeltaCom common stock in exchange for each share
of AvData common stock that he or she owns. Fractional shares of ITC DeltaCom
common stock will not be issued in the merger, and AvData stockholders otherwise
entitled to a fractional share will be paid in cash for such fractional share.
BACKGROUND OF THE MERGER
Since early 1997, AvData has been approached from time to time by a number
of companies seeking a business combination with AvData. During this period,
AvData engaged Bowles Hollowell Conner ("BHC"), formerly Wheat First Butcher
Singer, as its financial advisor to advise the AvData board of directors with
respect to the various proposals presented by the potential acquirors.
On or about December 1, 1998, Andrew Walker, Chief Executive Officer of ITC
DeltaCom, telephoned James Black, Chief Executive Officer of AvData, to express
an interest in AvData and to initiate discussions between the two companies
which could potentially lead to a mutually beneficial business combination. ITC
DeltaCom, pursuant to a marketing agreement, is a sales channel for AvData.
On December 8, 1998, Mr. Black and Juliet Reising, then Vice President and
Chief Financial Officer of AvData, made a presentation to Mr. Walker and Douglas
Shumate, Senior Vice President and Chief Financial Officer of ITC DeltaCom,
which included AvData's strategic plan, certain financial projections and a tour
of AvData's facilities. As a result of this meeting and information subsequently
provided, ITC DeltaCom communicated to AvData that it would be interested in
pursuing a business combination in which it would acquire AvData for $20 million
"ITC DeltaCom stock." Based on the previous independent valuations of AvData,
Mr. Black and Ms. Reising believed that the proposed purchase price was at the
lower end of the range of the fair value of AvData as a stand alone company.
On January 19, 1999, the AvData board of directors met to consider whether
to pursue ITC DeltaCom's proposal. Due to the fact that several directors serve
on both ITC DeltaCom's and AvData's boards of directors and the potential
conflicts of interests as a result thereof, the AvData board appointed a
special, strategic committee consisting of Messrs. James D. Elliott, Jr., Warren
B. French, Jr. and Kenneth F. Leddick, all of whom are disinterested directors
since they have no relationship with ITC DeltaCom, to act on behalf of the board
of directors in considering the potential acquisition of AvData by ITC DeltaCom
or some other sale of AvData. Based on the advice of Mr. Black and Ms.
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Reising, the board concluded to allow Mr. Black and Ms. Reising to continue to
negotiate the terms of a potential business combination with ITC DeltaCom and to
report to the strategic committee regarding the progress of such negotiations.
On January 25, 1999, the strategic committee held its first meeting, via
conference call, with Mr. Black and Ms. Reising also participating. The
strategic committee considered the proposal made by ITC DeltaCom, which was
summarized by Mr. Black and Ms. Reising, based on a preliminary term sheet and
valuation of AvData at $20 million. The strategic committee decided that in
order to determine the fairness of the ITC DeltaCom proposal, it would retain
BHC to serve as financial advisor with respect to a sale of AvData and to
solicit, on a limited basis, other potential acquirors of AvData. The strategic
committee formulated a list of potential strategic purchasers based on AvData's
current business, geographical location and discussions with companies who had
previously expressed an interest in a potential business combination with
AvData. It was determined that Mr. Black would provide the list to BHC following
the meeting so that BHC could begin the process of approaching these companies
on behalf of AvData. Shortly thereafter, BHC developed a confidential private
offering memorandum to present to the companies it would approach on behalf of
AvData.
The strategic committee held another meeting, via conference call, on
February 8, 1999, in which Mr. Black and Ms. Reising participated. BHC was also
present at the meeting and presented its preliminary financial analysis of
AvData. The strategic committee and BHC discussed the valuation presentation. In
addition, Mr. Black and Ms. Reising updated the strategic committee on the
ongoing negotiations with ITC DeltaCom. They reported that BHC was assisting in
the negotiations by providing financial analysis based on a number of factors,
including a discounted cash flow analysis, a financial comparison of similar
companies, and examples of similar, recent acquisitions.
On February 10, 1999, Messrs. Walker and Shumate met with Mr. Black and Ms.
Reising to further negotiate the purchase price of AvData. At that meeting ITC
DeltaCom introduced the concept of an "earn-out" provision to increase the
purchase price to a range which the strategic committee, based on the BHC
financial analysis, believed to be closer to the estimated value of AvData.
Executives of both companies participated in a conference call on February 12,
1999, in which ITC DeltaCom proposed a detailed "earn-out" provision structured
primarily on future revenues produced by AvData after the consummation of an
acquisition by ITC DeltaCom.
On February 17, 1999, the strategic committee held a meeting in which Mr.
Black and Ms. Reising updated the strategic committee on the negotiations with
ITC DeltaCom, and in particular, focused on the "earn-out" proposal and certain
other terms of the transaction. Mr. Black also updated the strategic committee
as to the progress BHC had made to date in contacting other prospective
acquirors of AvData. At that time, none of the solicited companies had made a
written proposal to BHC. At the February 17, 1999 meeting, the strategic
committee authorized Mr. Black and Ms. Reising to develop a term sheet for the
transaction with ITC DeltaCom, including a revised "earn-out" provision which
would incorporate revenue goals that officers of AvData believed to be
achievable when sales of ITC DeltaCom products by AvData are added to Avdata's
sales plan.
Mr. Black and Ms. Reising, with the assistance of the other AvData
officers, developed a revised "earn-out" proposal and response to the ITC
DeltaCom term sheet for the transaction. They presented these to the strategic
committee at a meeting on February 20, 1999. The strategic committee discussed
the "earn-out" provision, including the term of the earn-out and achievability
of the revenue goals. The strategic committee determined that Mr. Black and Ms.
Reising should present the revised proposals to ITC DeltaCom and continue
negotiations with respect to this transaction. BHC reported that, based on its
communications with other potential acquirors, none of the other companies
solicited would be able to structure the transaction as a tax-free exchange and
that the time frame for putting a transaction together would be much longer than
AvData was willing to accept due to the high degree of disruption to the
operations of the business while a transaction was being negotiated by the
officers of AvData.
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On February 24, 1999, Messrs. Walker and Shumate met with Mr. Black
and Ms. Reising to consider AvData's revised earn-out proposal and certain
other terms of the transaction. At that meeting, the parties reached agreement
as to all major terms of the transaction, other than the indemnification
provisions.
Mr. Black and Ms. Reising reported the status of the negotiations to the
strategic committee at a meeting held on February 25, 1999. The strategic
committee authorized the officers of AvData to finalize negotiations of the
terms of the deal, including a resolution of the indemnification provisions, and
to proceed directly to the negotiation of a definitive merger agreement without
completing the negotiation of a letter of intent. The strategic committee also
authorized Mr. Black to give the full AvData board of directors an update on the
status of the negotiations with ITC DeltaCom without calling a formal board
meeting to do so.
On February 25, 1999, Mr. Black and Mr. Walker discussed the terms of the
indemnification provisions and reached agreement regarding this outstanding
issue of the transaction and agreed to proceed immediately with negotiating a
definitive merger agreement.
The strategic committee met on March 29, 1999 to review the progress of
merger agreement negotiations. At that meeting, Sutherland, Asbill & Brennan
LLP, special counsel to AvData for the merger transaction, gave an overview of
outstanding issues relating to the merger agreement and BHC gave a preliminary
fairness opinion based on the terms of the current merger agreement draft. The
strategic committee was advised that officers of each company and their counsel
were meeting on March 30 and 31, 1999 to attempt to finalize the terms and
conditions of the merger.
On March 30 and 31, 1999, officers of ITC DeltaCom and AvData, along with
counsel for each company, met to negotiate a definitive merger agreement and
discuss issues that had arisen from ITC DeltaCom's due diligence efforts. These
meetings ended with resolution of many, but not all, of the open issues and with
ITC DeltaCom continuing due diligence on specified items.
Over the course of the next two weeks, ITC DeltaCom and AvData executives
continued to negotiate the terms of the merger agreement. On April 12, 1999, as
a result of the rising price per share of ITC DeltaCom's common stock, the price
per share of ITC DeltaCom common stock closed outside the range in which ITC
DeltaCom's financial advisor would render a fairness opinion as to the
transaction. Mr. Walker telephoned Mr. Black to discuss an adjustment to the
purchase price calculation based on the increased price of the ITC DeltaCom
common stock. Mr. Black discussed the situation with several members of the
strategic committee and then proposed a revised purchase price calculation to
Mr. Walker the next day. Mr. Black's revised proposal brought the terms of the
transaction within the range required by ITC DeltaCom's financial advisor and,
at the same time, preserved the value of the transaction to the AvData
stockholders.
On the morning of April 14, 1999, the strategic committee met to discuss
the new purchase price and the events giving rise to the need for an adjustment.
The strategic committee approved the revised purchase price and at that meeting
approved the merger agreement subject to the officers satisfactorily negotiating
the outstanding issues. Later that day, the strategic committee recommended the
proposed merger transaction to the full AvData board of directors, and BHC made
a presentation to the board as to the fairness of the transaction, from a
financial point of view, to AvData and its stockholders. The full board of
directors then unanimously approved substantially all of the terms of the
merger and the merger agreement and gave authority to Mr. Black to finalize
the terms of the merger and the merger agreement.
On April 15, 1999, ITC DeltaCom, Interstate FiberNet and AvData executed
the merger agreement.
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RECOMMENDATION OF AVDATA'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER
ON THE BASIS OF A RECOMMENDATION BY A SPECIAL COMMITTEE CONSISTING OF
AVDATA'S INDEPENDENT DIRECTORS AND OTHER FACTORS, AVDATA'S BOARD OF DIRECTORS
BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, AVDATA AND
THE AVDATA STOCKHOLDERS. ACCORDINGLY, AVDATA'S BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT AVDATA
STOCKHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF
THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
In making its decision to approve the merger agreement and to recommend
to the holders of AvData common stock that they vote their shares in favor of
adoption of the merger agreement, AvData's board of directors consulted with its
financial advisor, BHC, and considered a number of factors, including, among
others, the following material considerations:
. the directors' familiarity with and review of the business,
financial condition and result of operations of AvData, AvData's
competitive position in its business, and other financial
information and general economic conditions
. the advantages of a strategic combination with ITC DeltaCom, the
provider of terrestrial facilities and one of AvData's sales
channels, in enhancing AvData's network product and service
offerings, growth prospects and competitive position
. the possible alternatives to the merger including, among others,
continuing to operate AvData as an independent entity and the
associated risks
. the historical valuations of AvData common stock relative to the
value represented by the consideration to be received in the
merger
. the anticipated costs and disruption associated with pursuing
other strategic alternatives
. the directors' belief that the consideration payable in the merger
represented the highest value per share that could be negotiated
with ITC DeltaCom
. the timing of the transaction and premiums currently reported to
be obtained in comparable transactions
. that shares of ITC DeltaCom common stock are traded on The Nasdaq
National Market while there is no established market for shares of
AvData common stock
. the proposed structure of the transaction, including its tax-free
nature
. the terms and conditions of the merger agreement
. the financial condition of ITC DeltaCom
. the positive effect of the transaction on AvData's existing
customer base due to the continuation of existing satellite
services and the expansion of telecommunications services AvData
will be able to offer through ITC DeltaCom following the
transaction
. the continued employment of substantially all AvData employees
following the transaction
. the directors' belief that the similarities in the corporate
cultures and operating philosophies of AvData and ITC DeltaCom
will facilitate the assimilation of AvData into
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ITC DeltaCom with the least amount of disruption to AvData's
current operations and business strategies
. the oral opinion of BHC (subsequently confirmed by delivery of a
written opinion dated April 15, 1999) to the effect that as of
such date and based on and subject to certain matters stated
therein, the merger consideration was fair, from a financial point
of view, to AvData and its stockholders
AvData's board of directors also recognized that holders of AvData
common stock will be entitled to receive shares of ITC DeltaCom common stock in
the merger, and that this would allow such holders the opportunity to
participate in the benefits, if any, of increases in the value of ITC DeltaCom's
business and properties following the merger. Accordingly, AvData's board of
directors gave consideration to ITC DeltaCom's future prospects, as well as its
historical results of operations.
AvData's board of directors did not assign relative weights to the
foregoing factors or determine that any factor was of specific importance
relative to any other factor. Rather, AvData's board of directors viewed its
position and recommendation as being based on the totality of the information
presented to it and considered by it.
OPINION OF AVDATA'S FINANCIAL ADVISOR
AvData retained BHC on March 26, 1999, to act as its financial advisor
with respect to a sale of AvData. On April 14, 1999, BHC delivered its oral
opinion to AvData's board of directors that, as of such date and based upon and
subject to certain matters discussed with the board, the consideration being
offered by ITC DeltaCom, including the potential right to receive earn-out
shares as described in "Terms of the Merger Agreement and Related
Transactions--Conversion of AvData Common Stock" and "--Conversion of AvData
Stock Options," in exchange for all of the outstanding shares of AvData common
stock is fair from a financial point of view to the holders of AvData common
stock. This opinion was confirmed in writing on April 15, 1999.
The full text of BHC's written opinion, dated April 15, 1999, is
attached hereto as Exhibit C and sets forth certain important qualifications,
assumptions made, matters considered, areas of reliance on others, and
limitations on the review undertaken in connection with such opinion. The BHC
opinion was directed to the AvData board for its consideration in connection
with the proposed merger and is not a recommendation to any holder of AvData
common stock as to whether the merger is in such holder's best interests or as
to whether any such holder should vote for or against the merger. The summary
description of the BHC opinion set forth below is qualified in its entirety by
the full text of such opinion attached hereto as Exhibit C, and is incorporated
herein by reference and should be read carefully and in its entirety in
connection with this proxy statement and prospectus.
In arriving at its opinion, BHC among other things
. reviewed the financial terms of the merger as set forth in the
merger agreement;
. reviewed certain historical business, financial and other
information regarding AvData and ITC DeltaCom that was publicly
available or furnished by AvData's or ITC DeltaCom's management;
. reviewed certain financial forecasts and other data provided by
members of AvData's or ITC DeltaCom's management relating to their
respective businesses;
. conducted discussions with members of AvData's and ITC DeltaCom's
management with respect to their respective businesses, financial
and other information, including their respective business
prospects and financial forecasts;
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. conducted discussions with members of AvData's management with
respect to various strategic and operating benefits anticipated
from the merger;
. reviewed certain financial terms of the merger in relation to the
current and historical market prices and trading volumes of ITC
DeltaCom common stock;
. compared the financial position and operating results of AvData
with those of publicly traded companies BHC deemed relevant;
. compared the financial terms of the merger with certain financial
terms of other similar transactions BHC deemed relevant; and
. conducted such other financial studies, analyses and
investigations as BHC deemed appropriate.
In connection with its review, BHC relied upon the accuracy and
completeness of the foregoing financial and other information, and did not
assume any responsibility for any independent verification of such information.
AvData provided BHC with financial forecasts for the period from 1999 to 2003.
BHC assumed that these projections had been reasonably prepared on bases
reflecting the best available estimates and judgments of AvData's management as
to the future financial performance of AvData and that such projections provided
a reasonable basis upon which BHC could form its opinion. BHC did not assume
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
AvData or ITC DeltaCom, nor was BHC furnished with any such appraisals. AvData
imposed no limitations on BHC with respect to the investigations made or
procedures followed by BHC.
BHC's opinion was based on economic, monetary, market and other
conditions as in effect on, and the information made available to BHC as of, the
date of the opinion. Accordingly, although subsequent developments may affect
its opinion, BHC did not assume and does not have any obligation to update,
revise or reaffirm its opinion. BHC assumed that the merger will be consummated
in accordance with the terms described in the merger agreement and without any
waiver of any material terms or conditions. With the AvData board's permission,
BHC further assumed that, on the closing date of the merger, the price per share
of ITC DeltaCom common stock will not be less than $11.50. BHC's opinion does
not address the relative merits of the merger and the other business strategies
considered by AvData's board, nor does it address the board's decision to
proceed with the merger. The merger agreement is filed with this proxy statement
and prospectus as Exhibit A and the terms in the merger agreement and the
conditions to AvData's obligations thereunder should be reviewed and understood
by holders of AvData common stock in connection with their consideration of the
merger.
Set forth below is a brief summary of selected analyses presented by
BHC to the AvData board on April 14, 1999 in connection with BHC's opinion.
Comparable Public Company Analysis.
Using publicly available information and information provided by
AvData, BHC compared the historical financial and operating performance of
AvData with the corresponding performance of a group of publicly-traded network
services companies that BHC deemed to be similar to AvData. These comparable
companies were 4Front Technologies, Inc., Gilat Communications Ltd.,
International Network Services, Internoc Holdings NV, Norstan, Inc., Sykes
Enterprises, and Techforce Corp. In comparing AvData's financial performance to
that of these comparable companies, BHC made the following observations, among
others: (1) AvData had a latest twelve months' ("LTM") gross profit margin
("Gross Margin") of 37.7%, compared to the median LTM Gross Margin of 38.9% for
the comparable companies, (2) AvData had a LTM earnings (loss) before
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interest, taxes, depreciation and amortization ("EBITDA") margin of 8.6%,
compared to a median LTM EBITDA margin of 13.0% for the comparable companies,
and (3) AvData had a LTM earnings (loss) before interest and taxes ("EBIT")
margin of 5.0%, compared to a median LTM EBIT margin of 9.3% for the comparable
companies.
In order to arrive at an implied valuation for AvData, BHC calculated
the Adjusted Market Value, defined as aggregate equity value plus debt less cash
and cash equivalents, of the comparable companies as a multiple of (1) LTM
sales, (2) LTM EBITDA, (3) LTM EBIT, and (4) forward 1999 sales. An analysis of
the multiples of Adjusted Market Value to sales yielded a range of multiples
from 0.5x to 7.4x, with a median multiple of 1.3x for the comparable companies.
An analysis of the multiples of Adjusted Market Value to EBITDA yielded a range
of multiples from 5.7x to 31.7x, with a median multiple of 13.8x for the
comparable companies. An analysis of the multiples of Adjusted Market Value to
EBIT yielded a range of multiples from 9.6x to 82.7x, with a median multiple of
21.1x for the comparable companies. An analysis of the multiples of Adjusted
Market Value to forward 1999 sales yielded a range of multiples from 0.4x to
4.9x, with a median multiple of 1.3x for the comparable companies. BHC applied
the median LTM sales, EBITDA, EBIT and forward 1999 sales multiples for the
comparable companies to the corresponding historical results of AvData and
applied a 20% discount for size and liquidity relative to the comparable
companies to calculate the implied equity value of AvData. This analysis
indicated an equity value of AvData of approximately $27.0 million.
Comparable Acquisitions Analysis.
Using publicly available information, BHC reviewed selected recent
merger and acquisition transactions in the network services industry. These
transactions include: InaCom Corp.'s acquisition of Vanstar Corp., Qwest
Communications International, Inc.'s acquisition of Icon CMT Corp., CompuCom
Systems Inc.'s acquisition of Dataflex Corp., CompuCom Systems Inc.'s
acquisition of Computer Integration Corp., Xerox Corp.'s acquisition of
XLConnect Solutions, Inc., Xerox Corp.'s acquisition of Intelligent Electronics,
Inc., Wang Laboratories, Inc.'s acquisition of Ing. C. Olivetti & Co.
S.p.A.-Olsy Unit, Sprint Corp.'s acquisition of Paranet, Inc., and Vanstar
Corp.'s acquisition of Sysorex Information Systems, Inc. BHC compared the
Adjusted Market Value of the acquired companies as implied by the consideration
paid in each such transaction to the corresponding LTM sales, EBITDA and EBIT
for the acquired companies. This analysis indicated that Adjusted Market Value
as a multiple of (1) LTM sales ranged from 0.1x to 5.7x with a median of 0.3x,
(2) LTM EBITDA ranged from 8.7x to 39.8x with a median of 10.5x, and (3) LTM
EBIT ranged from 12.1x to 42.2x, with a median of 24.5x. BHC applied the median
LTM sales and EBITDA multiples for the comparable acquisitions to the
corresponding historical results of AvData and applied a 20% discount for size
relative to the comparable acquisitions, yielding an equity value of AvData of
approximately $14.6 million.
Dilution Analysis.
BHC performed a dilution analysis based on AvData's LTM financial
information. BHC assumed a 100% debt financed purchase of AvData common stock at
interest rates of 6.75% and 7.75%, with earnings taxed at 40% and no tax
deduction for goodwill to determine the maximum purchase price an acquiror could
pay in an all-cash for stock transaction with no earnings dilution at the time
of the acquisition. This analysis indicated an equity value of AvData of between
$15.5 million and $16.9 million.
Discounted Cash Flow Analysis.
BHC performed a discounted cash flow analysis to estimate the present
value of the projected unlevered free cash flows for AvData based on AvData's
projections. BHC calculated the estimated
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future free cash flows that AvData would produce for the fiscal years 1999
through 2003, as well as the estimated terminal value of AvData at the end of
the forecasting period. The terminal value was computed by multiplying AvData's
estimated fiscal year 2003 EBITDA by a range of multiples between 7.5x and 9.5x,
chosen to reflect AvData's potential acquisition multiple at the end of year
2003. The projected free cash flows and terminal values were discounted to
present values using a range of discount rates between 21.84% and 25.84%, chosen
to reflect assumptions regarding AvData's cost of capital. This analysis
indicated an equity value of AvData between $24.4 million and $34.4 million.
While the foregoing summary describes the analyses and examinations
that BHC deemed material in arriving at its opinion, it does not purport to be a
comprehensive description of all analyses and examinations actually conducted by
BHC. The preparation of a fairness opinion is not necessarily susceptible to
partial analysis or summary description, and selecting portions of the analyses
and of the factors considered by BHC, without considering all analyses and
factors, would create an incomplete view of the process underlying the analyses
set forth in the presentation of BHC to AvData's board of directors on April 14,
1999. In addition, BHC may have in its discretion given some analyses more or
less weight than other analyses, and may have deemed various assumptions more or
less probable than other assumptions. Accordingly, the ranges of valuations
resulting from any particular analysis described above should not be taken to be
BHC's view of the actual value of AvData or AvData common stock. To the
contrary, BHC expressed no opinion on the actual value of AvData or AvData
common stock, and its opinion that is addressed to AvData's board of directors
extends only to the belief expressed by BHC that, from a financial point of
view, the consideration that holders of AvData common stock will receive
pursuant to the merger is within the range of values that might fairly be
ascribed to AvData common stock as of the date of the opinion of BHC.
In performing its analyses, BHC made numerous assumptions with respect
to industry performance, general business and economic conditions, and other
matters, many of which are beyond the control of AvData. The analyses performed
by BHC are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than those suggested by such
analyses. Such analyses were prepared solely as part of BHC's analysis for the
AvData board of directors of the fairness of the merger to the holders of AvData
common stock from a financial point of view, and were provided solely to the
board in connection with the board's consideration of the merger. The analyses
do not purport to be appraisals or to reflect the prices at which a company
might actually be sold or the prices at which any securities may trade at any
time in the future. BHC used in its analyses various projections of future
performance prepared by the management of AvData. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain or accurate as projected. Accordingly, actual results
could vary significantly from those set forth in such projections.
As described above, the opinion of BHC and the presentation to AvData's
board of directors summarized above were among the many factors taken into
consideration by the board in making its determination to approve, and to
recommend that AvData's stockholders approve, the merger. BHC does not, however,
make any recommendation to holders of AvData common stock (or to any other
person or entity) as to whether such stockholders should vote for or against the
merger.
Pursuant to the engagement letter, AvData agreed to pay BHC an opinion
fee of $75,000 upon the delivery of the oral opinion to AvData's board of
directors that is described above. The opinion fee was not conditioned on the
outcome of BHC's opinion or whether AvData or its board of directors deemed such
opinion favorable or unfavorable. In addition, if the merger is effected on the
terms set forth in the merger agreement, the engagement letter provides for
AvData to pay BHC a transaction fee equal to $250,000, with the opinion fee
credited against the transaction fee. AvData will be obligated to pay the
transaction fee only if the merger (or another transaction) is consummated.
Accordingly, the payment of a substantial majority of BHC's total fee is subject
to consummation of the merger. The engagement letter also calls for AvData to
reimburse BHC for its reasonable out-of-pocket expenses and for AvData to
indemnify BHC, its affiliates, and other
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respective directors, agents, employees and controlling persons against certain
liabilities, including liabilities under the federal securities laws, relating
to or arising out of BHC's engagement. BHC and its affiliates may maintain
business relationships with AvData and its affiliates.
BHC, a division of First Union Capital Markets Corp., is a nationally
recognized investment banking firm and an affiliate of First Union Corporation.
BHC and its affiliates, as part of their investment banking activities, are
regularly engaged in the valuation of businesses and their securities in
connection with merger transactions and other types of acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. AvData
selected BHC as its financial advisor on the basis of BHC's experience and
expertise in transactions similar to the merger, and its reputation in the
telecommunications industry. In the past BHC or its affiliates have performed
certain investment banking services for AvData and ITC DeltaCom and received
customary fees for such services. In the ordinary course of business, BHC or its
affiliates may actively trade the debt and equity securities of ITC DeltaCom for
its or any such affiliate's own account or for the account of customers and,
accordingly, may hold a long or short position in such securities.
INTERESTS OF AVDATA DIRECTORS AND MANAGEMENT IN THE MERGER
Four directors of AvData are also directors of ITC DeltaCom: Donald W.
Burton, Campbell B. Lanier, III, William T. Parr and William H. Scott, III.
These directors directly own an aggregate of 2.6% of the outstanding AvData
common stock as of April 15, 1999. AvData's board of directors was aware of
these conflicts and considered them, among other matters, in selecting the
members of the strategic committee and later in approving the merger agreement
and the transactions contemplated thereby.
James H. Black, Jr., the current Chairman and Chief Executive Officer
of AvData, is expected to become a director and senior vice president of ITC
DeltaCom after the merger. Mr. Black is also expected to become senior vice
president of Interstate FiberNet and ITC DeltaCom Communications, Inc., an
indirect subsidiary of ITC DeltaCom. Mr. Black will be employed by ITC DeltaCom
Communications, Inc. for a period of one year, during which time his employment
may only be terminated "for cause". Upon expiration of the initial 12 months of
employment, Mr. Black's employment will be "at will."
Five of the six existing AvData officers are expected to become
employees of the surviving corporation. Any of these officers, including Mr.
Black, who stays with the surviving corporation following the merger will be
employed by ITC DeltaCom Communications, Inc., at or slightly higher, but not
more than 5% higher, than his or her current annual salary. ITC DeltaCom will
award annual performance bonuses in a manner substantially consistent with past
ITC DeltaCom policy and practice. In addition, each AvData officer, who
becomes an employee of the surviving corporation will receive credit for past
service with AvData with respect to all standard employee policies and benefit
plans provided by ITC DeltaCom Communications, Inc. ITC DeltaCom will require
each AvData officer to successfully pass a post-offer, pre-employment drug
screening test and enter into the standard non-disclosure, non-solicitation and
ownership of intellectual property agreement with ITC DeltaCom, Inc. All
AvData officers employed by ITC DeltaCom Communications, Inc., other than
Mr. Black, will be employees "at will." All employees of ITC DeltaCom
Communications, Inc., are eligible for option grants for the purchase of
ITC DeltaCom common stock, subject to the approval of ITC DeltaCom's board of
directors.
Severance Agreements. As of April 15, 1999, no officers or directors of
AvData have agreements that are affected by the merger, except Judith
H. Drobinski, Vice President-Human Resources, Secretary and Treasurer. Ms.
Drobinski's agreement specifies that if she is not offered an equivalent
position in the surviving organization based in Atlanta, she will be paid a
severance of six months salary, equal to $43,250.
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CERTAIN AVDATA STOCKHOLDERS HAVE RELATIONSHIPS WITH ITC DELTACOM
Eight of the nine directors of ITC DeltaCom are also directors of ITC
Holding Company, Inc., which owns approximately 21% of the outstanding stock of
AvData. One director of ITC DeltaCom is also the managing general partner of
South Atlantic Venture Fund Limited Partnership, which owns approximately 18% of
the outstanding stock of AvData. As of April 15, 1999, seven of the directors of
ITC DeltaCom own approximately 26% of the outstanding stock of AvData.
BUSINESS RELATIONSHIP
ITC DeltaCom and AvData currently do business with one another. Since
1996, AvData has purchased long distance service from ITC DeltaCom. Since 1998,
ITC DeltaCom has acted as a sales channel for AvData, whereby ITC DeltaCom
includes AvData's network operations and monitoring services as part of the
products and services that it sells to its customers.
ACCOUNTING TREATMENT
The parties to the merger agreement expect the merger to be accounted
for using the purchase method of accounting. ITC DeltaCom will be deemed the
acquiror for financial reporting purposes. Under the purchase method of
accounting, the purchase price in the merger is allocated among AvData assets
acquired and AvData liabilities assumed to the extent of their fair market
value, with any excess purchase price being allocated to goodwill.
LISTING ON THE NASDAQ NATIONAL MARKET
ITC DeltaCom has agreed to cause the shares of ITC DeltaCom common
stock issued in the merger to be approved for listing on The Nasdaq National
Market.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the merger may not be consummated until notifications have been
given and certain information has been furnished to the Federal Trade Commission
("FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and specified waiting period requirements have been satisfied. ITC
DeltaCom and AvData have filed or are in the process of filing pre-merger
notification and report forms with the FTC and the Antitrust Division.
At any time before or after the effective time of the merger, however,
the Antitrust Division, the FTC or a private person or entity could seek under
antitrust laws, among other things, to enjoin the merger or to cause ITC
DeltaCom to divest itself, in whole or in part, of the surviving corporation of
the merger or of certain businesses conducted by the surviving corporation of
the merger. There can be no assurance that a challenge to the merger will not be
made or that, if such a challenge is made, ITC DeltaCom will prevail. The
obligations of ITC DeltaCom and AvData to consummate the merger are subject to
the condition that the applicable waiting period under the HSR Act will have
expired. See "Terms of the Merger Agreement and Related Transactions--Conditions
to Consummation of the Merger."
In connection with the merger, AvData and/or ITC DeltaCom will be
required to submit regulatory notices and may be required to take further
actions before one or more federal or state
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regulatory agencies, including the FCC. In some instances, these regulatory
notices and/or actions are required to be filed or taken in advance of the
effective time of the merger. In addition, while not required, ITC DeltaCom
intends to provide courtesy notices prior to the effective time of the merger to
a number of government entities that have issued licenses, certifications and
similar telecommunications regulatory approvals to ITC DeltaCom and its
subsidiaries. ITC DeltaCom and AvData believe that any material regulatory
approvals will be obtained in the normal course; however, there can be no
assurance that all such approvals will be obtained by the effective time of the
merger. ITC DeltaCom and AvData are aware of no other governmental or regulatory
approvals required for consummation of the merger, other than compliance with
applicable federal and state communications and securities laws.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States
federal income tax consequences of the merger to a stockholder of AvData holding
shares of AvData common stock as a capital asset within the meaning of Section
1221 of the United States Internal Revenue Code of 1986, as amended (the
"Code"), at the effective time of the merger.
This discussion does not address all aspects of federal taxation that
may be relevant to particular stockholders of AvData in light of their personal
circumstances or to stockholders of AvData subject to special treatment under
the Code, including, without limitation, banks, tax-exempt organizations,
insurance companies, dealers in securities or foreign currencies, stockholders
who received their AvData common stock through the exercise of employee stock
options or otherwise as compensation, stockholders who are not U.S. persons and
stockholders who hold AvData common stock as part of a hedge, straddle or
conversion transaction. In addition, the discussion does not address any state,
local or foreign tax consequences of the merger. Finally, the tax consequences
to holders of stock options or restricted stock are not discussed.
The discussion is based on the Code, the United States Department of
Treasury regulations and administrative rulings and court decisions as of the
date of this prospectus and proxy statement, all of which are subject to change,
possibly with retroactive effects, and which are subject to differing
interpretations. No ruling has been or will be sought from the IRS concerning
the tax consequences of the merger. AvData stockholders are urged to consult
their tax advisors regarding the tax consequences of the merger to them,
including the effects of United States federal, state, local, foreign and other
tax laws.
Tax Consequences of the Merger. In accordance with Hogan & Hartson
L.L.P.'s tax opinion regarding the treatment of the merger as a reorganization
within the meaning of Section 368(a) of the Code, subject to the assumptions,
limitations, qualifications and other considerations described below under
"--Federal Income Tax Consequences--Considerations with Respect to Opinions," in
the opinion of Hogan & Hartson L.L.P.:
(1) no gain or loss will be recognized by an AvData
stockholder as a result of the receipt solely of shares of ITC DeltaCom
common stock in exchange for such stockholder's AvData common stock,
except to the extent of any cash received in lieu of fractional shares
and except that a portion of any earn-out shares received by an AvData
stockholder will be treated as interest income;
(2) an AvData stockholder who receives cash in lieu of a
fractional share of ITC DeltaCom common stock will be treated as if
such stockholder received such fractional share and then sold such
share back to ITC DeltaCom. Such stockholder will recognize gain or
loss on the sale of the fractional share equal to the difference
between (a) the amount of cash received for such fractional share and
(b) the stockholder's tax basis in such fractional share;
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(3) an AvData stockholder's tax basis in the ITC DeltaCom
common stock received in the merger (other than the portion of the
earn-out shares treated as interest income) will be equal to such
stockholder's aggregate tax basis in the AvData common stock
immediately prior to the merger, reduced by the amount of basis
allocable to the fractional share (as described in paragraph (2)
above);
(4) an AvData stockholder's holding period for ITC DeltaCom
common stock received in accordance with the merger (other than the
portion of the earn-out shares treated as interest income) will include
the holding period of the AvData common stock for which it was
exchanged, assuming such AvData common stock was held as a capital
asset on the effective date of the merger; and
(5) where cash is received by a dissenting AvData stockholder,
such cash payment will be treated by that stockholder as a distribution
and redemption of his or her AvData common stock under the provisions
and limitations of Section 302 of the Code.
Considerations with Respect to Opinions. The tax opinion of Hogan &
Hartson L.L.P. and the foregoing summary of the U.S. federal income tax
consequences of the merger are and will be subject to assumptions, limitations
and qualifications and are based on current law and, among other things,
representations of AvData and ITC DeltaCom, including representations made by
the respective managements of AvData and ITC DeltaCom. You should refer to the
full text of Hogan & Hartson L.L.P.'s tax opinion, a copy of which has been
filed as an exhibit to the registration statement of which this prospectus and
proxy statement forms a part, for a complete description of the assumptions made
and matters considered in connection with such tax opinion. Opinions of counsel
are not binding on the IRS and do not preclude the IRS from adopting a contrary
position. In addition, if any of such representations or assumptions are
inconsistent with the actual facts, the U.S. federal income tax consequences of
the merger could be adversely affected.
ACCORDINGLY, YOU ARE STRONGLY URGED TO CONSULT WITH YOUR TAX ADVISORS
WITH RESPECT TO THE PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN
INCOME TAX OR OTHER TAX CONSEQUENCES OF THE MERGER TO YOU.
RESTRICTIONS ON RESALES BY AFFILIATES
ITC DeltaCom is registering the shares of its common stock to be issued
in the merger under the Securities Act of 1933. The shares will be freely
transferable under the Securities Act, except for shares received by AvData
stockholders who are deemed to be affiliates of AvData before the merger or
affiliates of ITC DeltaCom. These affiliates may only resell their shares under
an effective registration statement under the Securities Act covering the
shares, in compliance with Rules 144 and 145 of the Securities Act or under
another exemption from the Securities Act's registration requirements. This
proxy prospectus and proxy statement does not cover any resales of ITC
DeltaCom's common stock by ITC DeltaCom or AvData affiliates. Affiliates will
generally include individuals or entities who control, are controlled by or are
under common control with AvData or ITC DeltaCom, and may include officers or
directors, as well as principal stockholders of AvData or ITC DeltaCom.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
If you are an AvData stockholder who does not vote in favor of the
merger agreement and who properly demands appraisal of your shares of AvData
common stock, you will be entitled to appraisal rights in connection with the
merger under Section 262 of the Delaware General Corporation Law.
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The following discussion only applies to AvData stockholders who wish
to dissent from the merger. Only a holder of record of AvData shares may
exercise appraisal rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO APPRAISAL RIGHTS UNDER THE DELAWARE GENERAL CORPORATION LAW AND IS
QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 262 WHICH IS ATTACHED AS
APPENDIX B TO THIS PROSPECTUS AND PROXY STATEMENT. ALL REFERENCES IN SECTION 262
AND IN THIS SUMMARY TO A STOCKHOLDER ARE TO THE RECORD HOLDER OF THE SHARES AS
TO WHICH APPRAISAL RIGHTS ARE ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST IN
SHARES HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR
NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS
SUMMARIZED BELOW IN A PROPER AND TIMELY MANNER TO PERFECT APPRAISAL RIGHTS.
Under the Delaware General Corporation Law, if you follow the
procedures set forth in Section 262, you will be entitled to have your AvData
shares appraised by the Delaware Court of Chancery and to receive payment of the
fair value of your shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, as determined by the Court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the special meeting, the corporation,
not less than 20 days prior to the meeting, must notify each of its stockholders
entitled to appraisal rights that appraisal rights are available and include in
the notice a copy of Section 262. This prospectus and proxy statement will
constitute such notice to the stockholders, and the applicable statutory
provisions are attached as Appendix B to this prospectus and proxy statement. If
you wish to exercise appraisal rights or to preserve your right to do so, you
should review the following discussion and Appendix B carefully. If you fail to
timely and properly comply with the procedures specified, you will lose your
appraisal rights.
If you wish to exercise appraisal rights, you must:
(1) deliver to AvData, before the vote on the merger at the
special meeting, a written demand for appraisal
(2) not vote in favor of the merger
(3) continuously hold of record your shares from the date
of delivering a demand for appraisal through the
effective time of the merger
To not vote in favor of the merger, you can either (a) vote "no" in
person or by proxy, (b) fail to vote or (c) abstain from voting. However, if you
vote in favor of the merger agreement, by proxy or in person, or return a signed
proxy that does not contain voting instructions and do not revoke it, you will
waive your right of appraisal and nullify any previously filed written demand
for appraisal. A vote against the merger, in person or by proxy, will not in and
of itself constitute a written demand for appraisal satisfying the requirements
of Section 262. If you fail to comply with any of these conditions and the
merger becomes effective, you will lose your appraisal rights and receive
instead the merger consideration you are entitled to in accordance with the
merger agreement.
Only a holder of record of AvData shares may assert appraisal rights
for the shares registered in his name. A demand for appraisal should be executed
by or on behalf of the holder of record, fully and correctly, as the holder of
record's name appears on his stock certificates. It must also state that the
holder of record intends to demand appraisal of his shares in connection with
the merger. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, execution of the demand should be made in
that capacity. If the shares are owned of record by more than one person, as in
a joint tenancy and tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including two or more joint
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owners, may execute a demand for appraisal on behalf of a holder of record.
However, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is agent for such
owner or owners.
A record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares held
for one or more beneficial owners without exercising appraisal rights with
respect to the shares held for other beneficial owners. If you hold your shares
in brokerage accounts or other nominee forms and wish to exercise appraisal
rights, you should consult your broker to determine the appropriate procedures
for making a demand for appraisal.
ALL WRITTEN DEMANDS FOR APPRAISAL UNDER SECTION 262 SHOULD BE SENT OR
DELIVERED TO AVDATA SYSTEMS, INC., 55 MARIETTA STREET, 18TH FLOOR, ATLANTA,
GEORGIA 30303, ATTENTION: CORPORATE SECRETARY.
Within 10 days after the effective time of the merger, the surviving
corporation of the merger must notify each holder of shares who has complied
with Section 262 and has not voted in favor of or consented to the merger of the
date that the merger has become effective. At any time within 60 days after the
effective time of the merger, you have the right to withdraw your demand for
appraisal and to accept the consideration offered in the merger. Within 120
days after the effective time of the merger, but not after that time, the
surviving corporation of the merger or any holder of shares who is entitled to
appraisal rights may file a petition in the Delaware Court of Chancery demanding
a determination of the fair value of the dissenting shares. The surviving
corporation of the merger is under no obligation to file this petition and ITC
DeltaCom has no present intention to cause the surviving corporation of the
merger to do so. Accordingly, it is the obligation of the holders of shares to
initiate all necessary action to perfect appraisal rights within the time
prescribed in Section 262.
Within 120 days after the effective time of the merger, if you have
complied with the requirements for exercise of appraisal rights, you will be
entitled, upon written request, to receive from the surviving corporation of the
merger a statement setting forth the aggregate number of shares not voted in
favor of the merger as to which demands for appraisal have been received and the
aggregate number of holders of those shares. The surviving corporation of the
merger must mail this statement to you within 10 days after it receives a
written request from you or within 10 days after the expiration of the period
for delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares and a
copy is served upon the surviving corporation of the merger, the surviving
corporation of the merger will then be obligated within 20 days to file with the
Delaware Register in Chancery a duly verified list containing the names and
addresses of all holders of shares who have demanded an appraisal of their
shares and with whom agreements as to the value of their shares have not been
reached. After notice to these stockholders as required by the Court, the
Delaware Court of Chancery may conduct a hearing on this petition to determine
those holders of shares who have complied with Section 262 and who have become
entitled to appraisal rights. The Delaware Court of Chancery may require the
holders of shares who demanded appraisal to submit their stock certificates to
the Register in Chancery for notation of the pendency of the appraisal
proceeding. If you fail to comply with this direction, the Court of Chancery
may dismiss the proceedings as to you.
After determining the holders of shares entitled to appraisal, the Delaware
Court of Chancery will appraise the fair value of their shares, exclusive of any
element of value arising from the accomplishment or expectation of the merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. YOU SHOULD BE AWARE THAT THE FAIR VALUE OF
YOUR SHARES AS DETERMINED BY SECTION 262 COULD BE MORE THAN, THE SAME AS OR LESS
THAN THE CONSIDERATION YOU WOULD RECEIVE IN THE MERGER IF YOU DID NOT SEEK
APPRAISAL OF YOUR SHARES.
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Section 262 provides that fair value is to be "exclusive of any element of
value arising from the accomplishment or expectation of the merger." The
Delaware Supreme Court has stated, in Cede & Co. v. Technicolor, Inc., 684 A.2d
289, 299 (Del. 1996), that this "narrow exclusion does not encompass known
elements of value, including those which exist on the date of the merger because
of a majority acquiror's interim acquisition in a two-step cash-out
transaction." In Weinberger v. Uop, Inc., 457 A.2d 701 (Del. 1983), the
Delaware Supreme Court held that "elements of future value, including the nature
of the enterprise, which are known or susceptible of proof as of the date of the
merger and not the product of speculation, may be considered." The Delaware
Supreme Court has stated that "proof of value by any techniques or methods which
are generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in the appraisal proceedings.
In addition, Delaware courts have decided that the statutory appraisal
remedy, depending on factual circumstances, may or may not be a dissenter's
exclusive remedy. The Court of Chancery will also determine the amount of
interest, if any, to be paid upon the amounts to be received by persons whose
shares have been appraised. The costs of the action may be determined by the
Court and taxed upon the parties as the Court deems equitable. Upon application
by a stockholder, the Court may also order that all or a portion of the expenses
incurred by any stockholder in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all the shares entitled to be appraised.
If you have duly demanded an appraisal in compliance with Section 262, you
will not, after the effective time of the merger, be entitled to vote your
shares for any purpose or be entitled to the payment of dividends or other
distributions on those shares, except dividends or other distributions payable
to holders of record of shares as of a date prior to the effective time of the
merger.
If you demand appraisal of your shares under Section 262 but fail to
perfect, or effectively withdraw or lose, your right to appraisal, your shares
will be converted into the right to receive the merger consideration you are
entitled to under the merger agreement, without interest. You will fail to
perfect, or effectively lose or withdraw, your right to appraisal if no petition
for appraisal is filed within 120 days after the effective time of the merger,
or if you deliver to AvData or the surviving corporation of the merger a written
withdrawal of your demand for appraisal and an acceptance of the merger.
However, any attempt to withdraw made more than 60 days after the effective time
of the merger will require the written approval of the surviving corporation of
the merger and, once a petition for appraisal is filed, the appraisal proceeding
may not be dismissed as to any holder absent court approval. It is not
necessary that each holder of shares properly demanding appraisal file a
petition for appraisal in the Delaware Court of Chancery. Rather, a single
valid petition suffices for the petitioning and non-petitioning holders of
shares who have properly demanded appraisal.
IF YOU FAIL TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW FOR PERFECTING APPRAISAL RIGHTS, YOU MAY LOSE THESE
RIGHTS. IN THAT CASE, YOU WILL RECEIVE THE MERGER CONSIDERATION YOU ARE ENTITLED
TO IN ACCORDANCE WITH THE MERGER AGREEMENT.
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TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The following summary of the material terms and provisions of the merger
agreement is qualified in its entirety by reference to the merger agreement.
The merger agreement is attached as Appendix A to this prospectus and proxy
statement and is considered a part of this document.
GENERAL
The merger agreement provides that at the effective time of the merger
AvData will be merged with and into Interstate FiberNet, a wholly-owned
subsidiary of ITC DeltaCom, with Interstate FiberNet being the surviving
corporation of the merger. A special committee consisting of AvData's
independent directors unanimously approved the merger agreement and the merger,
and recommended the merger agreement and the merger to the full board of
directors of AvData. AvData's board of directors unanimously approved the
merger agreement and the merger. At the effective time of the merger, each
AvData stockholder will receive, in exchange for his or her shares of AvData
common stock, shares of ITC DeltaCom common stock plus the potential right to
receive future shares of ITC DeltaCom common stock in accordance with formulas
specified in the merger agreement that are based upon certain revenues generated
by AvData or the surviving corporation during certain portions of 1999, all as
more fully described below.
This section of the prospectus and proxy statement describes aspects of the
merger, including the material provisions of the merger agreement.
STRUCTURE OF THE MERGER
Subject to the terms and conditions of the merger agreement and in
accordance with the Delaware General Corporation Law, at the effective time of
the merger, AvData will merge with and into Interstate FiberNet, which will
continue its corporate existence under the laws of the State of Delaware. At
the effective time of the merger, the separate corporate existence of AvData
will terminate. The certificate of incorporation of Interstate FiberNet will
become the certificate of incorporation of the surviving corporation of the
merger. The bylaws of Interstate FiberNet will become the bylaws of the
surviving corporation of the merger.
MANAGEMENT AFTER THE MERGER
As discussed in "The Merger--Interests of AvData Directors and Management
in the Merger," it is expected that after the merger, James H. Black, Jr. would
become a director and senior vice president of ITC DeltaCom as well as senior
vice president of Interstate FiberNet and ITC DeltaCom Communications, Inc, an
indirect subsidiary of ITC DeltaCom. The following sets forth biographical
information concerning Mr. Black:
James H. Black, Jr., 51, has been Chairman of the board of directors and
Chief Executive Officer of AvData since September, 1990. In 1980, Mr. Black co-
founded VideoStar Connections, Inc., an Atlanta-based company specializing in
business television satellite networks. He served as Executive Vice President
and a director of VideoStar from 1980 until 1989 when VideoStar was acquired by
EDS. He continued as Executive Vice President under EDS until May, 1990. Mr.
Black has been an officer and director of Business Television International,
Inc. since its founding in May, 1990. He also serves on the board of directors
of Air Quality Sciences, Inc., an indoor environmental testing and product
certification business; Norelli & Company, a strategic consulting firm; and Be
There Now, Inc., a 3-D, virtual image processing company. Mr. Black is a
graduate of the Massachusetts Institute of Technology where he received
undergraduate and graduate degrees in engineering, and received an MBA from the
Harvard Business School.
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CONVERSION OF AVDATA COMMON STOCK
Initial Shares. At the effective time of the merger, each AvData
stockholder will receive, in exchange for his or her AvData common stock, the
right to receive a specified number of shares of ITC DeltaCom common stock,
which varies with the ITC DeltaCom stock price as described below. ITC DeltaCom
will pay cash in lieu of any fractional share.
Escrow, Earn-out Shares Described below. ITC DeltaCom will hold a
---------------------------------------
portion of these shares of its common stock in an escrow account as described in
"Escrow Shares" below. Each AvData stockholder may also receive additional ITC
DeltaCom common stock in the future based upon specified types of revenues
generated by AvData (or, if after the merger, the surviving corporation) during
certain portions of 1999. This portion of the merger consideration is described
under the caption "Earn-out Shares" below.
Value of AvData Shares is Fixed if Price of ITC DeltaCom Common Stock
---------------------------------------------------------------------
is Within a Specified Range. If the ITC DeltaCom stock price is between $25.00
- ---------------------------
and $31.39 for the five consecutive trading days immediately preceding the
effective date of the merger, then each issued and outstanding share of AvData
common stock (other than shares held in the treasury of AvData) will convert
into the right to receive approximately $0.91932 in the form of ITC DeltaCom
common stock (or cash in lieu of a fractional share) at the effective time of
the merger. The value that AvData stockholders receive for their stock will not
fluctuate within this range since the number of shares of ITC DeltaCom common
stock will be adjusted proportionately as the ITC DeltaCom stock price changes.
References to ITC DeltaCom's stock price means the average daily price of ITC
DeltaCom common stock on The Nasdaq National Market (determined by averaging
the high and low price reported on such day) for the five consecutive trading
days immediately preceding the effective date of the merger.
Value of AvData Shares Will Fluctuate if Price of ITC DeltaCom Common
---------------------------------------------------------------------
Stock is Outside of a Specified Range. If the five-day trading average for ITC
- -------------------------------------
DeltaCom common stock is below $25.00, then it will be deemed to equal $25.00
for purposes of the merger consideration calculation. This means that the value
that AvData stockholders will receive for their stock will decline with
reductions in the value of ITC DeltaCom stock price below $25.00.
Similarly, if the five-day trading average for ITC DeltaCom common
stock is greater than $31.39, then it will be deemed to equal $31.39 for
purposes of the merger consideration calculation. This means that the value that
AvData stockholders will receive for their stock will rise with increases in the
value of ITC DeltaCom stock price above $31.39.
As of _____ __, 1999, which is the most recent practicable date prior
to the mailing of this proxy statement and prospectus, the ITC DeltaCom stock
price was $______.
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Explanatory Chart and Examples. The following chart lists some of the
------------------------------
possible values of the consideration that AvData stockholders will receive in
the merger (not including the right to possibly receive additional shares of ITC
DeltaCom common stock in the future, as described in "Earn-out Shares" below):
IF THE ITC DELTACOM THEN, FOR EACH SHARE OF AVDATA COMMON STOCK YOU OWN, YOU
STOCK PRICE IS WILL RECEIVE (IN THE FORM OF ITC DELTACOM COMMON
STOCK)/(1)/:
$15.00 $0.55428
$16.00 $0.59109
$17.00 $0.62791
$18.00 $0.66472
$19.00 $0.70154
$20.00 $0.73835
$21.00 $0.77484
$22.00 $0.81119
$23.00 $0.84753
$24.00 $0.88344
$25.00 $0.91932
$26.00 $0.91932
$27.00 $0.91932
$28.00 $0.91932
$29.00 $0.91932
$30.00 $0.91932
$31.00 $0.91932
$32.00 $0.93682
$33.00 $0.96539
$34.00 $0.99397
$35.00 $1.02254
$36.00 $1.05112
$37.00 $1.07969
$38.00 $1.10827
$39.00 $1.13684
$40.00 $1.16542
(1) The formulas that are in the merger agreement attached to this proxy
statement and prospectus as Appendix A yield slightly different results. It is
the intent of the parties to the merger agreement to amend the merger agreement
before the mailing of this proxy statement and prospectus to AvData stockholders
so that the formulas provide the results shown above.
EXAMPLE 1: If the ITC DeltaCom stock price is $28.00, then you will
receive approximately $0.9011 in the form of ITC DeltaCom common stock for each
share of AvData common stock that you own. If you owned 1,000 shares of AvData
common stock, you would receive approximately $901.10 of ITC DeltaCom common
stock which, at an assumed value of $28.00 per share, would equal 32 shares of
ITC DeltaCom common stock plus $5.10 cash in lieu of a fractional share.
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EXAMPLE 2: If the ITC DeltaCom stock price is $22.00, then you will
receive approximately $0.8119 in the form of ITC DeltaCom common stock for
each share of AvData common stock that you own. If you owned 1,000 shares of
AvData common stock, you would receive approximately $811.19 of ITC DeltaCom
common stock. Thus, you would receive 36 shares of ITC DeltaCom common stock
plus $19.19 cash in lieu of a fractional share.
EXAMPLE 3: If the ITC DeltaCom stock price is $35.00, then you will
receive approximately $1022.54 in the form of ITC DeltaCom common stock for
each share of AvData common stock that you own. If you owned 1,000 shares of
AvData common stock, you would receive approximately $1,022.54 of ITC DeltaCom
common stock. Thus, you would receive 29 shares of ITC DeltaCom common stock
plus $7.54 cash in lieu of a fractional share.
Each share of AvData common stock held in the treasury of AvData will be
canceled at the effective time of the merger without the payment of any
consideration. Each share of common stock of Interstate FiberNet issued and
outstanding immediately prior to the effective time of the merger will continue
to be one share of common stock of the surviving corporation of the merger, all
of which will continue to be held by ITC DeltaCom.
Escrow Shares. Upon conversion of AvData common stock into ITC DeltaCom
common stock at the time of the merger, ITC DeltaCom will withhold from each
AvData stockholder and retain in escrow approximately 17.5% of the total
number of shares of ITC DeltaCom common stock, as calculated above, that the
stockholder beneficially receives in the merger. This stock will be placed in
escrow as security for the AvData stockholders' performance of their indemnity
obligations described in "-- Indemnification" below. ITC DeltaCom will release
the escrow shares to AvData stockholders after the expiration of 24 months
following the effective time of the merger, subject to the retention of escrow
shares after the end of such 24 month period to cover any then-pending claims
for indemnification.
Earn-out Shares. AvData stockholders will also have a right to receive
additional ITC DeltaCom common stock in the future if AvData and, after the
merger, the surviving corporation, achieve specified performance goals during
1999.
Earn-Out Based on Complex Formulas. The performance goals for AvData
----------------------------------
and, after the merger, the surviving corporation, and the complex formulas for
determining the number of earn-out shares, can be found in section 2.8 of the
merger agreement in Appendix A. The formulas divide AvData's revenue for the
relevant test periods into three categories. The number of earn-out shares of
ITC DeltaCom common stock that the AvData stockholders will receive depends
heavily on increases in specified types of revenue in 1999.
Key Factor is Growth in Recurring Terrestrial Revenue. A large
-----------------------------------------------------
percentage (93%) of the earn-out formula depends solely on increases, measured
in December 1999, in the recurring monthly terrestrial revenue of the surviving
corporation after the merger. Recurring monthly terrestrial revenue has been a
relatively small component of AvData's overall revenues to date. However, this
area of AvData's business combines the efforts of AvData and ITC DeltaCom, and
the earn-out formulas give credit to the surviving corporation for recurring
terrestrial revenue sales of ITC DeltaCom's products that were not contemplated
in AvData's original business plan discussed below. The remaining 7% of the
total possible earn-out consideration depends on non-recurring
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revenue and VSAT customer revenue, which historically have constituted the large
majority of AvData's revenues.
AvData's management, prior to entering into merger negotiations with
ITC DeltaCom, established a business plan for 1999, including expected recurring
monthly terrestrial revenue. The parties to the merger agreement believe that
the consideration that AvData stockholders will receive at the time of the
merger (including the escrow shares) reflects the value of AvData if AvData
achieves its expected plan, but not more. AvData stockholders therefore will
only receive some or all of the 93% portion of the earn-out shares that is based
on recurring terrestrial revenue if the surviving corporation in the merger
exceeds this expectation.
Explanatory Chart and Examples. The following chart lists some of the
------------------------------
possible numbers of earn-out shares of ITC DeltaCom common stock that an AvData
stockholder could receive. We assume, for purposes of this chart, that AvData
stockholders receive the maximum possible earn-out consideration for non-
recurring revenues and VSAT revenues, which represents 7% of the total possible
earn-out consideration and which will occur if the 1999 targets for those types
of revenues are met or exceeded. Because the non-recurring revenues and VSAT
revenue portions of the earn-out have only a small effect on the number of earn-
out shares of ITC DeltaCom common stock, the chart does not give levels of
achievement for those two types of revenue.
<TABLE>
<CAPTION>
ITC DELTACOM PERCENTAGE BY WHICH RECURRING NUMBER OF EARN-OUT SHARES
COMMON STOCK PRICE MONTHLY TERRESTRIAL REVENUE IN OF ITC DELTACOM (FOR 1,000
DECEMBER 1999 EXCEEDS AVDATA SHARES OF AVDATA)/(1)/
MANAGEMENT'S PLAN
<S> <C> <C>
$25.00 or below 100% 0.89951
115% 4.55215
150% 8.19217
200% 12.77637
$26.00 100% 0.86491
115% 4.37707
150% 7.87708
200% 12.28497
$27.00 100% 0.83288
115% 4.21496
150% 7.58534
200% 11.82997
$28.00 100% 0.80313
115% 4.06442
150% 7.31443
200% 11.40748
$29.00 100% 0.77544
115% 3.92427
150% 7.06221
200% 11.01411
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
$30.00 100% 0.74959
115% 3.79346
150% 6.82681
200% 10.64698
$31.39 or higher 100% 0.71645
115% 3.62576
150% 6.52500
200% 10.17629
</TABLE>
(1) The formulas that are in the merger agreement attached to this proxy
statement and prospectus as Appendix A yield slightly different results. It is
the intent of the parties to the merger agreement to amend the merger agreement
before the mailing of this proxy statement and prospectus to AvData stockholders
so that the formulas provide the results shown above.
EXAMPLE: If the average ITC DeltaCom stock price is $28.00 at the time
of the merger, and the surviving corporation's recurring monthly terrestrial
revenue in December of 1999 is 150% of the amount in AvData management's plan,
then in exchange for 1,000 shares of AvData common stock, you will receive seven
earn-out shares of ITC DeltaCom common stock (which does not include the ITC
DeltaCom stock that you would also receive at the time of the merger or the
escrow shares). In lieu of the remaining 0.31443 fractional share of ITC
DeltaCom, you will receive the value of that fractional share (assuming a per
share value of $28.00) in cash, which equals $8.80.
CONVERSION OF AVDATA STOCK OPTIONS
At the effective time of the merger, each outstanding AvData employee stock
option automatically converts into an option to purchase shares of ITC DeltaCom
common stock. If, however, the AvData employee does not become an employee of
ITC DeltaCom or its subsidiaries at the effective time of the merger and has not
exercised the option before that time, the option will expire. The number of
shares of ITC DeltaCom common stock issuable under a converted option depends on
the same factors as conversion of AvData common stock into ITC DeltaCom common
stock in the merger, except that the ratio of ITC DeltaCom option shares to
AvData option shares (assuming an ITC/\DeltaCom common stock price of $25.00) is
0.0287 to one rather than 0.0368 to one. The lower exchange ratio reflects an
adjustment for an "escrow" of a portion of the option which corresponds to the
escrowing of a portion of the shares of ITC DeltaCom common stock issued in the
merger and for the earn-out. As some or all of ITC DeltaCom common stock comes
out of escrow and as a portion or all of the earn-out is achieved, ITC DeltaCom
will issue additional options.
The exercise price of each AvData stock option converted into an ITC
DeltaCom stock option will be adjusted by a multiplier equal to 0.97752
multiplied by the price of ITC DeltaCom stock (measured in the same manner as
described in "-- Conversion of AvData Common Stock" above). ITC DeltaCom
derived this multiplier by assuming a full release of ITC DeltaCom stock from
escrow, a partial achievement of the earn-out and a price of ITC DeltaCom stock
in the range between $25.00 and $31.39. This multiplier does not adjust over
time (due to the complexity involved).
The option conversion does not affect the existing vesting schedule in
effect for each AvData stock option as of April 15, 1999.
EXCHANGE OF CERTIFICATES
ITC DeltaCom has agreed to deposit with a bank or trust company selected by
ITC DeltaCom, as exchange agent in the merger for the benefit of the holders of
issued and outstanding shares of AvData common stock, certificates representing
the shares of ITC DeltaCom common stock
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<PAGE>
and cash in lieu of any fractional shares, to be issued or paid under the merger
agreement. At the earliest practicable date prior to the effective time of the
merger, ITC DeltaCom will mail a letter of transmittal to each holder of AvData
common stock. The letter of transmittal will contain instructions with respect
to the surrender to the exchange agent of your certificates.
YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY NOR
SHOULD YOU FORWARD THEM TO THE EXCHANGE AGENT UNLESS AND UNTIL YOU RECEIVE THE
LETTER OF TRANSMITTAL, AT WHICH TIME YOU SHOULD FORWARD THEM ONLY IN ACCORDANCE
WITH THE INSTRUCTIONS SPECIFIED THEREIN.
Until the certificates representing AvData common stock to be converted
into ITC DeltaCom common stock in the merger are surrendered for exchange at or
after the effective time of the merger, holders of such certificates will accrue
but will not be paid dividends or other distributions declared after the
effective time of the merger with respect to the ITC DeltaCom common stock into
which their AvData common stock has been converted. When the holders of such
certificates have surrendered them, any unpaid dividends or other distributions
will be paid, without interest. All stock certificates presented after the
effective time of the merger will be canceled and exchanged for the applicable
amount of cash and/or relevant certificate representing the applicable number of
shares of ITC DeltaCom common stock to be received pursuant to the merger.
Any shares of ITC DeltaCom common stock and cash that remain undistributed
by the exchange agent 12 months after the effective time of the merger will be
delivered to ITC DeltaCom upon demand. Certificates representing AvData common
stock must thereafter be surrendered for exchange to ITC DeltaCom. None of ITC
DeltaCom, Interstate FiberNet, AvData, the surviving corporation of the merger
or the exchange agent will be liable for any shares of ITC DeltaCom common
stock, dividends or distributions on such stock, or cash delivered to a public
official under any abandoned property, escheat or similar laws.
If a certificate representing AvData common stock has been lost, stolen or
destroyed, the exchange agent will issue the consideration properly payable in
accordance with the merger agreement upon the making of an affidavit of such
loss, theft or destruction by the claimant, and, if required by ITC DeltaCom,
the posting of a bond as indemnity against any claim that may be made later
against ITC DeltaCom, the surviving corporation of the merger or the exchange
agent with respect to such certificate.
For a description of the ITC DeltaCom common stock and a description of the
differences between the rights of the holders of AvData common stock, on the one
hand, and holders of ITC DeltaCom common stock, on the other, see "ITC DeltaCom
Common Stock and Comparison of Stockholder Rights."
EFFECTIVE TIME
The merger will occur as promptly as possible after the satisfaction or
waiver of all of the conditions precedent set forth in Article VIII of the
merger agreement. On the day the merger occurs, ITC DeltaCom and AvData will
file a certificate of merger with the Secretary of State of the State of
Delaware. The effective time of the merger will be the date and time of such
filing. If the merger is not consummated by June 30, 1999 (unless extended by
mutual consent of the parties), the merger agreement may be terminated by either
ITC DeltaCom or AvData, unless the failure to consummate the merger by such date
is due to the failure of the party seeking to terminate the merger agreement to
fulfill any of its obligations thereunder. See "--Conditions to Consummation of
the Merger." AvData and ITC DeltaCom each anticipate that, if the merger is
approved at the special meeting of AvData's stockholders, the merger will be
consummated during the summer of 1999. However, the consummation of the merger
could be delayed if there is a delay in obtaining governmental consents required
prior to consummation of the transactions contemplated in the
38
<PAGE>
merger agreement. There can be no assurances as to if or when such governmental
consents will be obtained or that the merger will be consummated.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations of AvData, ITC
DeltaCom and Interstate FiberNet.
Representations and Warranties of AvData. The merger agreement contains
representations and warranties of AvData as to, among other things:
. the corporate organization and existence of AvData, including that it
is duly organized, validly existing and in good standing with the
corporate power and authority to own, operate and lease its assets and
to carry on its business as currently conducted
. the certificate of incorporation and bylaws or other organizational
documents of AvData
. the capitalization of AvData, including the number of shares of
capital stock authorized, the number of shares and rights to acquire
shares outstanding and the number of shares reserved for issuance
. the corporate power and authority of AvData to execute and deliver the
merger agreement and related documents and to consummate the
transactions contemplated thereby
. the compliance of the merger agreement and related documents with (1)
AvData's certificate of incorporation and bylaws, (2) applicable laws,
and (3) certain material agreements of AvData, including the absence
of events of default or breach thereunder
. the required governmental and third-party consents
. the possession and validity of all required licenses, except as would
not have a material adverse effect on AvData, and the timely filing of
required regulatory reports
. AvData's financial statements, including that the information in such
financial statements is in accordance with AvData's books and records,
a fair presentation of the financial condition and results of
operations of AvData and is in compliance with U.S. generally accepted
accounting principles
. the absence of material undisclosed liabilities
. the collectability of accounts receivable of AvData
. the absence of certain changes in AvData's business since December 31,
1998
. the title to and condition of material assets owned by AvData
. the validity of and absence of defaults under certain debt
instruments, leases and other agreements of AvData
. the ownership and condition of the real property owned or leased by
AvData
. the absence of intellectual property infringement or contests
. AvData's year 2000 risk management plans and condition and year 2000
readiness of hardware and software
. compliance with environmental laws and the absence of environmental
liabilities
. the absence of material claims, actions, suits, proceedings and
certain judgments, decrees and injunctions
. complete and correct books and records
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<PAGE>
. the filing and accuracy of AvData's tax returns and the adequacy of
AvData's reserves for taxes
. significant customers of AvData
. the absence of certain business practices of AvData
. compliance with laws relating to employees or the workplace, and the
absence of material disputes with employees
. AvData's employee benefit plans and related matters, including that
such plans have been operated and administered in accordance with
applicable law
. the absence of certain potential conflicts of interests with
employees, directors, officers and significant stockholders
. keep insurance
. the absence of brokers, except as identified in the merger agreement
. the accuracy of AvData's corporate minute books
. the absence of any action by AvData that would cause the merger to
fail to qualify as a reorganization under Section 368(a) of the
Internal Revenue Code of 1986
. the adoption by AvData's board of directors of a resolution approving
the merger agreement and the merger and recommending adoption of the
merger agreement and approval of the merger by the stockholders of
AvData
. the vote required to approve the merger
. the exemption of the merger from Section 203 of the Delaware General
Corporation Law
. the absence of material misstatements or omissions in the information
furnished by AvData
ITC DeltaCom and other indemnified persons may make a claim for
indemnification for breach of any of the foregoing representations and
warranties until the end of the twenty-four month period after the effective
time of the merger. See "--Indemnification." The merger agreement permits AvData
to update, correct or otherwise modify its representations up to the effective
time of the merger to reflect changes or corrections so long as the failure to
update, correct or modify such representations does not constitute a breach of
the merger agreement.
Representations and Warranties of ITC DeltaCom and Interstate FiberNet. The
merger agreement contains representations and warranties of ITC DeltaCom and
Interstate FiberNet as to, among other things
. the corporate organization and existence of ITC DeltaCom and
Interstate FiberNet, including that each is duly organized, validly
existing and in good standing with the corporate power and authority
to own, operate and lease its properties and to carry on its business
as currently conducted
. ITC DeltaCom's certificate of incorporation and bylaws and the
certificate of incorporation and bylaws of Interstate FiberNet
. the capitalization of ITC DeltaCom, including the number of shares of
capital stock authorized, the number of shares and rights to acquire
shares outstanding and the number of shares reserved for issuance
. the corporate power and authority of ITC DeltaCom and Interstate
FiberNet to execute and deliver the merger agreement and related
documents and to consummate the transactions contemplated thereby
40
<PAGE>
. the compliance of the merger agreement and related documents with (1)
ITC DeltaCom's certificate of incorporation and bylaws and the
certificate of incorporation and bylaws of Interstate FiberNet, (2)
applicable laws, and (3) certain agreements of ITC DeltaCom and
Interstate FiberNet, including the absence of events of default or
acceleration thereunder
. the required governmental and third-party consents
. the absence of brokers utilized by ITC DeltaCom
. the absence of any action by ITC DeltaCom or Interstate FiberNet that
would cause the merger to fail to qualify as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986
. the absence of material misstatements or omissions in certain
information furnished by ITC DeltaCom
The merger agreement permits ITC DeltaCom to update, correct or otherwise
modify its representations up to the effective time of the merger to reflect
changes or corrections so long as the failure to update, correct or modify such
representations does not constitute a breach of the merger agreement.
BUSINESS OF AVDATA PENDING THE MERGER; OTHER AGREEMENTS
Under the merger agreement, AvData has agreed to: (1) conduct its business
in the ordinary course consistent with past practice, (2) preserve intact its
business organization, maintain its rights and contracts, use its commercially
reasonable efforts to retain the services of its principal officers and key
employees and maintain its relationship with its respective suppliers,
contractors, distributors, customers and others having business relationships
with it, (3) keep its assets in good repair and condition, ordinary wear and
tear excepted; and (4) keep in full force and effect insurance comparable in
amount and scope of coverage to that currently maintained. In addition, AvData
has agreed that, except as expressly contemplated by the merger agreement or
specified in a schedule thereto, without ITC DeltaCom's prior consent, it will
not, among other things:
. increase in any manner the compensation or fringe benefits of, or pay
any bonus to, any director, officer or employee
. grant any severance or termination pay (except for normal severance
practices or existing agreements in effect on the date of the merger
agreement) to, or enter into any severance agreement with, any
director, officer or employee, or enter into any employment agreement
with any director, officer or employee, except for severance
arrangements entered into prior to April 15, 1999, pursuant to an
employment agreement listed in the disclosure schedule to the merger
agreement
. establish, adopt, enter into or amend any benefit plan or arrangement,
except as may be required to comply with applicable law
. pay any benefit not provided for under any benefit plan or arrangement
. grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement or benefit plan or arrangement
(including the grant of stock options, stock appreciation rights,
stock-based or stock-related awards, performance units or restricted
stock, or the removal of existing restrictions in any benefit plan or
arrangement or agreement or awards made thereunder)
. take any action to fund or in any other way secure the payment of
compensation or benefits under any agreement
41
<PAGE>
. promote or fire any director, officer or employee
. declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock other
than capital stock repurchased from departing employees in the
ordinary course of business
. redeem, purchase or otherwise acquire any shares of capital stock of
AvData or any securities or obligations convertible into or
exchangeable for any shares of capital stock of AvData, or any
options, warrants or conversion or other rights to acquire any shares
of capital stock of AvData or any such securities or obligations, or
any other securities thereof, other than redemptions and purchases
from departing employees in the ordinary course of business or stock
acquired by AvData from current employees pursuant to historic AvData
practice in connection with the exercise of such employees' stock
options
. effect any reorganization or recapitalization
. split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect
of, in lieu of, or in substitution for, shares of its capital stock
. except upon the exercise of outstanding stock options in accordance
with their terms, issue, deliver, award, grant or sell, or authorize
the issuance, delivery, award, grant or sale (including the grant of
any limitations in voting rights or other encumbrances) of, any shares
of any class of AvData's capital stock, including shares held in
treasury, any securities convertible into or exercisable or
exchangeable for any such shares, or any rights, warrants or options
to acquire any such shares, or amend or otherwise modify the terms of
any such rights, warrants or options the effect of which will be to
make such terms more favorable to the holders thereof
. acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by
any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets of any other person,
other than the purchase of assets from suppliers or vendors in the
ordinary course of business
. sell, lease, exchange, mortgage, pledge, transfer or otherwise subject
to any encumbrance or dispose of, or agree to sell, lease, exchange,
mortgage, pledge, transfer or otherwise subject to any encumbrance or
dispose of, any of its assets, except for sales, dispositions or
transfers in the ordinary course of business
. propose or adopt any amendments to its articles or certificate of
incorporation, bylaws or other comparable charter or organizational
documents
. make or rescind any express or deemed election relating to taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes
which would reasonably be expected to have a material adverse effect
on AvData, or change any of its methods of reporting income or
deductions for federal income tax purposes from those employed in the
preparation of the federal income tax returns for the taxable year
ended December 31, 1997, except in either case as may be required by
law, the IRS or GAAP
. make or agree to make any new capital expenditure or expenditures over
$25,000 which are not included in AvData's 1999 capital budget
. (1) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire
42
<PAGE>
any debt securities of AvData, guarantee any debt securities of
another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person, or enter
into any agreement having the economic effect of any of the foregoing,
except for borrowings incurred in the ordinary course of business, or
(2) make any loans, advances or capital contributions to, or
investments in, any other person other than travel and payroll
advances to employees in the ordinary course of business
. pay, discharge, settle or satisfy any claims, liabilities or
obligations other than the payment, discharge or satisfaction, in the
ordinary course of business and in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by,
AvData's most recent financial statements or waive any material
benefits of, or agree to modify in any material respect, any
confidentiality, standstill or similar agreements to which AvData is a
party
. waive, release or assign any rights or claims, or modify, amend or
terminate any agreement to which AvData is a party
. make any change in any method of accounting or accounting practice or
policy other than those required by GAAP or a governmental entity
. take any action or fail to take any action that would have a material
adverse effect on AvData prior to or after the effective time of the
merger or a material adverse effect on ITC DeltaCom after the
effective time of the merger, or that would adversely affect the
ability of AvData prior to the effective time of the merger, or ITC
DeltaCom or any of its subsidiaries after the effective time of the
merger, to obtain consents of third parties or approvals of
governmental entities required to consummate the transactions
contemplated in the merger agreement
. authorize, or commit or agree to do any of the foregoing
AvData has also agreed:
. promptly to take all action necessary in accordance with the Delaware
General Corporation Law and AvData's certificate of incorporation and
bylaws to solicit from the stockholders of AvData proxies or consents
to adopt the merger agreement and approve the merger
. to mail this prospectus and proxy statement to its stockholders
promptly after the registration statement of which this prospectus and
proxy statement forms a part becomes effective, and to comply with the
proxy solicitation rules and regulations under the Securities Exchange
Act of 1934 in connection with the solicitation of proxies from such
persons
. to give ITC DeltaCom access to all of its properties, agreements,
books, records and personnel
. to furnish ITC DeltaCom with monthly unaudited consolidated financial
statements and other information concerning its business, operations,
prospects, conditions, assets, liabilities and personnel
. to prepare and timely file all AvData tax returns, which returns must
be materially accurate, pay all taxes with respect to its returns, pay
or otherwise make adequate provision for all taxes payable by AvData
for which no return is due before the date of the merger and promptly
notify ITC DeltaCom of any action, proceeding, claim or audit against
or with respect to AvData in respect of any taxes
43
<PAGE>
AvData and ITC DeltaCom have further agreed:
. to use their reasonable commercial efforts promptly to make all
filings under applicable laws and to obtain all material
authorizations, permits, consents and approvals of all third parties
and governmental entities necessary or advisable to consummate the
transactions contemplated by the merger agreement
. to use their reasonable best efforts to take all necessary, proper or
appropriate actions to consummate the transactions contemplated by the
merger agreement
NO SOLICITATION BY AVDATA
AvData has agreed not to initiate or solicit (including by way of
furnishing information or assistance), or take any other action to promote, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any "competing transaction," (as this term is defined
below) or enter into discussions or furnish any information or negotiate with
any person or otherwise cooperate in any way in furtherance of such inquiries or
to obtain a competing transaction, or agree to or endorse any competing
transaction, or authorize any of its directors, officers, employees, agents or
representatives to take any such action. AvData has agreed:
. promptly to notify ITC DeltaCom if any inquiries or proposals that
constitute, or may reasonably be expected to lead to, a competing
transaction are received by AvData or any of its directors, officers,
employees, agents, investment bankers, financial advisors, attorneys,
accountants or other representatives
. promptly to inform ITC DeltaCom as to the material terms of such
inquiry or proposal and, if in writing, promptly to deliver or cause
to be delivered to ITC DeltaCom a copy of such inquiry or proposal
. to keep ITC DeltaCom informed, on a current basis, of the nature of
any such inquiries and the status and terms of any such proposals.
None of the above restrictions, however, shall prohibit the board of
directors of AvData from furnishing information to, or entering into discussions
or negotiations with, or agreeing to or endorsing any competing transaction
with, any person or entity that makes a bona fide proposal to acquire AvData
pursuant to a merger, consolidation, share exchange, business combination or
other similar transaction, if, and only to the extent that,
. the board of directors of AvData, after consultation with outside
counsel, determines in good faith that such action is required for the
board of directors of AvData to comply with its fiduciary duties to
the AvData stockholders imposed by the Delaware General Corporation
Law;
. prior to furnishing such information to, or entering into discussions
or negotiations with, such person or entity, it provides written
notice to ITC DeltaCom to the effect that AvData is furnishing
information to, or entering into discussions or negotiations with,
such person or entity;
. prior to furnishing such information to such person or entity, AvData
receives from such person or entity an executed confidentiality
agreement with terms no less favorable to AvData than those contained
in the confidentiality agreement executed by ITC DeltaCom dated
January 15, 1999; and
. AvData keeps ITC DeltaCom informed, on a current basis, of the status
and content of any such discussions or negotiations.
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<PAGE>
For purposes of the merger agreement, "competing transaction" means any of
the following involving AvData, other than the transactions contemplated by the
merger agreement:
. any merger, consolidation, share exchange, business combination, or
other similar transaction.
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets of AvData, taken as a whole,
or issuance of 20% or more of the outstanding voting securities of
AvData in a single transaction or series of transactions
. any tender offer or exchange offer for 20% or more of the outstanding
shares of capital stock of AvData
. any solicitation of proxies in opposition to approval by the
stockholders of AvData of the merger
. any agreement or public announcement by AvData or any other person
of a proposal, plan or intention to do any of the foregoing.
INDEMNIFICATION
If the merger agreement is approved, all AvData stockholders will be
deemed to have agreed severally to indemnify, defend and hold ITC DeltaCom and
all other "indemnified persons" (as defined below) harmless against all losses
resulting from, imposed upon or incurred by any indemnified person, directly or
indirectly, as a result of:
. any inaccuracy or breach of a representation or warranty of AvData given or
made by AvData in the merger agreement, in the certificate of merger or in
the exhibits or schedules to the merger agreement or in any certificate or
document delivered by or on behalf of AvData pursuant thereto
. any failure by AvData to perform or comply with any covenant or agreement
contained in the merger agreement, in the certificate of merger or in the
exhibits or schedules to the merger agreement or in any certificate or
document delivered by or on behalf of AvData pursuant thereto
. certain other litigation, tax, assessment, employee benefit and customer-
related matters as described in the merger agreement
Notwithstanding the foregoing, however, AvData's stockholders will not be
responsible for indemnification with respect to
. the first $60,000 of losses incurred with respect to certain employee benefit
matters set forth in the merger agreement;
. the first $220,000 of any losses incurred with respect to certain tax and
assessment matters set forth in the merger agreement; and
. the first $100,000 of any other losses, except for losses incurred with
respect to certain customer-related matters set forth in the merger
agreement, for which there will be no deductible.
Any payment for indemnification will be made from the ITC DeltaCom common stock
held in escrow. See "-- Conversion of AvData Common Stock; Escrow Stock." No
individual AvData stockholder will be liable for any of the above losses in an
amount greater than a percentage of the total loss that equals the percentage of
common stock owned by that stockholder of all AvData common stock that is
outstanding or issuable pursuant to options that are held by persons who become
employees of ITC
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<PAGE>
DeltaCom or any of its subsidiaries as of the effective time of the merger and
are vested immediately prior to the merger.
As used in the above description, the term "indemnified person" means any
of ITC DeltaCom, Interstate FiberNet and their respective officers and
directors, and each person, if any, who controls or may control ITC DeltaCom or
Interstate FiberNet within the meaning of the Securities Act of 1933 (but no
stockholder of AvData may be considered an indemnified person).
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<PAGE>
STOCKHOLDERS' REPRESENTATIVE
If the merger is approved, Mr. Kenneth F. Leddick will become attorney-in-
fact and authorized and empowered to act, for and on behalf of any or all of the
AvData's stockholders (with full power of substitution in the premises), in
connection with the indemnity provisions and the agreement covering the ITC
DeltaCom common stock held in escrow as they relate to AvData and its
stockholders generally, and such other matters as are reasonably necessary for
the consummation of the transactions contemplated in the merger agreement. The
AvData stockholders' representative would have the authority, among other
things, to:
. review all claims for indemnification asserted by an indemnified
person, and, to the extent deemed appropriate, dispute, question the
accuracy of, compromise, settle or otherwise resolve any and all such
claims;
. compromise on the AvData stockholders' behalf with ITC DeltaCom any
claims asserted under the indemnity provisions in the merger
agreement;
. authorize payments to be made with respect to any such claims for
indemnification;
. execute and deliver on behalf of the AvData stockholders any document
or agreement contemplated by or necessary or desirable in connection
with the merger agreement or the escrow agreement; and
. take such further actions including coordinating and administering
post-closing matters related to the rights and obligations of the
AvData stockholders as are authorized in the merger agreement and the
escrow agreement.
The AvData stockholders' representative will not be liable to any AvData
stockholder, ITC DeltaCom, Interstate FiberNet or their respective affiliates or
any other person with respect to any action taken or omitted to be taken by the
AvData stockholders' representative in that role under or in connection with the
merger agreement unless such action or omission results from or arises out of
fraud, gross negligence or willful misconduct on the part of the AvData
stockholders' representative. ITC DeltaCom and Interstate FiberNet will be
entitled to rely on the appointment and treat the AvData stockholders'
representative as the duly appointed attorney-in-fact of each AvData
stockholder. Each AvData stockholder who votes in favor of the merger, by such
vote, without any further action, and each AvData stockholder who receives
shares of ITC DeltaCom common stock in connection with the merger, by acceptance
thereof and without any further action, confirms such appointment and authority.
If Mr. Leddick fails to serve as the AvData stockholders' representative, the
holders of a majority of the then-previously issued shares of AvData common
stock will be entitled to elect a successor representative.
CONDITIONS TO CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligation to Effect the Merger. Each party's
obligation to effect the merger is subject to the satisfaction or waiver, where
permissible, of the following conditions at or prior to the effective time of
the merger:
(1) the merger agreement and the merger will have been adopted and
approved by the requisite vote of the stockholders of AvData;
(2) no governmental entity or court will have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, judgment, injunction or other order, provided that the
failure to obtain a required consent or approval of a governmental entity,
other than those specified in paragraphs (3) and (4) below, will not form
the basis for an assertion that this condition is not satisfied;
(3) the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act will have expired or been terminated;
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(4) all consents, waivers, approvals and authorizations required to be
obtained and all filings or notices required to be made, by ITC DeltaCom or
AvData prior to the consummation of the transactions contemplated in the
merger agreement, other than the filing of the articles of merger in
accordance with the Delaware General Corporation Law, will have been
obtained from and made with the FCC;
(5) the registration statement of which this prospectus and proxy
statement forms a part will have become effective and no stop order
suspending its effectiveness will have been issued and no proceedings for
that purpose will have been initiated or, to the knowledge of ITC DeltaCom
or AvData, threatened by the SEC;
(6) ITC DeltaCom will have received all federal or state securities
permits and other authorizations necessary to issue ITC DeltaCom common
stock in the merger; and
(7) no action or proceeding before any government entity will have
been instituted or threatened (and not subsequently settled, dismissed, or
otherwise terminated) which is reasonably expected to restrain, prohibit or
invalidate the merger or other transactions contemplated by the merger
agreement other than an action or proceeding instituted or threatened by a
party thereto.
Conditions to the Obligation of ITC DeltaCom and Interstate FiberNet to
Effect the Merger. The obligation of ITC DeltaCom and Interstate FiberNet to
effect the merger is subject to the satisfaction or waiver, where permissible,
of the following conditions at or prior to the effective time of the merger:
(1) the representations and warranties of AvData will be true and
correct as of the date of the merger agreement and will be true and correct
in all material respects (except that where any statement in a
representation expressly includes a standard of materiality, such statement
will be true and correct in all respects giving effect to such standard) as
of the effective time of the merger as though made as of the effective time
of the merger, except for a representation or warranty that speaks as of a
specific date or time (which need only be true and correct in all material
respects as of such date or time), and ITC DeltaCom will have received a
certificate of the chief executive officer of AvData to that effect;
(2) AvData will have performed or complied in all material respects
with all agreements required to be performed or complied with by it under
the merger agreement at or prior to the effective time of the merger, and
ITC DeltaCom will have received a certificate of the chief executive
officer of AvData to that effect;
(3) there will have not occurred a material adverse change in the
business, operations, financial condition, assets or liabilities of AvData
(regardless of whether or not such events or changes are inconsistent with
the representations and warranties given in the merger agreement by
AvData), except changes contemplated by the merger agreement;
(4) ITC DeltaCom and Interstate FiberNet will have obtained approval
of the merger agreement and the merger by the boards of directors of ITC
DeltaCom and Interstate FiberNet, respectively;
(5) ITC DeltaCom will have obtained approval of the merger agreement
by the "Majority Lenders" as such term is defined in the First Amended and
Restated Credit Agreement dated as of February 24, 1998 by and among
Interstate FiberNet, NationsBank, N.A., as a Lender and Administrative
Lender, and the other Lenders party thereto, as further amended;
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(6) AvData will have delivered to ITC DeltaCom at or before the
closing of the merger all consents or notices necessary to be obtained or
made by AvData in connection with the transactions contemplated by the
merger agreement;
(7) other than 30,772,170 shares of AvData common stock and 122
options to purchase 1,936,500 shares of AvData common stock, there will be
no other securities of AvData outstanding that are convertible into or
exchangeable for AvData common stock or any other equity securities of
AvData and no outstanding options, rights (preemptive or otherwise), or
warrants to purchase or to subscribe for any shares of such stock or other
equity securities of AvData;
(8) ITC DeltaCom will have received from AvData "cold comfort"
letters of Arthur Andersen LLP dated the date on which the registration
statement of which this proxy statement and prospectus is a part will
become effective and the effective time of the merger, respectively, and
addressed to ITC DeltaCom, reasonably customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the registration statement of which this
proxy statement and prospectus is a part and transactions such as those
contemplated by the merger agreement;
(9) ITC DeltaCom, Interstate FiberNet, the escrow agent and the
AvData stockholders' representative will have entered into the Escrow
Agreement at or before the closing of the merger;
(10) ITC DeltaCom will have received an opinion from Sutherland,
Asbill & Brennan, LLP, counsel to AvData, in form and substance reasonably
satisfactory to ITC DeltaCom and its counsel;
(11) ITC DeltaCom will have entered into a Noncompetition Agreement
duly executed by James H. Black, Jr. in form, scope and substance
reasonably acceptable to ITC DeltaCom;
(12) ITC DeltaCom will have received an executed Affiliate Agreement
from each affiliate of AvData that receives ITC DeltaCom common stock in
the merger;
(13) AvData will have executed and/or delivered to ITC DeltaCom such
additional documents, certificates, opinions and agreements as ITC DeltaCom
may reasonably request;
(14) the number of shares held by AvData stockholders that exercise
their appraisal rights in connection with the merger will not be so large
that the merger would fail to qualify as a reorganization within the
meaning of Section 368 of the Internal Revenue Code of 1986;
(15) AvData employees identified in the merger agreement will have
agreed to become employees of ITC DeltaCom Communications, Inc. following
the effective time of the merger and will have executed a Confidentiality,
Ownership and Intellectual Property and Nonsolicitation Agreement; and
(16) certain loans identified in the merger agreement will be paid in
full or secured by ITC DeltaCom common stock subject to documentation
reasonably acceptable to ITC DeltaCom, as provided in the merger agreement.
Conditions to the Obligation of AvData to Effect the Merger. The obligation
of AvData to effect the merger is subject to the satisfaction or waiver, where
permissible, of the following conditions at or prior to the effective time of
the merger:
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<PAGE>
(1) the representations and warranties of ITC DeltaCom and Interstate
FiberNet made in the merger agreement will be true and correct in all
material respects, on and as of the effective time of the merger with the
same effect as though such representations and warranties had been made on
and as of the effective time of the merger (provided that any
representation or warranty contained therein that is qualified by a
materiality standard will not be further qualified by this condition),
except for representations and warranties that speak as of a specific date
or time other than the effective time of the merger (which need only be
true and correct in all material respects as of such date or time), and
AvData will have received a certificate signed on behalf of ITC DeltaCom by
the chief executive officer of ITC DeltaCom to that effect;
(2) the agreements and covenants of ITC DeltaCom and Interstate
FiberNet required to be performed on or before the effective time of the
merger will have been performed in all material respects, and AvData will
have received a certificate of the chief executive officer of ITC DeltaCom
to that effect;
(3) ITC DeltaCom and Interstate FiberNet will have delivered to AvData
at or before closing of the merger all consents or notices necessary to be
obtained or made by ITC DeltaCom and Interstate FiberNet, as the case may
be, in connection with the transactions contemplated by the merger
agreement;
(4) ITC DeltaCom, Interstate FiberNet, the escrow agent and the AvData
stockholders' representative will have entered into the Escrow Agreement at
or before closing of the merger;
(5) AvData will have received an opinion from Hogan & Hartson L.L.P.,
counsel to ITC DeltaCom and Interstate FiberNet, in form and substance
reasonably satisfactory to AvData and its counsel;
(6) AvData will have obtained approval of the merger agreement and the
transactions contemplated hereunder by AvData's stockholders;
(7) ITC DeltaCom or its appropriate affiliate will have amended its
401(k) plan so as to permit the transfer of the existing loans for those
employees of AvData who have loans under AvData's 401(k) plan and who
become employees of ITC DeltaCom or any of its subsidiaries as of the
effective time of the merger.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the effective time
of the merger:
(1) by mutual written consent of ITC DeltaCom and AvData;
(2) by ITC DeltaCom if (1) AvData breaches in any material respect any of
its representations, warranties, covenants or agreements contained in the merger
agreement, or any such representation or warranty becomes untrue in any material
respect, in any such case such that the conditions precedent to the obligations
of ITC DeltaCom to close the merger are not satisfied and such breach is not
promptly cured within 30 days following receipt by AvData of written notice of
such breach or (2) the closing price of ITC DeltaCom common stock on The Nasdaq
National Market is less than $11.50 as of the trading day immediately preceding
the day of the effective time of the merger;
(3) by AvData if either ITC DeltaCom or Interstate FiberNet breaches in
any material respect any of their representations, warranties, covenants or
agreements contained in the merger agreement, or any such representation or
warranty becomes untrue in any material respect, in any such case such that the
conditions precedent to the obligation of AvData to close specified in the
50
<PAGE>
merger agreement are not satisfied and such breach is not promptly cured within
30 days following receipt by ITC DeltaCom of written notice of such breach;
(4) by either ITC DeltaCom or AvData if any decree, permanent injunction,
judgment, order or other action by any court of competent jurisdiction or any
government entity preventing or prohibiting consummation of the merger will have
become final and nonappealable;
(5) by either ITC DeltaCom or AvData if the effective time of the merger
has not occurred on or prior to June 30, 1999 (unless such date will be extended
by the mutual written consent of the parties), except that this right to
terminate the merger agreement is not available to any party whose breach of
representations, warranties, covenants or agreements contained in the merger
agreement was the sole cause of, or resulted in, the failure of the effective
time of the merger to occur by such date or the inability of such condition to
be satisfied;
(6) by ITC DeltaCom, if (1) the board of directors of AvData withdraw,
modify or change its recommendation of the merger agreement or the merger in a
manner adverse to ITC DeltaCom or resolves to do any of the foregoing or (2)
AvData enters into any agreement, commitment or understanding regarding a
"competing transaction" (as defined below), or endorses or publicly announces
any proposal, plan or intention to enter into a competing transaction;
(7) by ITC DeltaCom, if the board of directors of AvData recommends to
AvData stockholders (1) any merger, consolidation, share exchange, business
combination, or other similar transaction, (2) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the assets of
AvData or issuance of 20% or more of the outstanding voting securities of AvData
in a single transaction or series of transactions; or (3) any tender offer or
exchange offer for 20% or more of the outstanding shares of capital stock of
AvData;
(8) by AvData, if the board of directors of AvData (1) fails to make or
withdraws or modifies its recommendation to AvData stockholders that they
approve the merger, if there exists at such time a tender offer, exchange offer
or bona fide proposal by another person or entity to acquire AvData or (2)
recommends to AvData stockholders approval or acceptance of such a bona fide
proposal, in each case only if the board of directors, after consultation with
outside legal counsel, determines in good faith that such action is necessary
for the board of directors to comply with its fiduciary duties to AvData
stockholders under the Delaware General Commercial Law; or
(9) by AvData if the merger agreement fails to receive the requisite vote
for approval and adoption by AvData stockholders at the AvData stockholders'
special meeting.
If this merger agreement is terminated pursuant to any of the above
reasons, the merger agreement will forthwith become void and there will be no
liability or obligation on the part of any party hereto, except that
. all information and knowledge obtained pursuant to the merger agreement,
the negotiations and execution of the merger agreement, or the
effectuation of the transactions contemplated thereby will continue to
be subject to the confidentiality agreement dated January 15, 1999
between the parties
. if the merger agreement is terminated by ITC DeltaCom for the reasons
provided in paragraphs 7 or 8 above, then AvData will pay ITC DeltaCom
$1 million for the reasonable fees and expenses incurred by ITC DeltaCom
in connection with the merger agreement and the transactions
contemplated thereby
. except as described above, all costs and expenses will be paid by the
party incurring such expense (which costs and expenses, in the case of
AvData, may not exceed $500,000)
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WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
Waiver. At any time prior to the effective time of the merger, the parties
to the merger agreement may agree to:
. extend the time for the performance of any obligation or other act
required to be performed under the merger agreement
. waive any inaccuracies in the representations and warranties contained
in the merger agreement or in any document delivered pursuant thereto
. waive compliance with any of the agreements or conditions contained in
the merger agreement.
Amendment. The merger agreement may only be amended by an instrument in
writing signed by ITC DeltaCom, AvData, Interstate FiberNet and the AvData
stockholders' representative.
EXPENSES
The merger agreement provides that each party will pay its own costs and
expenses incurred in connection with the merger agreement and the transactions
contemplated thereby, provided that if the merger agreement is terminated by ITC
DeltaCom for the reasons provided in paragraphs 7 or 8 of "--Termination of the
Merger Agreement" above, then AvData will pay ITC DeltaCom $1 million for its
reasonable fees and expenses. In no event may AvData's fees and expenses exceed
$500,000.
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INFORMATION ABOUT ITC DELTACOM
GENERAL
ITC DeltaCom provides integrated voice and data telecommunication 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. In connection with these businesses, ITC DeltaCom
owns, operates and manages an extensive fiber optic network in the southern
United States. ITC DeltaCom had revenues of approximately $171.8 million for
the year ended December 31, 1998, which represents a 50% increase over revenues
of $114.6 million for the year ended December 31, 1997.
ITC DeltaCom provides integrated retail telecommunications services to mid-
sized and major regional businesses in the southern United States in a single
bundled package tailored to the business customer's specific needs. These
services include local exchange services, long distance services, toll free
calling, calling card and operator services, Asynchronous Transfer Mode or ATM,
frame relay, high capacity broadband private line services, primary rate
interface connectivity and collocation service to Internet service providers, as
well as Internet, intranet and Web page hosting and development services, and
customer premise equipment sales, installation and repair. ITC DeltaCom refers
to these services collectively as its Retail Services. As of December 31, 1998,
ITC DeltaCom provided Retail Services to approximately 10,700 business
customers. ITC DeltaCom currently offers Retail Services in 22 metropolitan
areas (including local exchange services in 20 markets) in Alabama, Arkansas,
Florida, Georgia, Louisiana, Mississippi, North Carolina and South Carolina. ITC
DeltaCom intends to provide a full range of Retail Services in a total of
approximately 42 metropolitan areas throughout the southern United States over
the next two years. For the year ended December 31, 1998, revenue from the
Retail Services was $119.9 million and EBITDA as a percentage of revenue or
EBITDA Margin for the Retail Services was (5)%.
ITC DeltaCom provides wholesale long-haul services to other
telecommunications carriers, including AT&T Corp., MCI WorldCom, Inc., Sprint
Corporation, Qwest Communications International Inc., Cable & Wireless
Communications, Inc., Allnet Communications, Inc. d/b/a Frontier Communications
Services and IXC Communications, Inc. ITC DeltaCom refers to these wholesale
long-haul services as its Carriers' Carrier Services. ITC DeltaCom's fiber
optic network reaches over 80 points of presence, or POPs, in ten southern
states, Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North
Carolina, South Carolina, Tennessee and Texas. This network extends
approximately 7,800 route miles, of which approximately 4,150 miles are owned by
ITC DeltaCom. The remaining approximately 3,650 miles are owned and operated
principally by three public utilities, Duke Power Company, Florida Power & Light
Company and Entergy Technology Company, but are managed and marketed by ITC
DeltaCom. For the year ended December 31, 1998, revenue from the Carriers'
Carrier Services was $51.9 million and EBITDA Margin for the Carriers' Carrier
Services was 58%. As of December 31, 1998, ITC DeltaCom had remaining future
long-term contract commitments for Carriers' Carrier Services totaling
approximately $139.7 million. These contracts expire on various dates through
2008 and are expected to generate approximately $122.4 million in revenues to
ITC DeltaCom through 2003, of which approximately $34.2 million are expected to
be realized in 1999.
In connection with offering local exchange services, ITC DeltaCom has
entered into an interconnection agreement with BellSouth Telecommunications,
Inc. to (1) resell BellSouth's local exchange services and (2) interconnect ITC
DeltaCom's network with BellSouth's network for the purpose of immediately
gaining access to all of BellSouth's unbundled network elements. ITC DeltaCom
has also entered into similar interconnection agreements with GTE Corporation
for its Alabama market, with Southwestern Bell Telephone Company for its
Arkansas markets and with Sprint Corporation for Sprint's Florida markets.
ITC DeltaCom intends to complete additional interconnection agreements with
GTE Corporation, Southwestern Bell Telephone Company and Sprint Corporation
for certain other markets that it serves or intends to serve. These agreements
allow ITC
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DeltaCom to enter new markets with minimal capital expenditures and to offer
local exchange services to its current customer base.
ITC DeltaCom was incorporated in Delaware in March, 1997. ITC DeltaCom's
principal executive offices are located at 1791 O.G. Skinner Drive, West Point,
Georgia 31833, its telephone number is (706) 385-8000 and its Internet Website
is http://www.itcdeltacom.com.
ADDITIONAL INFORMATION
A detailed description of ITC DeltaCom's business, executive compensation,
various benefit plans, including stock option plans, voting securities and the
principal holders thereof, certain relationships and related transactions,
financial statements and other matters related to ITC DeltaCom is set forth in
documents considered a part of, but not included in, this prospectus and proxy
statement. Stockholders desiring copies of such documents may contact ITC
DeltaCom at its address or telephone number indicated under "Where You Can Find
More Information."
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SELECTED CONSOLIDATED FINANCIAL DATA OF ITC DELTACOM
The information in the following table is based on historical financial
information included in ITC DeltaCom's prior SEC filings. You should read the
following financial information in connection with the historical financial
information, including the notes which accompany such financial information.
The historical financial information is considered a part of this document. See
"Where You Can Find More Information" on page ___. The selected historical
statement of operations data for each of the years ended December 31, 1994,
1995, 1996, 1997 and 1998 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 begins on the next page)
55
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SELECTED CONSOLIDATED FINANCIAL DATA OF ITC DELTACOM
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994(a)(b) 1995 1996(c) 1997(d)(e) 1998
--------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues $ 4,946 $ 5,751 $ 66,518 $ 114,590 $ 171,838
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of services 2,485 3,149 38,756 54,550 82,979
Selling, operations, and
administration 948 1,627 18,876 38,255 64,901
Depreciation and amortization 738 1,268 6,438 18,332 30,887
----------- ----------- ----------- ----------- -----------
Total operating expenses 4,171 6,044 64,070 111,137 178,767
----------- ----------- ----------- ----------- -----------
Operating income (loss) 775 (293) 2,448 3,453 (6,929)
Equity in losses of
unconsolidated subsidiary (97) (258) (1,590) -- --
Interest expense (274) (297) (6,173) (21,367) (32,828)
Interest and other income (other
expense), net 82 41 172 4,251 7,397
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes,
preacquisition (earnings) loss
and extraordinary item 486 (807) (5,143) (13,663) (32,360)
Income tax provision (benefit) 113 (303) (1,233) (3,324) (6,454)
Preacquisition (earnings) loss (236) -- -- 74 --
Extraordinary item (net of income tax) -- -- -- (508) (8,436)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 137 $ (504) $ (3,910) $ (10,773) $ (34,342)
=========== =========== =========== =========== ===========
Basic and diluted net income (loss) per
common share: (f)
Before extraordinary loss $ -- $ (0.01) $ (0.10) $ (0.26) $ (0.51)
Extraordinary loss -- -- -- (0.01) (0.16)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ -- $ (0.01) $ (0.10) $ (0.27) $ (0.67)
=========== =========== =========== =========== ===========
Basic weighted average common shares
outstanding (f) (g) 38,107,350 38,107,350 38,107,350 40,249,816 50,972,361
Diluted weighted average common shares
outstanding (f) (g) 38,203,852 38,203,852 38,203,852 40,249,816 50,972,361
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1994(a)(b) 1995 1996(c) 1997(d)(e) 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ 255 $ (242) $ 3,415 $ 116,446 $ 190,118
Total assets 20,062 20,922 113,208 386,104 587,517
Long-term debt, advances from ITC
Holding and capital lease obligations,
including current portions 4,014 3,144 75,443 203,889 417,934
Stockholders' equity 13,761 14,307 19,257 148,266 118,200
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994(a)(b) 1995 1996(c) 1997(d)(e) 1998
---------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures 3,704 1,806 6,173 43,874 147,842
Cash flows provided by
operating activities 979 1,437 8,189 6,302 9,512
Cash flows used in investing
activities 10,704 1,479 72,694 93,854 118,166
Cash flows provided by
financing activities 10,102 180 65,150 180,625 198,447
EBITDA, as adjusted (h) 1,513 975 8,886 21,785 23,958
Ratio of earnings to fixed charges (i) 2.65x -- -- -- --
</TABLE>
(a) Through August 17, 1994, ITC DeltaCom owned a 49% interest in Interstate
FiberNet and accounted for this investment under the equity method. On
August 17, 1994, ITC DeltaCom purchased the remaining 51% interest in
Interstate FiberNet. Interstate FiberNet's revenues and expenses have been
included in the consolidated statement of operations effective January 1,
1994, with the preacquisition earnings attributable to the previous owner
deducted to determine consolidated net income for 1994.
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<PAGE>
(b) On August 17, 1994, ITC DeltaCom entered into the Gulf States FiberNet
partnership. ITC DeltaCom obtained a 36% general partnership interest, and
the investment was accounted for under the equity method.
(c) On January 29, 1996, ITC Holding purchased DeltaCom. DeltaCom's results of
operations are included in the historical statement of operations data since
the date of acquisition. See Note 11 to the consolidated financial
statements in ITC DeltaCom's Annual Report on Form 10-K incorporated herein
by reference.
(d) On March 27, 1997, ITC DeltaCom 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 11
to the consolidated financial statements in ITC DeltaCom's Annual Report on
Form 10-K incorporated herein by reference.
(e) On March 27, 1997, ITC DeltaCom 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 data
effective January 1, 1997 with the preacquisition loss attributable to the
previous owner deducted to determine the consolidated net loss for the year
ended December 31, 1997. See Note 11 to the consolidated financial
statements in ITC DeltaCom's Annual Report on Form 10-K incorporated herein
by reference.
(f) On July 29, 1998, ITC DeltaCom announced a two-for-one stock split of its
common stock to be effected in the form of a stock dividend. The record date
for the stock split was August 18, 1998 and the payment date was September
4, 1998. The common stock began trading giving effect to the stock split on
September 8, 1998. All references to number of shares, except shares
authorized, and to per share information in the consolidated financial
statements have been adjusted to reflect the stock split on a retroactive
basis.
(g) Pursuant to Staff Accounting Bulletin 98, for periods prior to the
completion of the initial public offering, basic net loss per share is
computed using the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed using
the weighted average number of shares of common stock outstanding during the
period and nominal issuances of common stock and common stock equivalents,
regardless of whether they are anti-dilutive.
(h) EBITDA, as adjusted, represents earnings before extraordinary item,
preacquisition (earnings) loss, equity in losses of unconsolidated
subsidiaries, net interest, income taxes, depreciation and amortization.
EBITDA, as adjusted, is provided because it is a measure commonly used in
the industry. EBITDA, as adjusted, 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, as adjusted, 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
1998 by $0.8 million, $5.1 million, $13.7 million and $32.4 million,
respectively.
57
<PAGE>
PRO FORMA FINANCIAL DATA
The pro forma statement of operations for the year ended December 31, 1998
give effect to the following transactions as if each had occurred on January 1,
1998: (1) the issuance of our March 1998 senior notes, (2) the redemption of
$70 million of our 1997 senior notes, (3) the issuance of our November 1998
senior notes, (4) the issuance of our May 1999 convertible subordinated notes,
(5) the issuance of 6,037,500 shares of our common stock in May 1999 and (6) the
merger with AvData. The pro forma balance sheet data as of December 31, 1998
give effect to (1) the issuance of our May 1999 convertible subordinated notes,
(2) the issuance of 6,037,500 shares of our common stock in May 1999 and (3) the
merger with AvData, as if each occurred on December 31, 1998.
The pro forma financial and operating information does not purport to
represent what our 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
operations of ITC DeltaCom. The pro forma adjustments are based on currently
available information and certain assumptions that management believes to be
reasonable.
58
<PAGE>
ITC DELTACOM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------------
ADJUSTMENTS
HISTORICAL FOR OUR 1998 ADJUSTMENTS PRO FORMA,
ITC DELTACOM AND 1999 PRO FORMA AVDATA FOR AVDATA AS FURTHER
Consolidated FINANCINGS (1) AS ADJUSTED HISTORICAL ACQUISITION(2) ADJUSTED
------------- -------------- ------------ ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 171,838 $ -- $171,838 $30,183 $ -- $ 202,021
Cost of services 82,979 -- 82,979 18,796 -- 101,775
----------- ---------- -------- ------- ----------- -----------
Gross margin 88,859 -- 88,859 11,387 -- 100,246
----------- ---------- -------- ------- ----------- -----------
Operating expenses:
Selling, operations, and
administration 64,901 -- 64,901 8,771 -- 73,672
Depreciation and amortization 30,887 -- 30,887 1,085 1,251 33,223
----------- ---------- -------- ------- ----------- -----------
Total operating expenses 95,788 -- 95,788 9,856 1,251 106,895
----------- ---------- -------- ------- ----------- -----------
Operating (loss) income (6,929) -- (6,929) 1,531 (1,251) (6,649)
----------- ---------- -------- ------- ----------- -----------
Other (expense) income:
Interest expense (32,828) (14,933) (47,761) -- -- (47,761)
Interest income 9,753 (414) 9,339 172 -- 9,511
Other (expense) income (2,356) 2,512 156 -- -- 156
----------- ---------- -------- ------- ----------- -----------
Total other (expense) income (25,431) (12,835) (38,266) 172 -- (38,094)
----------- ---------- -------- ------- ----------- -----------
(Loss) income before income taxes
and extraordinary item (32,360) (12,835) (45,195) 1,703 (1,251) (44,743)
Income tax benefit (6,454) -- (6,454) -- -- (6,454)
----------- ---------- -------- ------- ----------- -----------
Net (loss) income before extraordinary
item $ (25,906) $ (12,835) $(38,741) $ 1,703 $ (1,251) $ (38,289)
=========== ========== ======== ======= =========== ===========
Basic and diluted net loss before
extraordinary item per common share $ (0.51) $ (0.66)(3)
=========== ===========
Basic and diluted weighted average
common shares outstanding 50,972,361 6,037,500 1,144,000 58,153,861
</TABLE>
______________
(1) Reflects (a) adjustments to interest expense for the sale by us of our March
1998 senior notes, the redemption of $70 million principal amount of our
1997 senior notes, the sale by us of our November 1998 senior notes, and the
sale by us of the May 1999 convertible subordinated notes, (b) the
elimination of the non-recurring charge of $2.5 million ($1.5 million, net
of tax), related to reclassifying our interest rate swap from a hedge of an
anticipated transaction to a trading security and (c) a pro forma adjustment
to reduce interest income relating to the release of restricted assets after
giving effect to the redemption of a portion of our 1997 senior notes, as if
each had occurred on January 1, 1998.
(2) Reflects amortization of goodwill and customer base, over 20 years and 10
years, respectively, in connection with the AvData acquisition based on
management's preliminary allocation of the purchase price. This allocation
may be revised within one year from the acquisition date.
(3) Excludes the impact of an additional $10 million of common stock subject to
issuance to the stockholders of AvData under the earn-out provisions of the
merger agreement. If such consideration is earned and issued, the pro forma
net loss per share would also have been $(.66).
59
<PAGE>
ITC DELTACOM, INC. AND SUBSIDIARIES
Unaudited Pro Forma Balance Sheet
AS OF DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
ADJUSTMENTS
HISTORICAL FOR OUR 1998 ADJUSTMENTS PRO FORMA,
ITC DELTACOM AND 1999 PRO FORMA, AVDATA FOR AVDATA AS FURTHER
CONSOLIDATED FINANCING (1) AS ADJUSTED HISTORICAL ACQUISITION ADJUSTED
------------ ------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $184,167 $217,882 $402,049 $ 3,505 $ -- $405,554
Current restricted assets 14,300 -- 14,300 -- -- 14,300
Accounts receivable, net 37,526 -- 37,526 4,080 -- 41,606
Other current assets 6,165 -- 6,165 1,601 -- 7,766
Long-term restricted assets 5,735 -- 5,735 -- -- 5,735
Intangible assets, net 63,160 -- 63,160 -- 22,152(2) 85,312
Property, plant and equipment, net 262,050 -- 262,050 4,629 -- 266,679
Other long-term assets 14,414 2,975 17,389 490 (490)(3) 17,389
-------- -------- -------- ------- ------- --------
Total assets $587,517 $220,857 $808,374 $14,305 $21,662 $844,341
======== ======== ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 20,043 $ -- $ 20,043 $ 3,543 $ -- $ 23,586
Accrued interest 8,049 -- 8,049 -- -- 8,049
Other accrued liabilities 22,873 -- 22,873 1,613 -- 24,486
Current maturities of long-term debt and
capital lease obligations 1,075 -- 1,075 60 (60)(3) 1,075
Long-term debt and capital lease obligations 416,859 100,000 516,859 25 (25)(3) 516,859
Deferred income taxes 418 -- 418 -- -- 418
Other long-term liabilities -- -- -- 911 -- 911
Preferred stock 15 -- 15 -- -- 15
Common stock 513 60 573 299 (288)(4) 584
Treasury stock -- -- -- (165) 165(4) --
Additional paid-in capital 167,023 120,797 287,820 8,222 21,667(4) 317,709
Note receivable from officer -- -- -- (225) 225(4) --
Accumulated deficit (49,351) -- (49,351) 22 (22)(4) (49,351)
-------- -------- -------- ------- ------- --------
Total liabilities and stockholders' equity $587,517 $220,857 $808,374 $14,305 $21,662 $844,341
======== ======== ======== ======= ======= ========
</TABLE>
_________________
(1) Reflects proceeds from the sale by us of $100 million in 4 1/2% convertible
subordinated notes, net of debt issuance costs, in May 1999 and the sale of
6,037,500 shares of our common stock in May 1999, net of offering expenses.
(2) Reflects intangibles related to the AvData acquisition, including $19.3
million of goodwill and $2.9 million of customer base. The allocation of
the purchase price to the fair values of net assets acquired is based on
current estimates by management and may be revised up to one year from the
acquisition date.
(3) Reflects an adjustment to (a) provide a valuation allowance against AvData's
deferred tax asset, and (b) to reflect the repayment of certain liabilities
assumed to be repaid by AvData prior to the acquisition date.
(4) Reflects (a) the issuance of 1,144,000 shares of common stock by us, based
on an assumed $25 per share price, (b) the issuance of common stock
options with a value of approximately $1.3 million and (c) the reversal of
AvData's historical equity. Excludes the effect of the $10 million of
common stock subject to issuance under the earn out provision of the merger
agreement.
ITC DELTACOM INFORMATION
60
<PAGE>
INFORMATION ABOUT AVDATA
AVDATA OVERVIEW
AvData is a provider of satellite and terrestrial-based network solutions,
primarily to mid-size companies based in the southeastern United States and to
wireless messaging and cellular operators nationwide. AvData designs,
implements and operates private communications networks that carry high-speed,
two-way data for Internet, intranet, voice, paging and other digital
transmissions for its customers. AvData delivers high reliability for these
networks based upon its continuous network monitoring (24 hours a day, every
day) and its ability to quickly identify and correct network outages. AvData
generates monthly recurring revenues under long term contracts by providing on-
going network services to its customers, in addition to any non-recurring
equipment and other purchases AvData's customers might make.
As of March 31, 1999, AvData had an installed base of approximately 3,500
revenue-producing sites in North America and the Caribbean. Founded in 1988,
AvData's revenues have grown from less than $7 million in 1994 to more than $30
million in 1998, although AvData's revenues are expected to decline in 1999
following substantial completion of the buildout under a large customer
contract. AvData has achieved this growth by increasing its base of revenue-
producing sites, adding terrestrial network solutions to the satellite
technology offered since its founding and through a large, multi-year contract
obtained in September 1995 with PageMart Wireless, Inc., which represents
AvData's single largest network to date.
AvData believes that demand for network solutions will continue to grow due
to:
. increasing demand for bandwidth in intra-business communications,
especially for Internet and intranet traffic and other digital
communications applications,
. increasing complexity of networks and network operations, leading to a
growth in outsourcing of the design, implementation and especially the
ongoing operation and monitoring of communications networks,
. high costs of attracting and retaining qualified information technology
professionals with the skills required to handle network issues "in-house,"
and
. increased demand for a "one-stop shopping" network solution, both from
customers who prefer to deal with a single vendor and from facilities
providers that wish to offer a "one-stop shopping" network solution to
their own customers.
To capitalize on these trends, AvData developed network operations and
management services that the company believes are attractive to customers
seeking to outsource network operations. AvData's services are particularly
attractive to entities for whom network failure is extremely costly. AvData
believes these services also will be attractive to systems integrators seeking
to offer a complete, turnkey network solution to their customers.
AvData uses both satellite and terrestrial capacity to provide on-going
network connectivity for its customers. AvData acquires capacity from multiple
vendors as needed to satisfy customer demand. To date, AvData has not
experienced significant difficulties obtaining capacity. AvData believes that
the use of multiple vendors and diverse routing reduces exposure from the
failure of a single communications facility provider, since at least critical
portions of customer traffic often can be relocated from a failed facility to a
functioning facility of the same or of another vendor. AvData believes that a
strategic relationship with a facilities owner, such as through the merger with
ITC DeltaCom, will reduce its costs to provide network capacity and make
AvData's network solutions more cost competitive.
AVDATA INFORMATION
61
<PAGE>
AvData's principal customers in recent years include PageMart Wireless, Inc.
(a national messaging network with over 1,800 sites on-line), and Motion
Industries (a wholly-owned subsidiary of Genuine Parts Company with over 300
sites).
DATA NETWORK INDUSTRY
DATA NETWORK APPLICATIONS. There has been significant growth in the use of
-------------------------
wide area data networks in recent years. Data networks include various types of
services, such as temporary dial up connections, leased lines for private
networks, ISDN, frame relay and ATM (asynchronous transfer mode) services.
These data networks are used for many different business applications.
Private network services. Many companies implement "private" networks to
meet business communications needs, particularly data processing for
repetitive commercial transactions (such as in retail or consumer
businesses, banks and other financial institutions, brokerages, etc.), e-
mail, voice, and even business television and video teleconferencing
applications. Private corporate networks can provide high performance and
control and security for processing commercial transactions, as well as
make available more bandwidth for transmission of graphics and video
applications.
Intranet and Internet. The Internet has become a major vehicle for
economic and social activity enabling broad, global access to financial and
business information, research material, and information on leisure, arts
and general interest topics. Business uses of the Internet include
communication within and among businesses, electronic commerce, advertising
and merchandising. Internet usage has also led to increased demand for
intranet services for corporate applications. Intranet servers are used for
publishing information, processing data and data-based applications and
collaboration among employees, vendors, and customers within a more private
domain defined by the business.
Information retrieval. Retail establishments and financial enterprises use
data communications networks for retrieval of information stored on central
computers. Companies with large scale advance reservation systems (hotels,
travel and entertainment providers) use networks for reservations and
information. Banks use data networks to verify account balances, process
branch bank transactions and for automatic teller machines. Retail
companies verify credit standing, update pricing information and gather
inventory information.
Image transmissions. Manufacturing, publishing, research and medical
industries use dedicated communications networks for high-resolution image
transmissions requiring large amounts of bandwidth.
Future Demand for Networks. Demand for data networks is expected to continue
--------------------------
to grow. Trends driving demand for increased data communications include:
. increasing demand for data transmission in intra-business communications,
and in particular the need for wide bandwidth,
. the growth in Internet and intranet traffic,
. continuing technological advancements leading to new bandwidth intensive
applications,
. new licenses being awarded for new or existing technologies and
deregulation that opens previously closed telecommunications markets, and
. increased use of video applications.
AVDATA INFORMATION
62
<PAGE>
Increasing Demand for Data Transmission in Intra-business communications;
Need for Wide Bandwidth. The continuing rapid growth in the
telecommunications markets reflects an increased demand for communications
capacity for data communications. The number of transactions to be
processed over the communications infrastructure has been steadily
increasing. In addition, the shift from large host computers and
centralized data network architectures to distributed PC and workstation
based platforms has led to demand for private networks to establish and
interconnect local (LAN) and wide area (WAN) networks. As businesses expand
and become geographically more diverse, the ability to link multiple
locations within a single network becomes more important. A portion of the
increased demand requires wide bandwidth and high speed data capacity for
applications that rely heavily on graphics and result in traffic patterns
that involve bursts of transmissions. There is also increasing demand for
near-instantaneous response time and more reliable data transport. This
demand has necessitated upgrades of corporate data networks to accommodate
the high data transfer requirements of these applications.
Internet and intranet services. There has been a significant increase in
recent years in demand for networks to support intranets and extranets to
distribute information within or outside of companies using the
increasingly popular Internet protocols. This increase is expected to
continue. Businesses also are increasingly using networks for "always on"
access to the Internet for applications such as research, e-mail, data
exchange, software and graphics, financial transactions and even voice
communications. The utility of Internet services, which contain
significant amounts of data and graphics requiring wide bandwidth, can be
constrained by the lack of sufficient bandwidth in existing infrastructure.
Even where infrastructure quality is high, the rapid growth of Internet
usage continues to create network congestion. These trends are expected to
continue, and efficient management of network bandwidth should become
increasingly important.
Continuing technological advancements. New technological advances have
increased capacity and efficiency and lowered cost, thereby resulting in
increases in demand. New software protocols and methodologies, such as
frame relay, Asynchronous Transfer Mode (ATM), and others, have reduced
transmission delays and improved use of available capacity. Improvements
in routers and servers have enhanced the quality and efficiency of data
networks.
Grants of new licenses, deregulation. Over the past several years the
United States and other countries have increased grants of
telecommunications licenses and changed applicable rules to permit new
competitors to provide facilities and services. The increased competition
has reduced prices, thereby increasing demand, and has led companies to
introduce new applications and features that need to be supported by
complex data networks.
Increased use of video applications. Demand for video applications has
been growing and is expected to continue to increase. New technology and
lower costs have increased demand for business television networks and data
networks that included the large amounts of bandwidth needed for many video
applications.
NETWORK SOLUTIONS
The significant growth in the use and complexity of data networks has
also led to significant growth in demand for overall network solutions. The
need for network solutions arises from factors such as:
. the need to design and implement complex networks
. the difficulties of implementing networks that involve multiple vendors or
technologies
. increasing demand for "one-stop shopping" for the overall network
AVDATA INFORMATION
63
<PAGE>
. the increasing cost to businesses from failures of data networks, leading
to greater willingness to spend capital on promoting efficient operation
and reducing network downtime
Need for Complex Network Design and Implementation. Over the last
several years fiber optic cable has become prevalent in the United States,
and additional fiber optic cable continues to be laid. Similarly, VSAT
(Very Small Aperture Terminal) earth station systems can be installed and
satellite bandwidth can be accessed from virtually any location within the
geographic coverage of the satellites. However, implementation of an
efficient terrestrial or satellite network to utilize these communications
infrastructures requires planning and design to integrate functionally the
components, particularly when the network must reach many locations over
long distances simultaneously, and involves specialized applications
requiring specialized knowledge or skills or involves frame relay or other
complex services. Many end users do not have sufficient expertise to plan
and design these networks, and therefore outsource these services.
Demand for "One-Stop Shopping" Network Solution. Data networks often
involve multiple vendors and may even involve multiple technologies.
Customers must obtain local telephone lines and long distance "private
lines" or similar bandwidth services, and must install or connect routers,
computer servers and other data equipment to successfully implement a wide-
area network. And wide area networks must interconnect with local area
networks. As a result, customers who try to design and implement their own
data networks must deal with a multiple vendor environment. Once the
networks are installed, until a problem is diagnosed and a vendor takes
responsibility for restoration of service, customers may not know where to
turn when an outage occurs. As a result, demand is developing
(particularly from companies for whom network failure is extremely costly),
for a single provider who will design and implement the entire network,
deal with the multiple vendors on the customer's behalf and be responsible
for monitoring the network, diagnosing the cause of any outage and
following through directly or with the responsible vendor to have service
restored.
Greater Cost of Network Failures. As the usage of data networks has
grown, customers use their networks for more "mission critical"
applications, and a premium is being placed on the speed with which service
can be restored. Customers that face significant costs or loss of business
upon network failure therefore have shown greater willingness to spend
capital on promoting efficient operation and reducing network downtime.
Improving network availability often requires continuous network monitoring
and management. Customers may not have the capability of performing this
activity internally, particularly on large wide area networks, and
individual vendors of portions of the network often cannot or do not offer
to monitor or manage the elements of the network provided by others. A
network solutions provider can monitor a customer's entire network from
end-to-end, perform diagnostics and then dispatch maintenance and other
related services to speed network restoration.
As the demand for network solutions has grown, networks and network
operations have become increasingly complex. This has led to a growth in
outsourcing of the design, implementation and especially the ongoing operation,
monitoring and management of data networks.
AVDATA PRODUCTS AND SERVICES
AvData provides satellite and terrestrial-based network solutions.
AvData's offerings include the network design, equipment and bandwidth
provisioning, integration and on-going network operation. AvData also
developed network operations and management products for customers that already
have networks in place or are putting in new or upgraded networks or for
facilities providers that wish to offer a "one-stop shopping" network solution.
AvData can provide as much or as little of the total network solution as the
customer specifies, but almost always provides the ongoing monitoring and
management of the nodes on the network.
AVDATA INFORMATION
64
<PAGE>
SATELLITE AND TERRESTRIAL-BASED NETWORK SOLUTIONS.
- --------------------------------------------------
CONSULT.
AvData designs data networks for its customers. AvData's engineers
analyze the customer's requirements, measure traffic flow, identify network
problem areas and other relevant factors, and design a network that will meet
the customer's needs. The new network often represents an upgrade of a prior
network that no longer adequately serves the customer's needs. Depending upon
the number and locations of sites, nature of the data traffic, presence or
absence of fiber optic connectivity at the sites, customer preferences and
budgets, and other factors, the network design may be for a satellite or
terrestrial network or a combination of both technologies. Although
historically a substantial portion of the networks installed by AvData have been
satellite networks, in recent years most new networks provided by AvData have
been terrestrial. AvData works with the customer to refine and finalize the
design so it best meets the customer's objectives.
INTEGRATE.
Once AvData has finalized the design, AvData procures and installs the
required equipment, obtains the terrestrial or satellite capacity under a lease
or service contract, and provides network operations and monitoring for the
customer over the contract term. The customer purchases the equipment, and
installation services from AvData, resulting in one-time revenue, and pays
AvData a monthly service fee which covers the capacity cost and compensates
AvData for the network operations and monitoring. In certain situations, the
customer may already own or choose to purchase a portion of the installation
services and bandwidth directly from another vendor. AvData's project engineers
manage the network installation, assisted by senior network engineers who
specialize in implementation of particular types of networks or components (such
as routers or VSATs).
Terrestrial Networks. AvData's terrestrial networks solutions include
frame relay circuits, routers, software and other products. Hardware is procured
from various manufacturers including Visual Networks, Nortel (formerly Bay
Networks), CISCO, Motorola and others. AvData obtains most of its circuits from
MCI WorldCom, but also uses other facilities providers including ITC DeltaCom
and Sprint. AvData generally leases the circuits directly and then provides
capacity to customers under long term contracts, generally three to five years,
and may offer options to extend the contract term or increase the amount of
capacity available for the network. AvData seeks to match its lease term for
the circuits as closely as possible to the terms of its contract with the
customer, so that AvData does not face economic exposure, if the customer does
not extend the contract upon expiration. To date AvData generally has not
experienced any difficulties in acquiring circuits at a reasonable cost. AvData
seeks to aggregate its circuit acquisitions to obtain better pricing, but the
particular circuits needed depends on the number and location of sites in the
customer's network. The use of multiple vendors, diverse routing and
alternative technologies to provide back up solutions, allows AvData some
ability to restore service in the event of a catastrophic terrestrial facility
failure.
Satellite Networks. AvData's satellite networks include satellite
capacity, earth station equipment, and other products.
Satellite Capacity. AvData obtains most of its domestic satellite
------------------
capacity from GE American Communications, Loral and PanAmSat, three of the
largest operators of satellites with coverage of the United States. AvData
generally leases this capacity, which resides on four different satellites,
directly from the satellite operator. All of the capacity used by AvData is Ku-
band. AvData provides capacity to customers under long term contracts, generally
three to five years, and may offer options to extend the contract term or
increase the amount of capacity available for the network subject to the pricing
and availability of additional satellite capacity at that time. AvData seeks to
match its lease with the satellite operator as closely as possible to the terms
of its contracts with its major customers so that AvData is not exposed if the
customers do not extend the contract
AVDATA INFORMATION
65
<PAGE>
upon expiration, although AvData does keep a small additional amount of
satellite capacity in reserve to meet growth requirements within its customer
base. To date, AvData generally has not experienced any difficulties in
acquiring capacity at a reasonable cost, but there is no assurance that
satellite failures or damage from meteor storms or other natural events, or
increases in the demand for satellite capacity in the marketplace, will not
create an unexpected shortage in the supply of capacity in the future and
increase capacity prices. The use of capacity on four different satellites gives
AvData some ability to restore service if a catastrophic event makes one
satellite unavailable for service. AvData's larger customers operate on two
satellites or retain back-up capacity on a second satellite to protect critical
network applications in the event of a failure.
VSATs and Software. AvData principally resells VSAT equipment and
------------------
utilizes related software to manage the equipment, all manufactured by NEC, for
whom AvData serves as the largest United States distributor. NEC offers a line
of high-performance VSAT systems and related equipment and software for one-way
and two-way data transmissions, including two-way paging. The VSATs offer high
network reliability, a flexible modular architecture, with rapid response time,
high throughput, and an advanced network management system. The software
accommodates multiple network protocols and methodologies, including TCP/IP,
SNA/SDLC, X.25 and various others. For certain customer requirements,
particularly those requiring high network availability, VSAT technology can be a
better solution than terrestrial alternatives. To date, AvData generally has not
experienced any difficulties in acquiring VSAT equipment and related software,
and believes that the VSAT network products it resells continue to be
competitive both technically and economically.
OPERATE.
AvData provides network operations and monitoring services for its
customers. AvData emphasizes these services in marketing to potential
customers, and believes that the services represent a key portion of AvData's
network solutions. To date, AvData has experienced a high rate of renewal upon
expiration of contracts for these services. Some customers, who own and operate
their networks, contract with AvData for ongoing maintenance and support
services, for which they pay monthly fees. AvData provides maintenance and
support to customers under long term contracts, generally three to five years,
and may offer options to extend the contract term or change the type of support
services being provided.
AvData currently offers three levels of network operations and
monitoring services: basic, advanced and premium.
Basic service includes reactive network monitoring and customer
notification. The customer then resolves the problem internally or with the
relevant carrier or vendor. AvData provides the customer with basic reports on
network availability.
Advanced service still involves reactive network monitoring, but adds
diagnosis, dispatch of repair teams to any location in the United States, and
escalation of the problem with the relevant carrier or vendor by AvData on the
customer's behalf until the problem is resolved. Advanced service includes
reporting on network availability and a periodic network review.
Premium service involves comprehensive, proactive network management
to detect anomalies before they result in network failures or outages. Through
application of additional resources, AvData offers more rapid trouble isolation
and resolution of network problems. AvData manages the customer's carriers and
vendors to escalate problems for resolution. Premium service also gives
customers comprehensive network reporting, including network availability,
analysis regarding congestion on the network, burst patterns and access issues,
and other matters. Customers receive a periodic network review.
In providing network operations and monitoring services, AvData
focuses on customer satisfaction, and believes that its high quality of service
attracts customers. AvData
AVDATA INFORMATION
66
<PAGE>
conducts frequent internal reviews of service delivery to improve its level of
service. It also uses a monthly, company-wide bonus program based on customer
satisfaction to motivate employees to provide high quality service.
AvData provides network operations and monitoring services principally
through its network operations center ("NOC") in Atlanta, which connects to
network monitoring devices installed at various points on each customer's
network. The NOC operates 24 hours of every day of the year. AvData's network
analysts perform continuous network surveillance, responding to any alarms from
the monitoring devices, alerting the customer of problems and commencing
diagnosis and escalation of any problems. Network engineers perform more complex
diagnosis, interface with the responsible vendor, and arrange (where
appropriate) for repair work, focusing on restoration of service (if service has
been interrupted). AvData emphasizes the skills of its personnel in diagnosing
network problems, sometimes avoiding outages before they occur, and in working
with the responsible vendor to ensure speedy restoration.
NETWORK OPERATIONS SERVICES.
- ----------------------------
AvData has developed network operations and management services for
customers that already have networks in place or are putting in new or upgraded
networks or for facilities providers that include this service in the products
and services they provide for their own customers. AvData believes this service
is attractive to customers seeking to outsource network operations, especially
those for whom network failure is extremely costly. AvData also believes this
service is attractive to facilities providers seeking to offer a "one-stop
shopping" network solution. This service takes advantage of AvData's resources
and skills, and leverages its investment in its NOC and other facilities.
AvData charges a monthly service fee for the network management services, and
seeks long term contracts for the service.
OTHER PRODUCTS AND SERVICES.
- ----------------------------
AvData provides a variety of related products and services to
customers, including network expansion (which may include additional equipment
and terrestrial or satellite capacity), additional network support services
(such as help desk operations or after-hours monitoring services), LAN
monitoring and network consulting services (including network design and
analysis services).
SALES AND MARKETING
AvData uses both direct and indirect sales channels to market its
products and services. AvData's sales and marketing focuses principally on
customers with headquarters in the southeastern United States. AvData primarily
markets its services through direct sales for larger networks, but uses a
combination of direct and indirect sales channels for distribution of its
network management services to large and small networks.
In marketing its services, AvData emphasizes the quality of its
network operations and monitoring services, especially to those for whom network
failure is extremely costly. AvData also highlights its ability to serve the
customer as a full service provider that is responsible for the end-to-end
network implementation, including network design, assembly of all network
components (including terrestrial or satellite capacity, routing or VSAT
equipment and software), network customization, installation, and network
operation and monitoring. AvData thereby provides the customer with a single
point of contact for its entire network.
Direct Sales. AvData has three direct sales employees that sell its
products and services, primarily in the southeastern United States. These
network sales often are substantial in size and involve a long-term complex
sales process. AvData is currently expanding its sales force in order to sell
network operations and monitoring services directly to larger customers.
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AvData also has four account managers who serve as the primary contacts
for existing customers. The network implementation and adjustments and the
ongoing network operations and monitoring services that AvData provides require
a significant amount of customer interaction, and for this reason AvData
considers its account managers a critical part of the sales team. These account
managers are also responsible for responding to existing customers who have new
requirements for network expansions, new technology and other growth
requirements.
Indirect Sales Channels. AvData also sells network operations and
monitoring services through distribution arrangements with ITC DeltaCom and
other companies in the United States that together employ approximately 475
sales representatives. These companies include AvData's services as part of the
products and services sold by these companies to their customers. These
distribution companies are also existing providers to many of AvData's target
customers, that makes marketing easier and increases awareness of customer
needs. AvData has two sales employees that are responsible for managing the
indirect sales activities.
CUSTOMERS AND BACKLOG
Customers. The majority of AvData's customers are medium-sized companies
with businesses ranging from wireless communications providers to retailers,
bankers, manufacturers, distributors and pipeline companies. In general,
networks for these customers range from approximately 20 to 400 sites, with an
average of approximately 100 to 150 sites and a few AvData customers that have
data networks considerably larger than this range.
Some of AvData's largest customers include PageMart Wireless (a national
paging company that plans over 3,000 sites in the United States) and Motion
Industries (with over 300 sites). PageMart Wireless, which holds nationwide
narrowband PCS licenses, uses the network obtained from AvData for its
nationwide two-way messaging business. This network also carries PageMart's
traditional one-way paging traffic. Motion Industries is a nationwide
industrial products distributor, who use their network to locate and track
products in their warehouses nationwide.
Although AvData has numerous customers, AvData's revenues have been
dependent on large contracts. PageMart Wireless accounted for approximately 72%
of AvData's revenues in 1998, during which over 1800 sites of the PageMart
Wireless network were installed. Motion Industries also accounted for over 10%
of AvData's revenues in 1997 and 1996. AvData is largely dependent upon these
customers, particularly PageMart, and its recurring and non-recurring revenues
would be adversely affected if AvData lost these accounts.
Recurring Revenue. At December 31, 1998, AvData had recurring revenue
contracts amounting to approximately $10 million, as compared to approximately
$8 million at December 31, 1997. The majority of the recurring revenue consists
of contracts under which AvData provides terrestrial circuits or satellite
capacity and network operations and management services, and the customers pay
for network services on a monthly basis over the term of the contract. These
contracts generally have terms between three to five years.
NETWORK OPERATIONS AND SERVICE
AvData has its network operations center at its corporate headquarters in
Atlanta from which it performs network operations and monitoring services and
customer support functions 24 hours a day, every day of the year. AvData also
conducts satellite shared hub services from the NOC using multiple satellite
earth stations located at those premises, and AvData also has a shared hub
facility in Greensboro, North Carolina.
The Atlanta network operations center also allows AvData to perform
diagnostic procedures on customer networks and to reconfigure networks to alter
data speeds, change frequencies and provide additional bandwidth. The hardware
at the NOC and shared hub facility include significant redundancy, and the
Atlanta and Greensboro sites provide some back-up support
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for each other. AvData also has access to back-up sites on vendor or customer
premises in the Birmingham, Alabama; Washington, DC; and Chicago areas.
THE AVDATA STRATEGY
AvData's strategy to maintain and increase revenue is based on the
following elements:
. Provide network solutions, particularly network operation and
management are responsive to customer's needs
. Develop base of recurring revenues
. Continue to support multiple vendors for terrestrial and satellite
networks
. Leverage network operations services through direct and channel
sales
Provide Network Solutions, Particularly Network Operation and Management.
AvData targets the needs of medium-sized businesses for reliable and high
quality data networks. AvData emphasizes its network solutions and its ability
to design the network to the customer's needs, implement the network and then
ensure a high standard of reliability through network operation and monitoring.
AvData offers its customers a single point of contact and high quality of
service throughout the network. AvData believes this approach is attractive to
potential customers looking to outsource network operations, especially those
for whom network failure is extremely costly.
Develop Base of Recurring Revenues. As part of its network solutions,
AvData enters into long term contracts with its customers for terrestrial
circuits or satellite capacity and for network operation and monitoring
services. These services yield a monthly service fee, often on a per site or
per node basis. To date, customer renewal rates have been fairly high. As of
March 31, 1999, AvData had an installed base of approximately 3,500 revenue-
producing sites in North America and the Caribbean. This generates a stream of
recurring revenue for AvData. AvData's recurring revenue has increased every
year and averaged more than 20% per year growth.
Continue to Support Multiple Vendors for Terrestrial and Satellite
Networks. AvData uses both satellite and terrestrial capacity to provide
connectivity for its customers, and acquires capacity from multiple vendors when
required to satisfy customer demand. AvData believes that the use of multiple
vendors and diverse routing reduces exposure to failure of a single
communications facility, since at least critical portions of customer traffic
often can be relocated from a failed facility to a functioning facility of the
same or another vendor. AvData believes that a strategic relationship with a
facilities owner, such as through the merger with ITC DeltaCom, will reduce its
facilities cost and make AvData's total network solutions offerings more cost
competitive.
Leverage Network Operations Services through Direct Sales and Channels.
To capitalize on outsourcing trends and increased demand for a "one-stop
shopping" network solution, AvData has introduced network operations and
management services that AvData believes will be attractive to customers seeking
to outsource network operations, especially those for whom network failure is
extremely costly. AvData believes these services also will be attractive to
facilities providers seeking to offer a "one-stop shopping" network solution to
their own customers. These services are already distributed by ITC DeltaCom and
three other companies.
COMPETITION
The data communications industry is highly competitive and the level of
competition is increasing. As a provider of data networks in the United States,
AvData competes with a large number of telecommunications service providers,
including major terrestrial carriers and satellite and VSAT providers who offer
data networks to their customers. AvData has encountered strong competition
from major established terrestrial carriers such as AT&T, the regional Bell
operating companies, MCI/WorldCom, Sprint and others. These carriers offer
technological solutions for
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customer networks, including ISDN lines and frame relay networks. On the
satellite side, AvData competes with Hughes Network Systems and Gilat. These
competitors have significant advantages, including long-standing customer
relationships, significantly greater financial resources, and control (directly
or through affiliations) over terrestrial and satellite facilities and
manufacture of VSAT equipment for use in data networks. The increasingly
competitive environment has put pressure on prices and margins. AvData also
competes with some bandwidth facilities providers and there can be no assurance
that these competitors will continue to sell capacity to AvData at a rate that
will enable AvData to compete effectively for these terrestrial facilities,
although this would not affect operation and monitoring services. AvData
emphasizes the quality and reliability of its networks, arising from its network
operation and monitoring, to compete against these large facilities providers.
AvData also faces competition from companies that provide network
operations and monitoring, particularly those located in the southeastern United
States. These companies include NetSolv, Comdisco, and BellSouth teamed with
EDS.
AvData expects to become more competitive after the merger. See "The
Merger -- Recommendation of AvData's Board of Directors and Reasons for the
Merger." However, these competitive advantages may not be realized unless and
until functional combination of the companies occurs. See "Risk Factors --ITC
DeltaCom may not be able to successfully integrate AvData into its operations."
REGULATION
The telecommunications environment is highly regulated. As a provider
of communications services in the United States, AvData is subject to the
regulatory authority of the United States, primarily the Federal Communications
Commission (the "FCC"). All entities that use radio frequencies to provide
communications services in the United States are subject to the jurisdiction of
the FCC under the Communications Act of 1934. The Communications Act requires
that the operation of satellite earth station facilities, including VSAT systems
such as those owned by AvData, be authorized under licenses issued by the FCC.
Major changes in earth station or VSAT operations require modifications to the
FCC licenses, which must also be approved by the FCC. AvData generally obtains
licenses for the earth station facilities used in its customers' networks. The
FCC generally grants earth station and VSAT licenses (such as those held by
AvData) for ten year terms. The FCC generally renews such licenses routinely,
but there can be no assurance that AvData's licenses will be renewed at their
expiration dates or that these renewals will be for full terms.
The changing policies and regulations of the FCC will continue
to affect the telecommunications industry. AvData cannot predict the impact that
these changes will have on its business.
HUMAN RESOURCES
As of March 31, 1999, AvData had 72 full-time employees. Of its total
work force, six are senior managers, thirty-two are in engineering and
operations (including network operations and monitoring), twenty are in
marketing, sales and sales support, six work in technical development activities
and eight are devoted to general and administrative activities. More than 90% of
AvData's full-time employees will become employees of ITC DeltaCom if the merger
is consummated.
PROPERTIES
AvData's principal offices comprise approximately 19,000 square feet
located in Atlanta. These offices house not only AvData's personnel, but also
contain AvData's network
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operations center. The lease covering these facilities expires in 2001. AvData
also leases space in Greensboro, North Carolina, where it operates a shared hub
facility.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the knowledge
of AvData management, threatened against AvData. AvData is a party to various
regulatory proceedings incidental to its business. To the knowledge of AvData
management, none of these proceedings is material to AvData.
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SELECTED FINANCIAL DATA OF AVDATA
Selected financial data for AvData is presented in the table below and
should be read in conjunction with "AvData Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and with AvData's financial
statements and related notes presented later in this prospectus and proxy
statement. The summary historical statement of operations data for each of the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 and the summary
historical balance sheet data for the years then ended, have been extracted from
those financial statements which have been audited by Arthur Andersen LLP,
independent public accountants.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales and service revenue $ 6,800,415 $ 9,252,374 $16,247,438 $13,529,639 $30,182,711
----------- ----------- ----------- ----------- -----------
Cost of sales and service revenue 2,937,660 4,084,960 8,859,881 6,612,267 18,795,435
----------- ----------- ----------- ----------- -----------
Operating expenses:
Operations and engineering 777,639 1,151,754 1,797,373 2,129,230 2,752,167
Sales and marketing 1,202,439 2,011,951 2,622,972 2,319,025 3,231,050
General and administrative 876,180 1,062,409 1,462,074 1,325,614 2,787,306
Depreciation 636,931 685,975 759,498 887,452 1,085,381
----------- ----------- ----------- =========== ===========
Total operating expenses 3,493,189 4,912,089 6,641,917 6,661,321 9,855,904
----------- ----------- =========== =========== -----------
Operating income 369,566 255,325 745,640 256,051 1,531,372
Interest income, net 89,216 84,546 148,357 151,824 171,386
----------- ----------- ----------- =========== -----------
Net income $ 458,782 $ 339,871 $ 893,997 $ 407,875 $ 1,702,758
=========== =========== =========== =========== ===========
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $ 4,086,629 $ 5,390,510 $ 7,970,926 $ 7,065,656 $ 9,224,548
Total assets 6,376,992 8,038,644 11,626,245 11,529,125 14,343,105
Current liabilities 1,834,159 2,692,544 5,100,405 3,777,672 5,253,298
Long-term liabilities 0 463,396 749,013 1,409,671 936,655
Stockholders' equity 4,542,833 4,882,704 5,776,827 6,341,782 8,153,212
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash flows provided by
operating activities $ 1,496,986 $ 2,468,889 $ 1,874,480 $ 1,051,590 $ 1,504,210
Cash flows used in
investing activities 888,240 1,059,813 1,768,356 1,606,602 1,340,529
Cash flows provided by
financing activities 3,750 0 126 297,278 53,898
</TABLE>
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AVDATA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with AvData's Financial Statements and notes thereto included elsewhere in this
prospectus and proxy statement.
OVERVIEW
AvData is a provider of satellite and terrestrial-based network
solutions, primarily to mid-size companies based in the southeastern United
States and to wireless messaging and cellular operators nationwide. AvData
designs, implements and operates private communications networks that carry high
speed two-way data, Internet, intranet, voice, paging and other digital
transmissions.
AvData earns non-recurring and recurring revenues from sales of its
network solutions and ongoing network services that it provides. AvData derives
non-recurring revenue from customer purchases of network design, equipment,
software and installation services. AvData's recurring revenues come from
monthly service fees for capacity (whether terrestrial or satellite) and for
network operations and maintenance.
The large majority of AvData's non-recurring revenues come from sales
of equipment for new network or significant network upgrades or expansions.
AvData also realizes revenues from (1) sales of replacement equipment or
additional equipment for moves and changes, (2) sales of post-installation
software upgrades and (3) one-time services (such as network analysis or
consulting). The charges to customers for network design, equipment, software
and installation services vary principally with the number of sites, but also
with the types of technologies employed.
The charges to customers for capacity and for network operations and
monitoring vary with the amount of capacity, the length of the contract, the
types of network operations and monitoring and the extent of other services
needed by the customer to implement and operate the network. AvData often
charges for network operations and monitoring on a per node, or per device
monitored basis. As of March 31, 1999, AvData had an installed base of
approximately 3,500 revenue-producing sites in the United States and in other
locations in North America and the Caribbean.
In the majority of AvData's network sales, the customer purchases
equipment, software and installation services from AvData, which AvData
integrates and makes operational. AvData records revenue when the network or an
individual site is accepted by the customer. For capacity and for network
operations and monitoring, customers pay monthly fees in advance, which are
recognized as service revenues as the services are provided. AvData's cost of
sales and services revenue includes the cost of system design, third party
equipment, software and installation, system integration, and third party
capacity (whether terrestrial or satellite).
RESULTS OF OPERATIONS
DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
Total sales and service revenue in 1998 was $30,183,000, an
increase of $16,653,000 (or 123.1%) as compared to total 1997 revenue of
$13,530,000. The increase in revenue in 1998 was primarily attributable to an
unusually large backlog from a single customer of approximately $19 million of
network equipment sales, installation and integration services at the beginning
of 1998, which was delivered during the year. The backlog had grown as a result
of delays in the customer's network roll-out stemming from delays by the
customer's other suppliers of significant infrastructure
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equipment and software, which interface with AvData-furnished equipment. Of that
backlog, AvData delivered approximately 93% and recognized approximately $17.7
million in 1998 as revenue. The significant increase in 1998 revenue was
partially offset by a reduction in revenues of approximately $1.1 million
resulting from the expiration in 1997 of a multi-year sales and marketing
arrangement with a major supplier. Although AvData's recurring revenues have
been increasing and AvData believes its recurring revenues will continue to
increase in the future, AvData's non-recurring revenues are expected to decline
in 1999 reflecting delivery of the backlog under the large customer contract in
1998.
Total cost of sales and service revenue in 1998 was $18,795,000, an
increase of $12,183,000 (or 184.3%) compared to total cost of sales in 1997 of
$6,612,000. This increase in cost of revenue was due primarily to the increase
in total revenues for the year resulting from the hardware sales to a single
customer, as discussed above. Cost of revenue as a percentage of revenue
increased in 1998 to 62.3% compared to 48.9% in 1997, also due principally to
the large sale to a single customer. Since a large portion of the sale consisted
of lower margin hardware, it changed AvData's product mix, caused overall costs
to increase and the resulting gross margins to decrease as a percentage of
revenue. The fact that there was no longer high gross margin fee revenue in 1997
from a major supplier for sales and marketing services, also caused a
significant reduction in AvData's 1998 margins. In addition, AvData suffered
significant, unexpected direct costs required to recover certain of its
nationwide networks following the catastrophic failure of the PanAmSat Galaxy IV
satellite in May 1998.
Total operations and engineering expenses were $2,752,000, an increase
of $623,000 (or 29.3%) as compared to the total operations and engineering
expenses in 1997 of $2,129,000. This expense consists primarily of salaries,
other payroll expenses and training. The increase in 1998 reflects the addition
of new employees in both operational and engineering positions to support the
revenue growth. Recruiting, compensation, and training expenses required to
attract and retain highly skilled technical talent rose as compared to prior
years due to the tight labor market for these professionals. Significant,
unexpected, indirect expenses associated with the Galaxy IV satellite failure
contributed to the increased expense in 1998. Nevertheless, operations and
engineering expenses declined as a percentage of revenue to 9.1% in 1998 from
15.7% in 1997, since the hardware portion of the large sale to a single customer
did not require a proportional increase in operations and engineering personnel.
AvData expects operating and engineering expenses to decline in 1999, but
increase as a percentage of revenues.
Sales and marketing expenses totaled $3,231,000 during 1998, an
increase of $912,000 (or 39.3%) as compared to $2,319,000 in 1997. Sales and
marketing expenses increased primarily due to growth in the number of employees
during 1998 which increased payroll and related expenses. AvData also increased
new service introductions and related marketing efforts in 1998. Further, as a
result of increased revenues, commission-related expenses increased as sales
increased, and more employees participated in sales based incentive programs.
Nevertheless, sales and marketing expenses declined as a percentage of revenue
to 10.7% in 1998 as compared to 17.1% in 1997, since sales and marketing
employees did not increase proportionately with revenues. AvData expects sales
and marketing expenses to decline in 1999, but increase as a percentage of
revenues, if AvData does not replace the large sale that occurred in 1998.
However, since AvData intends to build up its sales of new products in 1999,
AvData expects that the decline in expense will be comparatively small (and that
the increase as a percentage of revenue will be comparatively large) to the
charges in 1998.
General and administrative expenses increased to $2,787,000 in 1998,
an increase of $1,461,000 (or 110.2%) from the total expense of $1,326,000 in
1997. The increase in general and administrative expense primarily resulted from
the hiring and recruiting of new employees throughout the year, as well as
utilizing the services of temporary employees to aid in processing the
significantly increased transaction volume in 1998. The Galaxy IV failure
required unusually high temporary staffing levels operating 24 hours a day in
order to recover the affected nationwide networks as quickly as possible.
Consistent with the revenue growth discussed above, incentive
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compensation payments increased. Other increases in general expenses were also
related to the increase in the volume of business compared to 1997. General and
administrative expenses stayed fairly consistent as a percentage of revenue,
declining to 9.2% in 1998 from 9.8% in 1997. AvData expects general and
administrative expenses to decline in 1999.
Depreciation expense increased by $198,000 to $1,085,000 in 1998
compared to depreciation expense of $887,000 in 1997. The increase primarily
results from additional depreciation related to capital expenditures of
$1,341,000 in 1998 and $1,607,000 in 1997. These investments were required to
support the rapidly increasing size of networks operated by AvData.
Operating income increased $1,275,000 to $1,531,000 in 1998 from
$256,000 in 1997. As a percentage of revenues, operating income improved to 5.1%
of revenues from 1.9% of revenues in 1997. Operating margin increased primarily
because of the increased revenues from AvData's largest customer, as discussed
above.
Net interest income increased $19,000 or 12.5% to $171,000 in 1998
from $152,000 in 1997. The increase in interest income was primarily
attributable to increased cash balances generated from operations and invested
in cash equivalents.
DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996.
Total sales and service revenue in 1997 was $13,530,000, a decrease of
16.7% or $2,717,000 as compared to the 1996 total sales and service revenue of
$16,247,000. The decrease in total revenue in 1997 was due primarily to market
delays stemming from the failure of suppliers of other significant network
infrastructure and software to meet their delivery commitments to large AvData
customers, causing overall system roll-outs to be stalled. However, late in
1997, PageMart, AvData's largest customer, was able to procure alternative
infrastructure and eventually expedited the lagging delivery schedule, resulting
in significant orders for AvData which increased the equipment sales,
installation and recurring services backlog for AvData to more than $19 million
at year-end. Additionally, revenues from a sales and marketing agreement with a
major supplier decreased from $1.6 million in 1996 to $1.1 million in 1997, a
decline of approximately $500,000. This decrease in revenue was due to a
reduction in the sales and marketing support levels related to this agreement
from 1996 to 1997.
Total cost of sales in 1997 was $6,612,000, which was a 25.4% decrease
compared to total cost of sales for 1996 of $8,860,000. Cost of sales generally
decreased as a percentage of total revenue to 48.9% for 1997 from 54.5% for
1996, increasing AvData's gross margin percentages from 45.5% in 1996 to 51.1%
in 1997. This margin improvement resulted from the higher profitability of the
product mix despite the decreased revenue levels.
Total operations and engineering expenses were $2,129,000 and
$1,797,000 in 1997 and 1996, respectively. Operations and engineering expenses
increased $332,000 (or 18.5%) in 1997. Expenses increasing in 1997 include rent
expense and expenses that related to a large customer project. Although revenues
declined because of the lagging delivery schedule for the large customer, AvData
increased its personnel to support test and evaluation steps in the project that
were intended to help the customer get its other vendors back on schedule.
Sales and marketing expenses totaled $2,319,000 during 1997, a
decrease of $304,000 (or 11.6%) as compared to 1996. In 1997, AvData adopted a
narrower market focus and accordingly reduced both public relations expenses and
expenses relating to tradeshow activity. There was also a decrease in commission
expense related to the decrease in sales volume compared to the prior year.
General and administrative expenses decreased to $1,326,000 in 1997, a
reduction of $136,000 (or 9.3%) from the total expense of $1,462,000 in 1996.
General and administrative expenses decreased due to a reduction in
discretionary spending associated with the decreased
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revenue levels in 1997. Expenses that decreased from 1996 included incentive
based compensation, communications expense, total salaries and training.
Depreciation expense increased by $128,000 or 16.9% in 1997 to
$887,000 from $759,000 in 1996. This increase is largely due to the depreciation
of additional fixed assets purchased in 1997, as well as assets purchased late
in 1996 that were depreciated for a full year in 1997.
Operating income decreased $490,000 to $256,000 in 1997 from $746,000
in 1996. As a percentage of revenues, operating income decreased to 1.9% of
revenues from 4.6% of revenues in 1996, since in 1997 expenses were increased to
support the roll-out of the large scale network expected in late 1997 that did
not materialize until 1998.
Net interest income increased $4,000 or 2.7% to $152,000 in 1997
compared with $148,000 in 1996. The slight increase in interest income in 1997
was comparable to the interest earned in 1996, as there were no significant
changes in the amount of investments earning interest.
LIQUIDITY AND CAPITAL RESOURCES
AvData has historically had sufficient operating cash flow to cover
any increase in expenses necessary to grow AvData. However, AvData also
maintains a $750,000 bank line of credit secured by network equipment, computer
equipment and software at the prime rate with an initial maturity of one year
and renewable for one-year intervals upon maturity. As of December 31, 1998 and
1997, no amounts were outstanding on this line of credit.
1998 COMPARED TO 1997
In 1998, cash provided from operations was $1,504,000, compared to
cash provided from operations of $1,052,000 in 1997. The increase of $452,000 in
cash from operating activities was primarily the result of the increase in the
net income of $1,295,000, as well as changes in working capital. Cash used for
investing activities in 1998 was $1,341,000 compared to $1,607,000 in 1997. The
decrease in investing activities was due to a decrease in capital expenditures.
Capital expenditures were driven primarily by infrastructure systems
enhancements, leasehold improvements, and various other fixed assets
acquisitions. Cash provided from financing activities was $54,000 in 1998
compared to $297,000 in 1997. The decrease in the cash from financing activities
was principally the result of repayments of principal versus borrowings from
AvData's equipment note payable.
1997 COMPARED TO 1996
In 1997, cash provided from operations was $1,052,000, compared to
cash provided from operations of $1,874,000 in 1996. The decrease of $822,000 in
cash from operations was primarily the result of increased expenses without a
corresponding increase in revenue. Cash used in investing activities in 1997 was
$1,607,000 compared to $1,768,000 in 1996. The decrease was due to slightly less
capital expenditures in 1997 compared to 1996. Cash provided from financing
activities was $297,000 in 1997 compared to $126 in 1996. The increase in the
cash financing was principally the result of net proceeds from the issuance and
repurchase of common stock of $229,000, which resulted from stock option
exercises, as well as proceeds from a note payable of $140,000.
COMMITMENTS
Net capital expenditures were $1,341,000, $1,607,000, and $1,768,000
in 1998, 1997, and 1996, respectively. Historically, capital expenditures have
been, and future expenditures are anticipated to be, primarily to support
expansion of AvData's operations, infrastructure platforms, network management
systems and management information systems. AvData's capital expenditures for
the next several years are expected to be generally consistent with those of the
most
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recent years. See Note 6 of Notes to Financial Statements for additional
information on AvData's obligations and commitments.
AvData believes that funds generated from operations, together with
existing cash and potential borrowings under the credit facility, will be
sufficient to finance its current operations, planned capital expenditures, and
internal growth for at least the next several years.
FORWARD LOOKING STATEMENTS
Certain statements made in this prospectus and proxy statement, and
other written or oral statements made by or on behalf of AvData, may constitute
"forward looking statements" within the meaning of the federal securities laws.
When used in this prospectus, the words, "believes", "expects", "estimates", and
similar expressions are intended to identify forward looking statements.
Statements regarding future events and developments and AvData's future
performance, as well as expectations, beliefs, plans, estimates, or projections
relating to the future, are forward looking statements within the meaning of
these laws. Examples of such statements in this prospectus and proxy statement
include descriptions of AvData's plans with respect to developing new business
lines, plans to continue to change business mix, continuing growth and ability
to address year 2000 issues. All forward-looking statements are subject to
certain risks and uncertainties that could cause actual events to differ
materially from those projected. Such risks and uncertainties include, among
others, conditions affecting reliance on major clients and vendors; the ability
to successfully introduce and market a new product; the ability to attract and
retain key employees; the impact of competition; general economic conditions;
governmental regulation and the year 2000 issue. AvData's management believes
that these forward-looking statements are reasonable, however, you should not
place undue reliance on such statements. These statements are based on current
expectations and speak only as of the date of such statements. No obligation is
undertaken to update or revise publicly any forward looking statement, whether
as a result of future events, new information, or otherwise.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
AvData's market risk sensitive instruments do not subject AvData to
material market risk exposures.
INFLATION
AvData believes that inflation has not had a material effect on its
results of operations in recent years. AvData believes that its ability to
increase the prices charged for its services in future periods will depend
primarily on competitive pressures in the marketplace. There can be no assurance
that AvData's business will not be affected by inflation in the future.
YEAR 2000 ISSUES
AvData has reviewed and is addressing identified issues relating to
system readiness for the processing of date-sensitive information by its
computerized information systems. The year 2000 problem impacts computer
programs and hardware timers using two digits (rather than four) to define the
applicable year. As a result of addressing this issue, AvData has concluded that
all programs and timers that have time-sensitive functions will recognize four
digit dates prior to December 31, 1999 or have otherwise been converted and
tested to insure smooth operation through the year 2000 and beyond. As a result
AvData expects no miscalculations or system failures will occur before, during,
or after December 31, 1999. However, as stated below, AvData may incur problems
with year 2000 issues caused by year 2000 readiness failures of vendors,
suppliers or other third parties with whom AvData has material relationships.
AVDATA INFORMATION
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AvData has reviewed its information technology ("IT") and non-IT
computer systems and programs to determine which are not capable of recognizing
the year 2000 and to verify system readiness for the millennium date. The review
covers all of AvData's operations and is centrally managed. The review includes:
1. increasing employee awareness and communication of year 2000 issues;
2. inventorying hardware, software and data interfaces and confirming
year 2000 readiness of key vendors;
3. identifying mission-critical components for internal systems, vendor
relations and other third parties;
4. estimating costs for remediation;
5. estimating completion dates;
6. remediating any identified problems by correcting or replacing systems
or components;
7. testing and verifying systems;
8. implementing the remediation plan;
9. developing contingency plans; and,
10. training for contingency plans
AvData has completed more than 95% of the activities required
for the first three of these steps, more than 80% of the activities required for
the fourth and fifth steps and more than 75% of the activities required for the
sixth step. AvData is in the middle stages of performing the activities required
to complete the remaining steps and has begun to develop contingency plans to
handle its most reasonably likely worst case year 2000 scenarios.
AvData estimates that its year 2000 readiness costs will not exceed
$75,000. AvData generally expenses these costs as incurred. While certain costs
have been incurred, AvData has not incurred any material historical costs for
remediation. AvData does not expect these costs to have a material adverse
effect on its financial position, results of operations or cash flows.
AvData's estimate of its year 2000 readiness costs is a "forward-
looking statement" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Costs, results, performance
and effects of year 2000 activities described in those forward-looking
statements may differ materially from actual costs, results, performance and
effects in the future due to the interrelationship and interdependence of
AvData's computer systems and those of its vendors, material service providers,
customers and other third parties.
AvData has not yet fully identified its most reasonably likely worst
case year 2000 scenarios. AvData continues to contact its vendors, suppliers and
third parties, with which it has material relationships, regarding their state
of readiness. This activity is focused primarily on mission critical systems and
key business suppliers. Until AvData has received and analyzed substantial
responses from them it will have difficulty determining its worst case
scenarios.
AvData has begun to develop contingency plans to handle worst case
scenarios, to the extent they can be identified fully. AvData intends to
complete its contingency planning after completing its determination of worst
case scenarios. Completion of these activities depends upon
AVDATA INFORMATION
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the responses to the inquiries AvData has made of its major vendors, material
service providers and third parties with which it has material relationships.
AvData has also begun work on contingency plans for certain systems identified
as critical to its operations.
If AvData, its major vendors, its material service providers or its
customers fail to address year 2000 issues in a timely manner, such failure
could have a material adverse effect on AvData's business, results of operations
and financial condition. AvData depends on local exchange carriers and satellite
operators to provide most of its services. To the extent they fail to address
year 2000 issues which might interfere with their ability to fulfill their
obligations to AvData, such interference could have a material adverse effect on
AvData's future operations. If other telecommunications carriers are unable to
resolve year 2000 issues, it is likely that AvData will be affected to a similar
degree as others in the telecommunications industry.
LEGAL CONTINGENCIES
Various claims and proceedings of a nature considered normal
to its business are pending against AvData. Based on a review of current facts
and circumstances, management has provided for what it believes to be a
reasonable estimate of the exposure to loss associated with these matters. While
acknowledging the uncertainties' surrounding these matters, management is of the
opinion that resolution of these matters will not result in any significant
liability to AvData in relation to its financial position or liquidity.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 130 establishes standards for the reporting and presentation of
comprehensive income and its components. SFAS 131 establishes standards for
reporting information about operating segments. AvData is required to adopt both
SFAS 130 and SFAS 131 in 1999. The adoption of SFAS 130 and SFAS 131 will not
have a material effect on AvData's financial statements.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which defines the
type of costs related to such activities that should be capitalized versus
expensed as incurred.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" (SOP 98-5), which requires all costs
incurred in the start-up of a new business or business segment to be expensed as
incurred.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which establishes accounting and reporting standards for
derivatives and hedging activities.
AvData is required to adopt SOP 98-1, SOP 98-5 and SFAS 133 in 2000.
The adoption of these statements is not expected to have a material impact on
AvData's financial statements.
AVDATA INFORMATION
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF AVDATA
Holders of record of AvData common stock at the close of business on
_______ __, 1999 are entitled to notice of and to vote at the special meeting
and any adjournment of that meeting. As of April 15, 1999, there were 30,772,170
shares of AvData common stock issued and outstanding. Each share of AvData
common stock is entitled to one vote on each matter submitted for stockholder
action.
For purposes of calculating beneficial ownership, the number of shares
stated in the following tables include shares personally owned of record by that
person and shares that, under applicable regulations, are considered to be
otherwise beneficially owned by that person. Under these regulations, a
beneficial owner of a security includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise has
or shares voting power or dispositive power with respect to the security. Voting
power includes the power to vote or to direct the voting of the security.
Dispositive power includes the power to dispose or to direct the disposition of
the security. A person will be considered the beneficial owner of a security if
the person is legally entitled to share voting or dispositive power by reason of
joint ownership, trust or other contract or property right, or if the securities
are held by spouses and children over whom the person may have influence by
reason of relationship. A person also will be considered the beneficial owner of
a security if the person has a right to acquire beneficial ownership of the
security within 60 days.
The following table sets forth information concerning the number of shares
of AvData common stock held by each stockholder who is known to AvData's
management to be the beneficial owner of more than five percent of the
outstanding AvData common stock as of April 15, 1999. The percentages reflected
in the column "Percent of Class" in this table were computed based on a total of
30,772,170 shares of AvData common stock outstanding as of April 15, 1999.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP OF
NAME AND ADDRESS OF AVDATA COMMON PERCENT
BENEFICIAL OWNER OF COMMON STOCK STOCK OF CLASS
-------------------------------- ------------- --------
<S> <C> <C>
James H. Black, Jr. (1) 3,396,158 11.04%
55 Marietta Street
Atlanta, Georgia 30303
ITC Holding Company, Inc. 6,562,094 21.32%
1239 O.G. Skinner Drive
West Point, Georgia 31833
North State Telephone Co. 1,956,540 6.36%
Post Office Box 2326
High Point, North Carolina 27261
SCANA Capital Resources, Inc. 1,577,384 5.13%
1426 Main Street
Columbia, South Carolina 29201
South Atlantic Venture Fund Limited Partnership 5,556,149 18.06%
614 West Bay Street, Suite 200
Tampa, Florida 33606
</TABLE>
________
(1) Includes 1,350,000 shares owned jointly by Mr. Black and his
wife, over which he has shared voting and investment power.
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The following table sets forth information concerning the number of shares
of AvData common stock held as of April 15, 1999 by each of AvData's directors
and executive officers and all of AvData's directors and executive officers as a
group. The percentages reflected in the column "Percent of Class" in this table
were computed with reference to a total of 30,772,170 shares of AvData common
stock outstanding as of April 15, 1999 plus, where applicable, options to
purchase shares of AvData common stock that are currently exercisable or that
may be exercised within 60 days.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OF AVDATA COMMON STOCK
----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARED
SOLE VOTING VOTING AND TOTAL PERCENT OF
NAME OF AND DISPOSITIVE DISPOSITIVE BENEFICIAL OWNERSHIP
BENEFICIAL OWNER POWER POWER POWER CLASS
---------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
DIRECTORS
James H. Black, Jr. (1) 2,046,158 1,350,000 3,396,158 10.85%
Donald W. Burton (2) 0 5,556,149 5,556,149 17.76%
James D. Elliott 38,200 0 38,200 *
Warren B. French, Jr. 0 0 0 *
Campbell B. Lanier, III 305,810 277,757 583,567 1.86%
Kenneth F. Leddick 45,000 0 45,000 *
William T. Parr 192,545 0 192,545 *
William H. Scott, III 305,850 0 305,850 *
EXECUTIVE OFFICERS
Harold E. Cowan (3) 373,455 0 373,455 1.19%
Judith H. Drobinski (4) 255,221 0 255,221 *
James A. Miles (5) 262,500 0 262,500 *
Richard J. Santillo (6) 200,000 0 200,000 *
All directors and executive 4,024,739 7,183,906 11,208,645 35.82%
officers as a group
</TABLE>
___________________
* Indicates less than 1%.
______________
(1) Includes 1,350,000 shares owned jointly by Mr. Black and his wife, over
which he has shared voting and investment power.
(2) Mr. Burton, who serves as the managing general partner of South Atlantic
Venture Fund Limited Partnership, has either sole or shared voting and
investment power over the 5,556,149 shares owned by South Atlantic Venture
Fund Limited Partnership.
(3) Includes 28,750 shares represented by options which have been granted and
are exercisable.
(4) Includes 28,750 shares represented by options which have been granted and
are exercisable.
(5) All 262,500 shares are represented by options which have been granted and
are exercisable.
(6) All 200,000 shares are represented by options granted and shall be
exercisable at the effective time of the merger.
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AVDATA EXECUTIVE COMPENSATION
The following table shows information concerning the compensation paid to
James H. Black, Jr., Chairman and Chief Executive Officer of AvData, for
services rendered to AvData for the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
ANNUAL ANNUAL OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
------ ----- ------------ ------------
<S> <C> <C> <C>
$170,000 $139,108 /(1)/ $3,793/(2)/
</TABLE>
__________
(1) Amount does not exceed the lessor of $50,000 or 10% of total salary and
bonus.
(2) Consists of $3,545 of employer matching contributions to AvData's 401(k)
plan and the value of life insurance premiums of $248 paid for the benefit
of Mr. Black.
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ITC DELTACOM CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS
If the merger is completed, shares of AvData common stock will be converted
into shares of ITC DeltaCom common stock. As a result, AvData stockholders,
whose rights are currently governed by the Delaware General Corporation Law,
AvData's certificate of incorporation and bylaws, would become ITC DeltaCom
stockholders, whose rights are governed by the Delaware General Corporation Law,
ITC DeltaCom's certificate of incorporation and bylaws.
The following is a description of the capital stock of ITC DeltaCom,
including the ITC DeltaCom common stock to be issued in the merger, and a
summary of the material differences between the rights of AvData stockholders
and ITC DeltaCom stockholders. These differences arise from the differences
between ITC DeltaCom's certificate of incorporation and bylaws relative to
AvData's certificate of incorporation and bylaws. Although it is impractical to
compare all of the aspects in which the companies' governing instruments differ
with respect to stockholders' rights, the following discussion summarizes the
significant differences between them.
DESCRIPTION OF ITC DELTACOM CAPITAL STOCK
The following summary description of the capital stock of ITC DeltaCom is
based on the provisions of ITC DeltaCom's certificate of incorporation and
bylaws and the applicable provisions of the Delaware General Corporation Law.
For information on how to obtain copies of ITC DeltaCom's certificate of
incorporation and bylaws, see "Where You Can Find More Information."
AUTHORIZED AND OUTSTANDING CAPITAL STOCK OF ITC DELTACOM
Under ITC DeltaCom's certificate of incorporation, ITC DeltaCom has
authority to issue 90,000,000 shares of common stock, par value $.01 per share,
and 5,000,000 shares of preferred stock, par value $.01 per share, of which
1,750,000 shares have been designated as Series A Preferred Stock. As of March
15, 1999, 51,553,197 shares of ITC DeltaCom common stock and 1,480,771 shares of
ITC DeltaCom Series A Preferred Stock (and no other shares of preferred stock)
were issued and outstanding.
The rights of the holders of ITC DeltaCom common stock discussed below are
subject to such rights as ITC DeltaCom's board of directors may hereafter confer
on holders of ITC DeltaCom preferred stock that may be issued in the future.
Such rights may adversely affect the rights of holders of ITC DeltaCom common
stock.
ITC DELTACOM COMMON STOCK
Voting Rights. Each holder of ITC DeltaCom common stock is entitled to
attend all special and annual meetings of the stockholders of ITC DeltaCom and,
together with the holders of all other classes of stock entitled to attend and
vote at such meetings, to vote upon any matter or thing (including, without
limitation, the election of one or more directors) properly considered and acted
upon by the stockholders. Each holder of ITC DeltaCom common stock is entitled
to one vote per share with respect to all such matters.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of ITC DeltaCom, whether voluntary or involuntary, the holders of ITC
DeltaCom common stock and holders of any class or series of stock entitled to
participate therewith, will become entitled to participate equally on a per-
share basis in the distribution of any assets of ITC DeltaCom remaining after
ITC DeltaCom shall have paid, or provided for payment of, all debts and
liabilities of ITC
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DeltaCom and after ITC DeltaCom shall have paid, or set aside for payment, to
the holders of any class of stock having preference over the common stock in the
event of dissolution, liquidation or winding up the full preferential amounts
(if any) to which they are entitled. See "--Series A Preferred Stock."
Dividends. Subject to the rights, if any, of the holders of shares of ITC
DeltaCom preferred stock, the holders of ITC DeltaCom common stock and holders
of any class or series of stock entitled to participate therewith as to
dividends are entitled to receive dividends, when, as and if declared by the
board of directors, out of any assets legally available therefor. ITC DeltaCom
has never paid dividends and its ability to pay cash dividends is limited by the
terms of its credit facility and senior note indenture.
No holder of ITC DeltaCom common stock has any preemptive right to
subscribe for any of ITC DeltaCom's securities, nor does any holder of ITC
DeltaCom common stock have conversion rights. The rights, privileges,
preferences and priorities of holders of ITC DeltaCom common stock are subject
to, and may be adversely affected by, the rights of the holders of ITC DeltaCom
Series A Preferred Stock and shares of any series of preferred stock which ITC
DeltaCom may designate and issue in the future.
PREFERRED STOCK
The ITC DeltaCom certificate of incorporation authorizes the board, from
time to time and without further stockholder action, to provide for the issuance
of up to 5,000,000 shares of preferred stock in one or more series, of which
1,750,000 shares have been designated as Series A Preferred Stock, and to fix
the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date hereof, the board has not provided for the issuance
of any series of preferred stock other than the Series A Preferred Stock and
there are no agreements or understandings for the issuance of any such other
series of preferred stock. Because of its broad discretion with respect to the
creation and issuance of preferred stock without stockholder approval, the board
could adversely affect the voting power of the holders of the common stock and,
by issuing shares of preferred stock with certain voting, conversion and/or
redemption rights, could discourage any attempt to obtain control of ITC
DeltaCom.
SERIES A PREFERRED STOCK
ITC DeltaCom's board of directors has designated 1,750,000 shares of
preferred stock as series A Convertible Preferred Stock.
Conversion Rights. Holders of Series A Preferred Stock have the right, at
any time after March 14, 2002, to convert each share of Series A Preferred Stock
into one share of ITC DeltaCom common stock, subject to adjustment for stock
splits, stock dividends, recapitalizations and other specified events.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of ITC DeltaCom, whether voluntary or involuntary, holders of Series A
Preferred Stock will be entitled to receive a distribution of $7.40 per share,
plus any dividends declared and unpaid, prior to any payment or distribution of
assets to holders of ITC DeltaCom common stock. After such distribution has been
made, and after the holders of any other class or series of stock having
preference over the common stock have received the full preferential amounts to
which they are entitled, holders of ITC DeltaCom common stock will be entitled
to an equivalent distribution of $7.40 per share, plus any dividends declared
and unpaid, out of remaining assets of ITC DeltaCom. Holders of Series A
Preferred Stock and holders of the common stock and any other class or series of
stock entitled to participate with the common stock will be entitled to share
ratably in the distribution of any remaining assets of ITC DeltaCom, with
holders of Series A Preferred Stock entitled to receive an
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amount equal to the distribution made in respect of the number of shares of
common stock into which the Series A Preferred Stock is then convertible.
Dividend Rights. The holders of Series A Preferred Stock are entitled to
receive, when, as and if declared by ITC DeltaCom's board of directors out of
funds legally available therefor, dividends in an amount per share of Series A
Preferred Stock equal to the dividends payable on the number of shares of common
stock into which one share of Series A Preferred Stock is then convertible. So
long as any shares of Series A Preferred Stock are outstanding, no dividends may
be declared or paid on ITC DeltaCom common stock or any other class or series of
capital stock ranking on a parity with the Series A Preferred Stock as to
dividends unless dividends are also paid on the Series A Preferred Stock in an
amount per share equal to the dividends payable on the number of shares of
ITC/\DeltaCom common stock into which one share of Series A Preferred Stock is
convertible.
No Redemption Rights. The Series A Preferred Stock is not subject to
mandatory or optional redemption.
Voting Rights. Except as set forth in the following sentence, holders of
Series A Preferred Stock have no voting rights. The affirmative vote of holders
of at least two-thirds of the shares of Series A Preferred Stock outstanding is
necessary for (1) the authorization or issuance of any class of stock ranking
prior to the Series A Preferred Stock as to dividends or the distribution of
assets upon dissolution, liquidation or winding up of ITC DeltaCom, (2) an
increase in the authorized or issued amount of Series A Preferred Stock or (3)
the amendment, alteration or repeal, whether by merger, consolidation or
otherwise, of any provision of ITC DeltaCom's certificate of incorporation that
would affect any right, preference or voting power of the Series A Preferred
Stock.
CERTAIN CHARTER AND STATUTORY PROVISIONS
Classified Board. ITC DeltaCom's certificate of incorporation provides for the
division of its board of directors into three classes of directors, each serving
staggered, three-year terms. The certificate of incorporation further provides
that any alteration, amendment or repeal of certain sections of the certificate
relating to the election and classification of the board of directors,
indemnification and the vote requirements for such amendments to the certificate
requires the approval of the holders of at least two-thirds of the shares
entitled to vote thereon. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of ITC DeltaCom.
ITC DeltaCom's bylaws provide that any stockholder wishing to nominate
persons for election as directors at a meeting of stockholders must deliver to
the Secretary of ITC DeltaCom at ITC DeltaCom's principal executive office a
written notice of the stockholder's intention to make such a nomination. The
stockholder must furnish the notice not less that 60 days prior to the meeting
date (or, if ITC DeltaCom provides less than 75 days' notice or prior public
disclosure of the meeting date, not later than the close of business on the
fifteenth day following the date ITC DeltaCom mails the notice or provides
public disclosure). The stockholder's notice is required to include information
about each person whom the stockholder proposes to nominate for election or re-
election as a director and the stockholder giving the notice.
Certain Statutory Provisions. ITC DeltaCom is subject to the provisions of
Section 203 of the Delaware General Corporation Law. In general, this statute
prohibits a publicly held Delaware corporation such as ITC DeltaCom from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder, unless
. prior to such date, the corporation's board of directors approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder,
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. upon consummation of the transaction that resulted in such person
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding, for purposes of determining
the number of shares outstanding, shares owned by certain directors or
certain employee stock plans, or
. on or after the date the stockholder became an interested stockholder,
the business combination is approved by the corporation's board of
directors and authorized by the affirmative vote, and not by written
consent, of at least two-thirds of the outstanding voting stock of the
corporation excluding that stock owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person, other than the corporation and any direct or indirect
wholly-owned subsidiary of the corporation, who together with affiliates and
associates, owns or, as an affiliate or associate, within three years prior, did
own 15% or more of the corporation's outstanding voting stock.
ITC DeltaCom's certificate of incorporation empowers ITC DeltaCom's board
of directors to redeem any of ITC DeltaCom's outstanding capital stock at a
price determined by ITC DeltaCom's board of directors, which price will be at
least equal to the lesser of
(1) fair market value, as determined in accordance with ITC DeltaCom's
certificate of incorporation, or
(2) in the case of a "Disqualified Holder," such holder's purchase price,
if the stock was purchased within one year of such redemption,
to the extent necessary to prevent the loss or secure the reinstatement of any
license, operating authority or franchise from any governmental agency. A
"Disqualified Holder" is any holder of shares of stock of ITC DeltaCom whose
holding of such stock may result in the loss of, or failure to secure the
reinstatement of, any license or franchise from any governmental agency held by
ITC DeltaCom or any of its subsidiaries to conduct any portion of the business
of ITC DeltaCom or any of its subsidiaries. Under the Telecommunications Act of
1996, non-U.S. citizens or their representatives, foreign governments or their
representatives, or corporations organized under the laws of a foreign country
may not own, in the aggregate, more than 20% of a common carrier licensee or
more than 25% of the parent of a common carrier licensee if the FCC determines
that the public interest would be served by prohibiting such ownership.
Additionally, the FCC's rules may under some conditions limit the size of
investments by foreign telecommunications carriers in U.S. international
carriers.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company will serve as transfer agent and
registrar for the ITC DeltaCom common stock.
COMPARISON OF ITC DELTACOM COMMON STOCK AND AVDATA COMMON STOCK
The rights of AvData stockholders are currently governed by the Delaware
General Corporation Law, AvData's certificate of incorporation and AvData's
bylaws. In accordance with the merger agreement, at the effective time of the
merger each issued and outstanding share of AvData common stock will be
converted into the right
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to receive shares of ITC DeltaCom common stock based on a formula specified in
the merger agreement; provided, however, that shares of stock held by
stockholders who have properly exercised their rights to appraisal will be
converted into the right to receive cash in the amount of the appraised value
pursuant to Delaware General Corporate Law. Accordingly, upon consummation of
the merger, the rights of AvData stockholders who become stockholders of ITC
DeltaCom will be governed by the Delaware General Corporation Law and ITC
DeltaCom's certificate of incorporation and bylaws. The following are summaries
of the material differences between the rights of AvData stockholders and the
rights of ITC DeltaCom stockholders. For additional information, see "Where You
Can Find More Information."
AUTHORIZED CAPITAL
AvData. Under AvData's certificate of incorporation, AvData has authority
to issue 45,000,000 shares of common stock, par value of $.01 per share,
10,000,000 shares of preferred stock, par value of $.01 per share, and
30,000,000 shares of serial preferred stock, par value of $.01 per share, of
which 22,000,000 are designated as Series A. As of April 15, 1999, 30,772,170
shares of AvData common stock were issued and outstanding, 978,162 shares were
held in the treasury of AvData, and 1,936,500 shares were reserved for issuance
upon the exercise of outstanding options to purchase shares of AvData common
stock. As of April 15, 1999, no shares of either AvData's preferred stock or
serial preferred stock were issued and outstanding, held in the treasury of
AvData, or reserved for issuance upon the exercise of outstanding options.
BOARD OF DIRECTORS
AvData. Under AvData's bylaws, the number of directors of AvData will be no
less than one and no more than 21, and will be determined from time to time by
resolution adopted by AvData's board of directors. The current number of AvData
directors is eight. AvData's directors are elected for one-year terms by a
plurality vote at the annual stockholders meeting by the holders of shares
present at the meeting or represented by proxy and entitled to vote in the
election. A quorum at any meeting of AvData's board of directors consists of a
majority of the total number of directors, and a majority of the directors
present at any meeting at which a quorum is present is required to approve
AvData board of directors action.
ITC DeltaCom. Under ITC DeltaCom's bylaws, the number of ITC DeltaCom
directors will be no less than five and no more than 15. The current number of
ITC DeltaCom directors is nine. ITC DeltaCom's board of directors is divided
into three classes as nearly equal in number as possible, and the ITC DeltaCom
directors are elected for three-year terms by a plurality of the voting rights
represented by the shares present in person or represented by proxy at the
annual stockholders meeting and entitled to vote in the election. If the holders
of any class or series of ITC DeltaCom preferred stock have the right, under the
applicable certificate of designations, to vote separately as a class or series
to elect directors, then the directors so elected will not be divided into
classes and election and other terms of such directorships will be governed by
the certificate of designations. Currently, no holders of ITC DeltaCom preferred
stock have any such right. A quorum at any meeting of ITC DeltaCom's board of
directors consists of a majority of the total number of directors, and a
majority of the directors present at any meeting at which a quorum is present is
required to approve ITC DeltaCom board of directors action.
COMMITTEES OF THE BOARD OF DIRECTORS
AvData. AvData's bylaws provide that AvData's board of directors may
appoint committees, by resolution adopted by a majority of the entire AvData
board, to exercise the authority delegated to them.
ITC DeltaCom. Under ITC DeltaCom's bylaws, ITC DeltaCom's board of
directors may designate one or more committees, which must consist of ITC
DeltaCom directors.
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NEWLY CREATED DIRECTORSHIPS AND VACANCIES
AvData. Under AvData's bylaws, newly created directorships resulting from
an increase in the number of directors and vacancies may be filled by a majority
of the votes of directors then in office, whether or not a quorum. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office constitute less than a majority of the whole board immediately
prior to any such increase, the Court of Chancery of the State of Delaware may,
upon application of any stockholder or stockholders holding at least ten percent
of the total number of the then outstanding shares having the right to vote for
such directors, order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office, in accordance with the Delaware General Corporation Law. If one or
more directors resigns from the board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, have the
power to fill such vacancies, and their vote will take effect when such
resignations become effective.
ITC DeltaCom. Under ITC DeltaCom's certificate of incorporation, vacancies
and newly created directorships resulting from an increase in the authorized
number of ITC DeltaCom directors elected by all of the holders of ITC DeltaCom
common stock may be filled by a majority of the ITC DeltaCom directors then in
office, even if less than a quorum, or by a sole remaining director. If one or
more directors resigns from the board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, have the
power to fill such vacancies, and their vote will take effect when such
resignations become effective. When the number of directors is changed, any
newly created or eliminated directorship will be apportioned among the classes
of directors so as to make all classes as nearly equal in number as possible.
Notwithstanding the foregoing, if holders of any class or series of stock are
entitled to vote separately as a class or series to elect directors, then
vacancies and newly created directorships elected by such class or series may
only be filled by a majority of the directors elected by such class or series in
office.
REMOVAL OF DIRECTORS
AvData. Neither AvData's certificate of incorporation nor its bylaws
includes a provision setting forth the procedure for the removal of directors.
Under the Delaware General Corporation Law, any director or the entire board of
directors of a corporation without a classified board, such as AvData, may be
removed by the holders of a majority of shares then entitled to vote at an
election of directors with or without cause.
ITC DeltaCom. Under ITC DeltaCom's certificate of incorporation, any
director or directors may be removed by the holders of 66-2/3% of the total
number of shares then entitled to vote at an election of directors, but only for
cause, except as otherwise provided by a certificate of designations that
authorizes the holders of a series of ITC DeltaCom preferred stock to vote
separately by series to elect directors.
OFFICERS
AvData. Under AvData's bylaws, AvData's principal officers consist of a
Chairman, a President, a Treasurer, a Secretary and such other officers as the
board of directors may appoint. Any number of offices may be held by the same
person, except that neither the Chairman nor the President may also be the
Secretary. AvData's board of directors may remove any officer with or without
cause, by the vote of a majority of the entire AvData board of directors.
ITC DeltaCom. Under ITC DeltaCom's bylaws, ITC DeltaCom's officers consist
of a President, a Secretary and a Treasurer, and other officers and assistant
officers as may be elected or appointed by ITC DeltaCom's board of directors (or
an officer authorized by the board of directors).
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<PAGE>
Any number of offices may be held by the same person, except that the President
may not also be the Secretary. ITC DeltaCom's board of directors may remove any
officer, with or without cause, by the affirmative vote of a majority of ITC
DeltaCom's board of directors.
SPECIAL MEETINGS OF STOCKHOLDERS
AvData. Under AvData's bylaws, a special meeting of AvData's stockholders
may be called at any time by the board of directors or the President, and must
be called by the President or the Secretary upon the request in writing of
AvData stockholders holding of record a majority of the outstanding shares of
AvData entitled to vote at such meeting, which request must include a statement
of the purpose or purposes of the proposed meeting.
ITC DeltaCom. Under ITC DeltaCom's certificate of incorporation and bylaws,
a special meeting of ITC DeltaCom's stockholders may be called by a majority of
the directors in office, although less than a quorum, or the Chairperson (if
such office exists).
QUORUM AT STOCKHOLDER MEETINGS
AvData. Under AvData's bylaws, the holders of record of a majority of stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, constitute a quorum at each stockholder meeting.
ITC DeltaCom. Under ITC DeltaCom's bylaws, the holders of a majority of the
voting rights represented by the shares issued and outstanding and entitled to
vote at the meeting, and who are present in person or represented by proxy, will
constitute a quorum at all meetings of the stockholders for the transaction of
business. Where a separate vote by a class or classes is required, a majority of
the outstanding shares of such class or classes, present in person or
represented by proxy, will constitute a quorum entitled to take action with
respect to that vote on that matter. The holders of a majority of the voting
rights represented by the shares represented at a meeting, whether or not a
quorum is present, may adjourn such meeting from time to time.
STOCKHOLDER ACTION BY WRITTEN CONSENT
AvData. Under AvData's bylaws, any action required or permitted to be taken
at any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if written consents are signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to take such action at a meeting at which all shares
entitled to vote were present and voted.
ITC DeltaCom. Under ITC DeltaCom's certificate of incorporation and bylaws,
any action required or permitted to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if written consents are signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to take such
action and the written consents are delivered to ITC DeltaCom within 60 days of
the delivery to ITC DeltaCom of the earliest consent.
ADVANCE NOTICE OF STOCKHOLDER-PROPOSED BUSINESS AT ANNUAL MEETINGS
Neither ITC DeltaCom's certificate of incorporation or bylaws, nor AvData's
certificate of incorporation or bylaws, includes a provision which requires that
advance notice be given to ITC DeltaCom or AvData of stockholder-proposed
business to be conducted at annual meetings.
89
<PAGE>
AMENDMENT OF GOVERNING DOCUMENTS
AvData. AvData may amend, alter, change or repeal any provision of AvData's
certificate of incorporation as permitted by the Delaware General Corporation
Law. Under the Delaware General Corporation Law, an amendment to a corporation's
certificate of incorporation requires the recommendation of a corporation's
board of directors, the approval of a majority of all shares entitled to vote
thereon, voting together as a single class, and the approval of a majority of
the outstanding stock of each class entitled to vote separately thereon unless a
higher vote is required in the corporation's certificate of incorporation. Under
the Delaware General Corporation Law, the AvData stockholders have the power to
adopt, amend or repeal AvData's bylaws or to adopt new bylaws.
ITC DeltaCom. ITC DeltaCom may amend or repeal any provision of its
certificate of incorporation as permitted by the Delaware General Corporation
Law and ITC DeltaCom's certificate of incorporation, except as noted below.
Under the Delaware General Corporation Law, an amendment to a corporation's
certificate of incorporation requires the recommendation of a corporation's
board of directors, the approval of a majority of all shares entitled to vote in
the election of directors, voting together as a single class, and the approval
of a majority of the outstanding stock of each class entitled to vote separately
thereon unless a higher vote is required in the corporation's certificate of
incorporation. Under ITC DeltaCom's certificate of incorporation, the
affirmative vote of at least two-thirds of the voting rights represented by the
shares entitled to vote in the election of directors, voting together as a
single class, is required to amend or repeal Section 5 (the board of directors),
Section 6 (actions by stockholders), and Section 7 (amendment of certificate of
incorporation) of ITC DeltaCom's certificate of incorporation.
Under ITC DeltaCom's certificate of incorporation, ITC DeltaCom's board of
directors has the power to adopt, alter, amend and repeal ITC DeltaCom's bylaws
in accordance with the Delaware General Corporation Law. Also under ITC
DeltaCom's certificate of incorporation, the affirmative vote of at least two-
thirds of the voting rights represented by the shares entitled to vote in the
election of directors, voting together as a single class, is required for the
stockholders to amend or repeal ITC DeltaCom's bylaws.
BUSINESS COMBINATION WITH AN INTERESTED STOCKHOLDER
AvData and ITC DeltaCom are subject to the provisions of Section 203 of the
Delaware General Corporation Law as generally described above under "--
Description of ITC DeltaCom Capital Stock--Certain Charter and Statutory
Provisions."
90
<PAGE>
OTHER MATTERS
LEGAL MATTERS
The validity of the ITC DeltaCom common stock offered hereby and certain
federal income tax consequences in connection with the merger will be passed
upon by Hogan & Hartson L.L.P., Washington, D.C. Hogan & Hartson L.L.P. has
provided legal services to Campbell B. Lanier, III, Chairman of ITC DeltaCom.
Anthony S. Harrington, a partner of Hogan & Hartson L.L.P., beneficially owns
118,000 shares of ITC DeltaCom common stock and 224,690 shares of AvData common
stock.
The federal income tax consequences described in this prospectus and proxy
statement are the subject of an opinion issued by Hogan & Hartson L.L.P.
EXPERTS
The consolidated balance sheet of ITC DeltaCom as of December 31, 1998 and
1997, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998 and the
related schedule incorporated by reference in this registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto and is included herein in
reliance upon the authority of said firm as experts in giving said reports.
The balance sheet of AvData Systems, Inc. as of December 31, 1998 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998 included in
this registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report with respect thereto
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
OTHER MATTERS
As of the date of this prospectus and proxy statement, AvData's board of
directors knows of no matter that will be presented for consideration at the
special meeting other than as described in this prospectus and proxy statement.
If any other matters come before the special meeting or any adjournments or
postponements thereof and are voted upon, the enclosed proxies will confer
discretionary authority on the individuals named as proxies therein to vote the
shares represented by such proxies as to any such matters. The individuals named
as proxies intend to vote or not to vote in accordance with the recommendation
of the management of AvData.
WHERE YOU CAN FIND MORE INFORMATION
ITC DeltaCom has filed the registration statement of which this prospectus
and proxy statement forms a part. The registration statement registers the
distribution to AvData stockholders of the shares of ITC DeltaCom common stock
to be issued in connection with the merger. The registration statement,
including the attached exhibits and schedules, contain additional relevant
information about ITC DeltaCom common stock. The rules and regulations of the
SEC allows ITC DeltaCom to omit certain information included in the registration
statement from this prospectus and proxy statement.
91
<PAGE>
In addition, ITC DeltaCom files reports, proxy statements and other
information with the SEC under the Securities Exchange Act. You may read and
copy any of this information at the following locations of the SEC:
<TABLE>
<CAPTION>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet Web site that contains reports, proxy
statements and other information regarding issuers, like ITC DeltaCom, that file
electronically with the SEC. The address of that site is http://www.sec.gov. The
SEC file number for ITC DeltaCom's documents filed under the Securities Exchange
Act is 0-23252.
The SEC allows ITC DeltaCom to disclose important information to you by
referring you to another document filed separately with the SEC. This
information is considered to be a part of this prospectus and proxy statement,
except for any such information that is superseded by information included
directly in this document.
The documents listed below that ITC DeltaCom has previously filed or will
file with the SEC are considered to be a part of this prospectus and proxy
statement. They contain important information about ITC DeltaCom and its
financial condition.
. ITC DeltaCom's Annual Report on Form 10-K for its fiscal year ended
December 31, 1998, filed on March 25, 1999, as amended by Form 10-K/A,
filed on April 30, 1999;
. ITC DeltaCom's Registration Statement on Form S-3 filed with the SEC
on April 2, 1999, as amended; and
. All documents filed with the SEC by ITC DeltaCom under Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act after the date of
this prospectus and proxy statement and prior to the date of the
special meeting are considered to be a part of this prospectus and
proxy statement, effective the date such documents are filed
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or from ITC DeltaCom, by
requesting them in writing or by telephone at the following address:
ITC DeltaCom, Inc.
1791 O.G. Skinner Dr
West Point, Georgia 31833
Attn: Investor Relations
Telephone (706) 385-8000
These documents are available from ITC DeltaCom without charge, excluding
any exhibits to them unless the exhibit is specifically listed as an exhinit to
the registration statement of which this prospectus and proxy statement forms a
part. If you would like to request documents, please do so by _______, 1999 to
receive them before the special meeting of AvData's stockholders. If you request
any documents from ITC DeltaCom, ITC DeltaCom will mail them to you by first
class mail,
92
<PAGE>
or another equally prompt means, within two business days after ITC DeltaCom
receives your request.
This document is a prospectus of ITC DeltaCom and a proxy statement of
AvData. ITC DeltaCom has supplied all information contained in, or considered a
part of, this prospectus and proxy statement relating to ITC DeltaCom, and
AvData has supplied all such information relating to AvData.
Neither ITC DeltaCom nor AvData has authorized anyone to give any
information or make any representation about the merger or ITC DeltaCom or
AvData that is different from, or in addition to, that contained in this
prospectus and proxy statement or in any of the materials that ITC DeltaCom has
incorporated into this document. Therefore, if anyone does give you information
of this sort, you should not rely on it. The information contained in this
document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AVDATA SYSTEMS, INC. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Report of Independent Public Accountants...................................................................... F-1
Balance Sheets................................................................................................ F-2
Statements of Operations...................................................................................... F-3
Statements of Changes in Stockholders' Equity................................................................. F-4
Statements of Cash Flows...................................................................................... F-5
Notes to Financial Statements................................................................................. F-6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
AvData Systems, Inc.:
We have audited the accompanying balance sheets of AVDATA SYSTEMS, INC. (a
Delaware corporation) as of December 31, 1998 and 1997 and the related
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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 AvData Systems, Inc. as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
March 12, 1999
F-1
<PAGE>
AVDATA SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ----------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,505,172 $ 3,287,593
Accounts receivable, net of allowance for doubtful
accounts of $236,907 and $80,000 in 1998 and
1997, respectively 4,118,401 2,901,961
Inventory (Note 2) 1,448,336 745,921
Other current assets 152,639 130,181
------------ ------------
Total current assets 9,224,548 7,065,656
------------ ------------
PLANT AND EQUIPMENT (NOTE 2):
Network and related equipment 8,403,933 7,360,276
Office furniture and equipment 502,184 469,385
Computer equipment 945,410 691,711
Leasehold improvements 451,702 445,282
------------ ------------
10,303,229 8,966,654
Less accumulated depreciation (5,674,612) (4,593,185)
------------ ------------
Plant and equipment, net 4,628,617 4,373,469
------------ ------------
OTHER ASSETS:
Deferred income taxes (Note 5) 489,000 89,000
Other noncurrent assets 1,000 1,000
------------ ------------
Total other assets 490,000 90,000
------------ ------------
Total assets $14,343,165 $11,529,125
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------------ ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 3,580,675 $ 1,686,583
Deferred revenues 1,253,536 1,942,014
Income tax payable (Note 5) 359,012 89,000
Note payable--current portion 60,075 60,075
------------ ------------
Total current liabilities 5,253,298 3,777,672
------------ ------------
LONG-TERM LIABILITIES:
Deferred revenues 911,306 1,329,548
Note payable--long-term portion 25,349 80,123
------------ ------------
Total long-term liabilities 936,655 1,409,671
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 30,000,000
shares authorized, 22,000,000 shares designated
as Series A, 0 shares issued and outstanding in
1998 and 1997; preference in liquidation of $0
in 1998 and 1997 0 0
Common stock, $.01 par value; 45,000,000 shares
authorized, 31,554,332 and 28,699,643 shares
issued and outstanding at December 31, 1998
and 1997, respectively 315,543 286,996
Additional paid-in capital 8,205,576 7,900,598
Treasury stock, at cost, 914,830 and 197,209
shares at December 31, 1998 and 1997, (165,181) (93,377)
respectively
Notes receivable from officers and employees (225,111) (72,062)
Retained earnings (accumulated deficit) 22,385 (1,680,373)
------------ ------------
Total stockholders' equity 8,153,212 6,341,782
------------ ------------
Total liabilities and stockholders' equity $14,343,165 $11,529,125
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
AVDATA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
SALES AND SERVICE REVENUE $30,182,711 $13,529,639 $16,247,438
COST OF SALES AND SERVICE REVENUE
18,795,435 6,612,267 8,859,881
----------- ----------- -----------
Gross margin 11,387,276 6,917,372 7,387,557
----------- ----------- -----------
OPERATING EXPENSES:
Operations and engineering 2,752,167 2,129,230 1,797,373
Sales and marketing 3,231,050 2,319,025 2,622,972
General and administrative 2,787,306 1,325,614 1,462,074
Depreciation 1,085,381 887,452 759,498
----------- ----------- -----------
Total operating expenses 9,855,904 6,661,321 6,641,917
----------- ----------- -----------
OPERATING INCOME 1,531,372 256,051 745,640
INTEREST INCOME, NET 171,386 151,824 148,357
----------- ----------- -----------
NET INCOME $ 1,702,758 $ 407,875 $ 893,997
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
AVDATA SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN TREASURY STOCK
------------------------ ----------------------- -------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT
------------ ---------- ----------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 20,005,000 $200,050 5,851,643 $ 58,516 $7,607,267 88,393 $ (884)
Shares issued related to stock option
exercises 0 0 75,500 755 6,871 0 0
Purchase of treasury stock 0 0 0 0 0 8,824 (7,500)
Net income 0 0 0 0 0 0 0
---------- -------- ---------- --------- ---------- ------- ---------
BALANCE, DECEMBER 31, 1996 20,005,000 200,050 5,927,143 59,271 7,614,138 97,217 (8,384)
Preferred stock converted to common
stock (20,005,000) (200,050) 20,005,000 200,050 0 0 0
Shares issued related to stock option
exercises 0 0 2,767,500 27,675 286,460 0 0
Purchase of treasury stock 0 0 0 0 0 99,992 (84,993)
Net income 0 0 0 0 0 0 0
Notes receivable from officers and
employees, net 0 0 0 0 0 0 0
---------- -------- ---------- --------- ---------- ------- ---------
BALANCE, DECEMBER 31, 1997 0 0 28,699,643 286,996 7,900,598 197,209 (93,377)
Shares issued related to stock option
exercises 0 0 2,854,689 28,547 304,978 0 0
Purchase of treasury stock 0 0 0 0 0 717,621 (71,804)
Net income 0 0 0 0 0 0 0
Notes receivable from officers and
employees, net 0 0 0 0 0 0 0
---------- -------- ---------- --------- ---------- ------- ---------
BALANCE, DECEMBER 31, 1998 0 $ 0 31,554,332 $315,543 $8,205,576 914,830 $(165,181)
========== ======== ========== ========= ========== ======= =========
<CAPTION>
NOTES RETAINED
RECEIVABLE EARNINGS TOTAL
FROM (ACCUMULATED STOCKHOLDERS'
OFFICERS DEFICIT) EQUITY
---------- ----------- ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 0 $(2,982,245) $4,882,704
Shares issued related to stock option
exercises 0 0 7,626
Purchase of treasury stock 0 0 (7,500)
Net income 0 893,997 893,997
---------- ----------- ------------
BALANCE, DECEMBER 31, 1996 0 (2,088,248) 5,776,827
Preferred stock converted to common
stock 0 0 0
Shares issued related to stock option
exercises 0 0 314,135
Purchase of treasury stock 0 0 (84,993)
Net income 0 407,875 407,875
Notes receivable from officers and
employees, net (72,062) 0 (72,062)
---------- ----------- ------------
BALANCE, DECEMBER 31, 1997 (72,062) (1,680,373) 6,341,782
Shares issued related to stock option
exercises 0 0 333,525
Purchase of treasury stock 0 0 (71,804)
Net income 0 1,702,758 1,702,758
Notes receivable from officers and
employees, net (153,049) 0 (153,049)
---------- ----------- ------------
BALANCE, DECEMBER 31, 1998 $ (225,111) $ 22,385 $8,153,212
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
AVDATA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,702,758 $ 407,875 $ 893,997
------------- ----------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,085,381 887,452 759,498
Changes in assets and liabilities:
Accounts receivable, net (1,216,440) 513,054 (2,265,221)
Inventory (702,415) 182,110 (323,252)
Other current and noncurrent assets (422,458) (136,828) 115,980
Accounts payable, income taxes payable, and
accrued liabilities 2,164,104 (2,324,964) 3,112,683
Deferred revenues (1,106,720) 1,522,891 (419,205)
------------- ----------- ------------
Total adjustments (198,548) 643,715 980,483
------------- ----------- ------------
Net cash provided by operating activities 1,504,210 1,051,590 1,874,480
------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (1,340,529) (1,606,602) (1,768,356)
------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) proceeds from note payable (54,774) 140,198 0
Proceeds from issuance of common stock 333,525 314,135 7,626
Notes receivable from officers and employees, net (153,049) (72,062) 0
Purchase of treasury stock (71,804) (84,993) (7,500)
------------- ----------- ------------
Net cash provided by financing activities 53,898 297,278 126
------------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 217,579 (257,734) 106,250
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,287,593 3,545,327 3,439,077
------------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $3,505,172 $3,287,593 $3,545,327
============= =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AVDATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. GENERAL ORGANIZATION AND BUSINESS
AvData Systems, Inc. (the "Company") was incorporated on May 20, 1988 in
the state of Delaware. The Company provides network solutions for
corporate users and network infrastructure for wireless system operators.
The Company designs, integrates, manages, and operates data communication
networks using satellite and terrestrial technology. The Company is
headquartered in Atlanta, Georgia, and markets its services and products
to corporate customers located primarily in the southeastern United States
and to wireless operators nationwide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
disclosures of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period.
Actual results could differ from those estimates.
PLANT AND EQUIPMENT
Plant and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives for financial
reporting purposes, as follows:
Network and related equipment Three to ten years
Office furniture and equipment Five years
Computer equipment Five years
Leasehold improvements Five to seven years
Maintenance and repairs are charged to expense as incurred.
INCOME TAXES
Deferred income taxes are determined in accordance with Statement of
Financial Accounting Standards ("SFAS") 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.
F-6
<PAGE>
INVENTORY
Inventory consists primarily of data communications equipment held for
resale and is valued at the lower of first-in, first-out cost or market,
based on estimated realizable value. Work-in-process cost includes
component equipment and third-party installation costs.
Inventory balances at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Data communications equipment $1,035,078 $ 443,499
Work-in-process 413,258 302,422
---------- -----------
Total $1,448,336 $ 745,921
========== ===========
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments to be cash equivalents.
Temporary cash investments are securities with original maturities of 90
days or less.
REVENUE RECOGNITION
The Company earns revenue by selling and integrating data communications
equipment and by providing data communications services. The Company
recognizes revenue and the related costs on equipment sales and
integration upon acceptance by the customer. Service revenues and related
direct costs, consisting primarily of maintenance and bandwidth expenses,
are recognized as the services are provided.
In 1995, the Company entered into a long-term contract with one of its
customers for which it records revenue upon acceptance by the customer.
The Company has recorded $0 and $585,378 as accrued costs on the long-term
contract at December 31, 1998 and 1997, respectively, in the accompanying
balance sheets as deferred revenue. These amounts reflect estimated
expenses not yet incurred related to certain components of the contract.
This contract was terminated. Other amounts of deferred revenue consist
primarily of prepayments of services to be provided.
PRESENTATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
LONG-LIVED ASSETS
In 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indications of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. The adoption of SFAS No. 121 had no impact on the
Company's financial position or results of operations.
F-7
<PAGE>
3. PREFERRED STOCK
On January 1, 1997, all Series A preferred stock automatically converted
into fully paid and noncumulative shares of common stock of the Company at
the rate of one share of common stock for each share of preferred stock.
Accordingly, no Series A preferred stock was outstanding at December 31,
1998 and 1997.
If Series A preferred stock had been issued, the Series A preferred
stockholders would have been entitled to receive, when and as declared by
the board of directors, noncumulative dividends in an amount equal to
$.0034 per share per year in preference to any dividends on the
outstanding shares of common stock. Dividends are payable only if and when
declared by the board of directors. In the event of any dissolution,
liquidation, or winding down of the Company, Series A preferred
stockholders would be entitled to $.10 per share in liquidation
preferences before any distributions to common stockholders.
4. STOCK OPTIONS
In 1996, the board of directors and stockholders approved the amended and
restated stock option plan (the "1988 Option Plan"), which provides for
the issuance of up to 8,500,000 shares of common stock. Although options
granted under the 1988 Option Plan generally are intended to qualify as
incentive stock options, nonqualified options have also been granted under
the 1988 Option Plan. Total options outstanding under the 1988 Option Plan
were 1,026,000, 4,367,500, and 7,192,000 at December 31, 1998, 1997, and
1996, respectively. Options qualified as incentive stock options are
exercisable at a price equal to 100% of the fair market value at the date
of grant as determined by the board of directors. Options granted
generally become exercisable 50% after two years and an additional 25% per
annum for the next two years and remain exercisable for five years from
the grant date. The 1988 Option Plan terminated in June 1998.
In 1997, the board of directors and stockholders approved the 1997 stock
option plan (the "1997 Option Plan"). The 1997 Option Plan provides for
the issuance of up to 1,196,000 shares of common stock which was the
balance of the shares available under the 1988 Option Plan at the time the
1997 Option Plan was adopted. Total options outstanding under the 1997
Option Plan were 136,000 and 242,000 at December 31, 1998 and 1997,
respectively. Options granted under the 1997 Option Plan are exercisable
at a price equal to 100% of the fair market value at the date of grant as
determined by the board of directors. Options granted generally become
exercisable 50% after two years and an additional 25% per annum for the
next two years and remain exercisable for ten years from the grant date.
The 1997 Option Plan terminates in April 2007.
F-8
<PAGE>
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
TOTAL
INCENTIVE SHARES
STOCK STOCK UNDER EXERCISE
OPTIONS OPTIONS OPTION PRICE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995 6,737,500 200,000 6,937,500 $0.10-$1.50
Granted 440,000 0 440,000 $ 0.75
Exercised (75,500) 0 (75,500) $0.10-$0.25
Forfeited (110,000) 0 (110,000) $0.25-$1.50
------------ ----------- -----------
Outstanding, December 31, 1996 6,992,000 200,000 7,192,000 $0.10-$0.75
Granted 274,000 0 274,000 $ 0.85
Exercised (2,767,500) 0 (2,767,500) $0.10-$0.75
Forfeited (89,000) 0 (89,000) $0.25-$0.85
------------ ----------- -----------
Outstanding, December 31, 1997 4,409,500 200,000 4,609,500 $0.10-$0.85
Granted 0 0 0 $ 0.00
Exercised (2,854,689) 0 (2,854,689) $0.25-$0.75
Forfeited (592,811) 0 (592,811) $0.25-$0.85
------------ ----------- -----------
Outstanding, December 31, 1998 962,000 200,000 1,162,000 $0.10-$0.85
============ =========== ===========
Number of options exercisable 501,875 200,000
Exercise price of options exercisable at
December 31, 1998 $0.25-$0.85 $0.10
============ ===========
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
methodology required by APB Opinion No. 25 must make pro forma disclosures of
net income and, if presented, earnings per share, as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB Opinion No. 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted during 1998, 1997, and 1996 using the
Black-Scholes option pricing model prescribed by SFAS No. 123 using the
following weighted average assumptions:
Risk-free interest rate 6.48%-6.96%
Expected dividend yield 0%
Expected lives Five years
Expected volatility 0%
F-9
<PAGE>
The weighted average fair value of options for the Company's stock granted to
employees in 1997 and 1996 was $.85 and $.75 per share, respectively. The
total value of options for the Company's stock granted to employees was
approximately $0, $78,000, and $89,000 during 1998, 1997, and 1996,
respectively, which would be amortized on a pro forma basis over the life of
the options. If the Company had accounted for these plans in accordance with
SFAS No. 123, the Company's net income for the years ended December 31, 1998
and 1997 would have been as follows:
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
---------- ----------
<S> <C> <C>
Net income for the year ended December 31:
1998 $1,702,758 $1,660,961
1997 407,875 381,961
1996 893,997 849,575
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The
following table summarizes the Company's stock option transactions under the
option plans:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF PRICE
SHARES PER SHARE
----------- -----------
<S> <C> <C>
Outstanding at December 31, 1995 6,937,500 $0.24
Granted 440,000 0.75
Exercised (75,500) 0.10
Forfeited (110,000) 0.76
-----------
Outstanding at December 31, 1996 7,192,000 0.27
Granted 274,000 0.85
Exercised (2,767,500) 0.10
Forfeited (89,000) 0.69
-----------
Outstanding at December 31, 1997 4,609,500 0.40
Granted 0 0.00
Exercised (2,854,689) 0.29
Forfeited (592,811) 0.53
-----------
Outstanding at December 31, 1998 1,162,000 0.64
===========
</TABLE>
At December 31, 1998, 501,875 incentive stock options with a weighted average
exercise price of $.56 per share and 200,000 stock options with a weighted
average exercise price of $.10 per share were exercisable. At December 31,
1997, 3,113,000 incentive stock options with a weighted average exercise
price of $.32 per share and 200,000 stock options with a weighted average
exercise price of $.10 per share were exercisable. At December 31, 1996,
5,574,500 incentive stock options with a weighted average exercise price of
$.18 per share
F-10
<PAGE>
and 200,000 stock options with a weighted average exercise price of $.10 per
share were exercisable.
5. INCOME TAXES
As of December 31, 1998 and 1997, the Company's net operating loss ("NOL")
carryforwards available to offset its future income tax liability were
approximately $550,000 and $1,900,000, respectively; accordingly, no
provision for income taxes was made. These carryforwards begin to expire in
2007. Additionally, the utilization of existing NOL carryforwards may be
limited in future years, if significant ownership changes were to occur.
As of December 31, 1998 and 1997, the significant components of the Company's
deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Assets:
Deferred revenue $ 0 $ 939,000
NOL carryforwards 210,000 724,000
Alternative minimum tax ("AMT") credit carryforward 489,000 89,000
Accrued taxes 64,600 19,000
Allowance for doubtful accounts 105,000 30,000
Other 5,700 60,000
Depreciation 70,000 0
Liabilities:
Depreciation 0 (306,000)
----------- -----------
944,300 1,555,000
Valuation allowance (455,300) (1,466,000)
----------- -----------
Deferred tax assets $ 489,000 $ 89,000
=========== ===========
</TABLE>
The deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate
taxable income within the net operating loss carryforward period. Management
has considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes.
In 1998 and 1997, the Company was subject to the AMT and recorded related tax
expense in the amount of $400,000 and $89,000, respectively. As the credit
obtained from the payment of the AMT does not expire, the Company has also
recognized an offsetting deferred tax benefit of this temporary difference in
1998 and 1997.
F-11
<PAGE>
6. COMMITMENTS AND CONTINGENCIES AND CONCENTRATIONS
LEASE COMMITMENTS
The Company leases certain office space and equipment under noncancelable
operating lease agreements. Amounts expensed under these agreements were
$273,294, $269,449, and $205,872 for the years ended December 31, 1998, 1997,
and 1996, respectively.
At December 31, 1998, future minimum rental payments under noncancelable
operating leases are approximately as follows:
<TABLE>
<CAPTION>
Year ended:
<S> <C>
1999 $285,842
2000 293,570
2001 127,435
2002 2,322
2003 0
----------
$709,169
==========
</TABLE>
SATELLITE BANDWIDTH COMMITMENTS
A portion of the Company's operations is dependent upon the availability of
sufficient satellite bandwidth capacity. At December 31, 1998, the Company
had four long-term purchase agreements for satellite bandwidth capacity.
Satellite bandwidth expenses under these agreements were $2,592,669,
$1,932,507, and $1,131,402 for the years ended December 31, 1998, 1997, and
1996, respectively. The Company's commitment for 1999 under these agreements
is approximately $3,400,000.
SIGNIFICANT CUSTOMERS
One customer made up more than 10% of sales and service revenue of the
Company for the years ended December 31, 1998, 1997, and 1996. A different
customer made up more than 10% of sales and service revenue of the Company
for the year ended December 31, 1996. These customers accounted for
approximately 72%, 30%, and 10% of the Company's revenue in 1998, 1997, and
1996, respectively.
SOURCE OF EQUIPMENT
The Company purchases the majority of its equipment from a single major
manufacturer and depends on this manufacturer for its continuing source of
equipment supply. In 1994, the Company executed a multiyear agreement to
provide marketing and sales services to this manufacturer. Under this
agreement, the Company received $0, $972,000, and $1,005,000 of funding from
this supplier during 1998, 1997, and 1996, respectively. Of the total amount
available in fiscal 1998, 1997, and 1996, $0, $1,045,755, and $1,599,132,
respectively, are included as sales revenue in the statements of operations.
CONTINGENCIES
Various claims and proceedings of a nature considered normal to its business
are pending against the Company. Based on a review of current facts and
circumstances, management has provided for what it believes to be a
reasonable estimate of the exposure to loss
F-12
<PAGE>
associated with these matters. While acknowledging the uncertainties
surrounding these matters, management believes that resolution of these
matters will not result in any significant liability to the Company in
relation to its financial position or liquidity.
7. CREDIT FACILITIES
In 1997, the Company entered into a term loan agreement to finance the
purchase of office equipment. That equipment secures the loan. The loan
bears interest at 8.25% and requires minimum monthly payments of $5,006. The
agreement terminates July 1, 2000.
The Company also maintains a $750,000 bank line of credit secured by network
equipment, computer equipment, and software at the prime rate with an initial
maturity of one year and renewable for one-year intervals upon maturity. The
Company has never drawn on this line; accordingly, no amounts were
outstanding at December 31, 1998 and 1997.
The Company believes that the fair value of these financial instruments
approximated the carrying value for the years ended December 31, 1998 and
1997.
8. RELATED-PARTY TRANSACTIONS
In 1998, 1997, and 1996, the Company paid approximately $4,800, $85,000, and
$89,000, respectively, to a related party for digital audio broadcast and
production work. The related party's chairman and chief executive officer is
a director of the Company.
In 1997 and 1996, the Company paid approximately $14,000 and $114,000,
respectively, to a related party for computer equipment and supplies. The
related party's former president is a shareholder of the Company.
In 1998, 1997, and 1996, the Company recorded revenues of approximately
$74,000, $102,000, and $71,000, respectively, for communications services
provided to a related party. Additionally, the Company incurred expenses of
approximately $28,000, $26,000, and $29,000 in 1998, 1997, and 1996,
respectively, for insurance coverage obtained from the related party.
Certain directors of the Company hold a significant interest in the related
party.
The Company uses the services of, and sometimes provides services to, a
related party and certain of its subsidiaries during the normal course of
business. Total expense for the services received was approximately $50,000,
$59,000, and $58,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. Revenue earned was approximately $0, $6,000, and $102,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
In connection with options exercised, the Company loaned officers and
employees $210,000, $72,062, and $0 in 1998, 1997, and 1996, respectively.
These recourse notes are secured by common stock of the Company and an
unconditional promise to pay by the officers and employees. These notes bear
interest at 6.5% and are scheduled to be paid in full on various dates
through December 31,2000.
F-13
<PAGE>
In the Company's opinion, all of its related-party transactions have been
completed on an arm's-length basis.
9. 401(K) PLAN
The Company has a 401(k) plan whereby substantially all employees are
eligible to participate in the plan and may contribute up to 15% of their
compensation. In 1998, the plan provided for employer matching of up to a
maximum of one-half of the first 4% of the participating employee's salary,
which vests ratably over six years of service. In future years, the plan
provides for employer matching of up to a maximum of one-half of the first 2%
of the participating employee's compensation, with the same vesting terms.
The Company's contributions to the 401(k) plan totaled approximately $78,700,
$0, and $0 for the years ended December 31, 1998, 1997, and 1996,
respectively.
10. SUBSEQUENT EVENT (UNAUDITED)
On April 15, 1999 the Company entered into an Agreement and Plan of Merger
(the "Agreement") with ITC DeltaCom, Inc., pursuant to which the
Company will be merged with and into a wholly owned subsidiary of ITC
DeltaCom. Each outstanding share of AvData common stock, other than those
held in treasury, will be converted into a number of shares of ITC DeltaCom
common stock equal to the Exchange Ratio, as defined in the Agreement, plus
the right to possibly receive future shares of ITC DeltaCom common stock in
accordance with formulas specified in the Agreement that are based upon
certain revenues generated by AvData during certain portions of 1999.
F-14
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into
---------
this 15th day of April, 1999, by and among ITC/\DELTACOM, INC., a Delaware
corporation ("Acquiror"), INTERSTATE FIBERNET, INC., a Delaware corporation and
--------
a wholly-owned subsidiary of Acquiror ("Merger Sub") and AVDATA SYSTEMS, INC., a
----------
Delaware corporation (the "Company").
-------
WHEREAS, the Boards of Directors of each of Acquiror, Merger Sub and
the Company have determined that it is in the best interests of their respective
companies and stockholders that the Company merge with and into Merger Sub,
pursuant to and subject to the terms and conditions of this Agreement and the
General Corporation Law of the State of Delaware (the "DGCL").
----
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. The Merger.
Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the DGCL, at the Effective Time (as defined in
Section 1.2), the Company shall be merged with and into Merger Sub (the
- -----------
"Merger"). As a result of the Merger, the separate corporate existence of the
------
Company shall cease and Merger Sub shall continue as the surviving corporation
of the Merger (sometimes referred to herein as the "Surviving Corporation") as a
---------------------
wholly-owned subsidiary of Acquiror. The name of Merger Sub shall continue as
the name of the Surviving Corporation.
SECTION 1.2. Effective Time.
At the Closing (as defined in Section 1.6), the parties hereto shall
-----------
cause the Merger to be consummated by filing a certificate of merger (the
"Certificate of Merger") with the Secretary of State of the State of Delaware in
- ----------------------
such form as required by, and executed in accordance with the relevant
provisions of, the DGCL and in such form as approved by the Company and Acquiror
prior to such filing (the date and time of the filing of the Certificate of
Merger or such subsequent date or time specified therein being the "Effective
---------
Time").
- ----
A-1
<PAGE>
SECTION 1.3. Effect of the Merger.
At the Effective Time, the effect of the Merger shall be as provided
in this Agreement and the applicable provisions of the DGCL. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time,
except as otherwise provided herein, all the property (including, without
limitation, Intellectual Property), rights, privileges, powers and franchises of
Merger Sub and the Company shall vest in the Surviving Corporation, and all
debts, liabilities and duties of Merger Sub and the Company shall become the
debts, liabilities and duties of the Surviving Corporation.
SECTION 1.4. Certificate of Incorporation; Bylaws.
At the Effective Time, the certificate of incorporation of Merger Sub,
as in effect immediately prior to the Effective Time and as amended by the
Certificate of Merger, shall be the certificate of incorporation of the
Surviving Corporation, and the bylaws of Merger Sub, as in effect immediately
prior to the Effective Time, shall be the bylaws of the Surviving Corporation.
SECTION 1.5. Directors and Officers.
The directors of Merger Sub (or such other or additional individuals
as Acquiror may designate prior to Closing) shall continue as the directors of
the Surviving Corporation, each to hold office in accordance with the
certificate of incorporation and bylaws of the Surviving Corporation; and the
officers of Merger Sub (or such other or additional individuals as Merger Sub
may designate prior to Closing) shall continue as the officers of the Surviving
Corporation, in each case until their respective successors are duly elected or
appointed and qualified. Following the Effective Time, Acquiror shall, as soon
as practicable, take all steps necessary to appoint James H. Black, Jr. as a
Senior Vice President and member of the Board of Directors of Acquiror.
SECTION 1.6. Closing.
Subject to the terms and conditions of this Agreement, the closing of
the Merger (the "Closing") will take place as promptly as practicable after
-------
satisfaction of the latest to occur or, if permissible, waiver of the conditions
set forth in Article VIII hereof (the "Closing Date"), at the offices of
------------ ------------
Sutherland, Asbill & Brennan, LLP, 999 Peachtree Street N.E., Atlanta, GA 30309
unless another date or place is agreed to by the parties hereto.
A-2
<PAGE>
SECTION 1.7. Subsequent Actions.
If, at any time after the Effective Time, the Surviving Corporation
shall consider or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to continue
in, vest, perfect or confirm of record or otherwise in the Surviving Corporation
its right, title or interest in, to or under any of the rights, properties,
privileges, franchises or Assets of either of its constituent corporations
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger or otherwise to carry out this Agreement, the
officers and directors of the Surviving Corporation shall be directed and
authorized to execute and deliver, in the name and on behalf of either of such
constituent corporations, all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of each of such
corporations or otherwise, all such other actions and things as may be necessary
or desirable to vest, perfect or confirm any and all right, title and interest
in, to and under such rights, properties, privileges, franchises or Assets in
the Surviving Corporation or otherwise to carry out this Agreement.
SECTION 1.8. Tax Treatment of the Merger.
It is intended by the parties hereto that the Merger shall constitute
a reorganization of Merger Sub and the Company within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code"). The parties
----
hereby adopt this Agreement as a "plan of reorganization" of Merger Sub and the
Company within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United
States Treasury Regulations.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.1. Conversion of Securities.
At the Effective Time, by virtue of the Merger and without any action
on the part of the parties hereto or the holders of the following securities:
(a) Common Stock. Each share of common stock, par value $.01 per
------------
share, of the Company ("Company Common Stock") (excluding any shares described
--------------------
in Section 2.1(c)) issued and outstanding immediately prior to the Effective
---------------
Time (other than Dissenting Shares) shall cease to be outstanding and shall be
converted into and exchanged for the right to receive (i) the number of fully
paid and nonassessable shares of common stock, par value $0.01 per share, of
Acquiror ("Acquiror Shares") equal to the Exchange Ratio defined below and (ii)
---------------
the right to
A-3
<PAGE>
receive the number of Earnout Shares as identified in Section 2.8, subject to
-----------
the terms and conditions of this Agreement. All such shares of Company Common
Stock shall cease to exist, and each certificate previously evidencing any such
shares shall thereafter represent only the right to receive the Acquiror Shares
and Earnout Shares, as described in this Agreement, attributable thereto. The
holders of certificates previously evidencing such shares of Company Common
Stock outstanding immediately prior to the Effective Time shall cease to have
any rights with respect to such shares of Company Common Stock, except as
otherwise provided herein or by Law. Each such certificate ("Company Common
--------------
Stock Certificate") previously evidencing such shares of Company Common Stock
- -----------------
shall be exchanged for the number of Acquiror Shares equal to the number of
shares of Company Common Stock previously evidenced by the canceled Company
Common Stock Certificate upon the surrender of such Company Common Stock
Certificate in accordance with the provisions of Section 2.4, multiplied by
-----------
the Exchange Ratio. The Acquiror Shares to be issued to the Company
Stockholders by Acquiror pursuant to this Section 2.1, including the Earnout
-----------
Shares, shall be referred herein as the "Merger Stock." The Exchange Ratio
------------
shall be the quotient obtained by dividing the Per Share Price by the
Determination Price.
"Determination Price" shall mean the average of the Average Daily
-------------------
Price of Acquiror Shares on the Nasdaq National Market System (the "Nasdaq")
------
(or, if such security is not listed on the Nasdaq, such other principal exchange
or over-the-counter market on which such security is listed) for the five (5)
consecutive trading days (each a "Trading Day") on which trading of Acquiror
-----------
Shares occurs ending on the Trading Day immediately preceding the Closing Date;
provided, however, that in the event that such Determination Price would exceed
- -------- -------
$31.39 or be less than $25.00, $31.39 or $25.00, as the case may be, shall be
the Determination Price.
"Average Daily Price" with respect to any Trading Day shall be the
-------------------
average of the high price and low price reported on Nasdaq for any such Trading
Day.
"Initial Consideration" shall mean Twenty Eight Million Six Hundred
---------------------
Thousand Dollars ($28,600,000).
"Per Share Price" shall mean the quotient obtained by dividing the
---------------
Initial Consideration by the Total Converted Company Stock.
"Total Converted Company Stock" shall mean the sum of (i) the number
-----------------------------
of shares of Company Common Stock (other than treasury stock) issued and
outstanding immediately prior to the Effective Time and (ii) the number of
shares of Company Common Stock issuable at any time pursuant to the Company
A-4
<PAGE>
Stock Options exchanged pursuant to Section 2.7 which are vested immediately
-----------
prior to the Effective Time.
(b) Treasury Stock. All shares of capital stock of the Company held
--------------
in the treasury of the Company immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof and no Acquiror Shares
or other consideration shall be delivered or deliverable in exchange therefor.
(c) No Fractional Shares. No fraction of an Acquiror Share shall be
--------------------
issued in connection with the Merger. In lieu of any such fractional share, the
holder of the Company Common Stock that would be entitled to a fractional share
shall have the right to receive an amount in cash, without interest, equal to
the product of such fraction multiplied by the Per Share Price.
SECTION 2.2. Conversion of Merger Sub Shares.
At the Effective Time, each share of outstanding capital stock of
Merger Sub shall remain issued and outstanding after the Effective Time as a
share of capital stock of the Surviving Corporation.
SECTION 2.3. Escrow Stock; Stockholders' Representative.
(a) When making the issuances of Acquiror Shares pursuant to Section
-------
2.1(a) above, Acquiror shall withhold and retain in escrow from the Company
- ------
Stockholders (as defined in Section 11.2) an aggregate number of Acquiror Shares
------------
issuable pursuant to Section 2.1(a) equal to (i) the product of the
--------------
Stockholders' Percentage and $5,000,000 divided by (ii) the Determination Price
(as adjusted pursuant to Section 2.1(c)) (the "Escrow Stock"). The Escrow Stock
-------------- ------------
will be placed in escrow as security for the performance of the indemnity
obligations of the Company Stockholders under Section 10.2 of this Agreement,
------------
all pursuant to the terms and conditions of an escrow agreement among Acquiror,
the Surviving Corporation, the Stockholders' Representative and First Union
National Bank (the "Escrow Agent"), in form, scope and substance reasonably
------------
acceptable to the parties hereto (the "Escrow Agreement"). The Escrow Stock
----------------
shall be registered in the name of the Escrow Agent as nominee for the Company
Stockholders. The Merger Stock otherwise distributable as of the Effective Time
to each Company Stockholder in connection with the Merger as provided in Section
-------
2.1(a) shall be proportionally reduced to reflect the amount of Merger Stock
- ------
required to be deposited in escrow pursuant to this Section 2.3(a) and the
--------------
Escrow Agreement, and such Escrow Stock shall be released to the Company
Stockholders or Acquiror, as the case may be, only in accordance with the terms
of this Agreement and the Escrow Agreement. The fees of the Escrow Agent shall
be paid by Acquiror.
A-5
<PAGE>
(b) Kenneth F. Leddick shall, by virtue of the Merger, be appointed
attorney-in-fact and authorized and empowered to act, for and on behalf of any
or all of the Company Stockholders (with full power of substitution in the
premises), in connection with the indemnity provisions of Section 10.2 and the
------------
Escrow Agreement as they relate to the Company and the Company Stockholders
generally, and such other matters as are reasonably necessary for the
consummation of the transactions contemplated hereby including, without
limitation, (i) to review all claims for indemnification asserted by an Acquiror
Indemnified Person, and, to the extent deemed appropriate, dispute, question the
accuracy of, compromise, settle or otherwise resolve any and all such claims,
(ii) to compromise on their behalf with Acquiror any claims asserted thereunder,
(iii) to authorize payments to be made with respect to any such claims for
indemnification, (iv) to execute and deliver on behalf of the Company
Stockholders any document or agreement contemplated by or necessary or desirable
in connection with this Agreement or the Escrow Agreement and (v) to take such
further actions including coordinating and administering post-closing matters
related to the rights and obligations of the Company Stockholders as are
authorized in this Agreement and the Escrow Agreement (the above named
representative, as well as any subsequent representative of the Company
Stockholders appointed by the Company Stockholders being referred to herein as
the "Stockholders' Representative"). The Stockholders' Representative shall not
----------------------------
be liable to any Company Stockholder, Acquiror, the Surviving Corporation or
their respective affiliates or any other person with respect to any action taken
or omitted to be taken by the Stockholders' Representative in his role as
Stockholders' Representative under or in connection with this Agreement unless
such action or omission results from or arises out of fraud, gross negligence or
willful misconduct on the part of the Stockholders' Representative. Acquiror,
Merger Sub and the Surviving Corporation shall be entitled to rely on such
appointment and treat such Stockholders' Representative as the duly appointed
attorney-in-fact of each Company Stockholder. Each Company Stockholder who
votes in favor of the Merger pursuant to the terms hereof, by such vote, without
any further action, and each Company Stockholder who receives Acquiror Shares in
connection with the Merger, by acceptance thereof and without any further
action, confirms such appointment and authority. Should the named Stockholder
Representative fail or cease to serve hereunder as such, the holders of a
majority of the then-previously issued Company Common Stock shall be entitled to
elect a successor Stockholder Representative.
SECTION 2.4. Exchange of Company Common Stock Certificates.
(a) Exchange Agent. Prior to the Effective Time, Acquiror shall
--------------
deposit, or shall cause to be deposited, with a bank or trust company designated
by Acquiror (the "Exchange Agent"), for the benefit of the holders of Company
--------------
Common Stock for exchange through the Exchange Agent in accordance with this
Article II as of the Effective Time, (i) certificates representing the whole
- ----------
A-6
<PAGE>
Acquiror Shares issuable to such holders pursuant to Section 2.1 and (ii) cash
-----------
in an amount sufficient to permit payment of the cash payable in lieu of
fractional shares pursuant to Section 2.1(c) (such certificates for Acquiror
--------------
Shares and cash for fractional shares, together with any dividends or
distributions with respect thereto being hereafter referred to as the "Exchange
--------
Fund"). Acquiror shall irrevocably instruct the Exchange Agent, at the
- ----
Effective Time, to deliver the Acquiror Shares to be issued to the holders of
Company Common Stock pursuant to Section 2.1 out of the Exchange Fund pursuant
-----------
to the procedures set forth in Section 2.4(b) beginning immediately after the
--------------
Effective Time.
(b) Exchange Procedures. At the earliest practicable date prior to
-------------------
the Effective Time, Acquiror shall mail or shall cause to be delivered to each
holder of record of a Company Common Stock Certificate or Certificates (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Company Common Stock Certificates shall pass, only
upon proper delivery of the Company Common Stock Certificates to the Exchange
Agent and shall be in customary form) and (ii) instructions for use in effecting
the surrender of the Company Common Stock Certificates in exchange for cash or
certificates representing Acquiror Shares. Upon surrender of a Company Common
Stock Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, and such other customary documents as may
be required pursuant to such instructions, the holder of such Company Common
Stock Certificate shall be entitled to receive in exchange therefor, and
Acquiror shall thereupon cause the Exchange Agent to deliver to the holder of
such Company Common Stock Certificate, (i) a certificate representing that
number of whole Acquiror Shares which such holder has the right to receive in
accordance with Section 2.1 and (ii) cash in lieu of fractional Acquiror Shares
-----------
to which such holder is entitled pursuant to Section 2.1(c). The Company Common
--------------
Stock Certificates so surrendered shall forthwith be canceled. In the event of
a transfer of ownership of shares of Company Common Stock which is not
registered in the transfer records of the Company, the proper number of Acquiror
Shares may be issued to a transferee if the Company Common Stock Certificates
representing such shares of Company Common Stock, properly endorsed or otherwise
in proper form for transfer, are presented to the Exchange Agent, accompanied by
all documents required to evidence and effect such transfer and by evidence that
any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.4, each Company Common Stock Certificate shall be
-----------
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Stock issuable in exchange therefor,
together with any dividends or other distributions to which such holder is
entitled pursuant to Section 2.4(c). No interest will be paid or will accrue on
--------------
any cash payable pursuant to Section 2.1(c).
--------------
(c) Distributions with Respect to Unexchanged Shares of Acquiror
------------------------------------------------------------
Shares. No dividends or other distributions declared or made after the
- ------
A-7
<PAGE>
Effective Time with respect to Acquiror Shares with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Company Common
Stock Certificate with respect to the whole Acquiror Shares represented thereby
until the holder of such Company Common Stock Certificate shall surrender such
Company Common Stock Certificate. Subject to the effect of escheat, tax or
other applicable Laws, following surrender of any such Company Common Stock
Certificate, there shall be paid to the record holder of the certificates
representing whole Acquiror Shares issued in exchange therefor, without
interest, (i) promptly, the amount of any cash payable with respect to a
fractional share of Acquiror Shares to which such holder is entitled pursuant to
Section 2.1(c), and the amount of dividends or other distributions with a record
- --------------
date after the Effective Time theretofore paid with respect to such whole
Acquiror Shares, and (ii) at the appropriate payment date, the amount of
dividends or other distributions, with a record date after the Effective Time
but prior to surrender and a payment date occurring after surrender, payable
with respect to such whole Acquiror Shares.
(d) No Further Rights in Company Common Stock. All Acquiror Shares
-----------------------------------------
issued and cash paid pursuant to Section 2.1(c) shall be deemed to have been
--------------
issued and paid in full satisfaction of all rights pertaining to such shares of
Company Common Stock.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund
----------------------------
which remains undistributed to the holders of Company Common Stock for twelve
(12) months after the Effective Time shall be delivered to Acquiror, upon
demand. Any holders of Company Common Stock who have not theretofore complied
with this Article II shall thereafter look only to Acquiror for Acquiror Shares
----------
to which they are entitled pursuant to Section 2.1, any dividends or other
-----------
distributions with respect to Acquiror Shares to which they are entitled
pursuant to Section 2.4(c) and any cash in lieu of fractional Acquiror Shares to
--------------
which they are entitled pursuant to Section 2.1(c).
--------------
(f) No Liability. None of Acquiror, Merger Sub, the Company, the
------------
Surviving Corporation or the Exchange Agent shall be liable to any person for
any Acquiror Shares (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any abandoned property, escheat or
similar Laws.
(g) Lost, Stolen or Destroyed Company Common Stock Certificates. In
-----------------------------------------------------------
the event any Company Common Stock Certificate shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Company Common Stock Certificate, upon the making of an affidavit of
that fact by the holder thereof, such Acquiror Shares as may be required
pursuant to this Article II; provided, however, that Acquiror may, in its
---------- -------- -------
reasonable discretion if Acquiror determines that the owner of such lost, stolen
A-8
<PAGE>
or destroyed Company Common Stock Certificate is not sufficiently creditworthy
and as a condition precedent to the issuance thereof, require such owner to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Acquiror, the Surviving Corporation, or the
Exchange Agent with respect to the Company Common Stock Certificate alleged to
have been lost, stolen or destroyed.
(h) Conversion of Options. Acquiror shall take such actions, as are
---------------------
reasonably necessary to revise and adjust each Company Stock Option (as defined
in Section 2.7) as soon as practicable after the Effective Time with an
-----------
appropriate option agreement or amendment to existing option agreement.
Acquiror shall take all corporate action reasonably necessary subject to Section
-------
2.7(d), to reserve, if necessary, for issuance a sufficient number of Acquiror
- ------
Shares for delivery upon the exercise of New Options.
SECTION 2.5. Appraisal Rights.
(a) Notwithstanding any other provisions of this Agreement to the
contrary, shares of Company Common Stock that are issued and outstanding as of
the Effective Time and that are held by Company Stockholders who shall not have
voted in favor of the Merger or consented thereto in writing and who shall have
demanded properly in writing payment for such shares in accordance with Section
262 of the DGCL (collectively, the "Dissenting Shares") shall not be converted
-----------------
into or represent the right to receive Acquiror Shares pursuant to Section
-------
2.1(a). Such Company Stockholders shall be entitled to receive payment of the
- ------
fair value of such shares of Company Common Stock held by them in accordance
with the provisions of such Section 262 of the DGCL, except that all Dissenting
Shares held by Company Stockholders who shall have failed to demand payment or
deposit their Company Common Stock Certificates where required or who
effectively shall have withdrawn or lost their rights to appraisal of such
shares of Company Common Stock under such Section 262 shall thereupon be deemed
to have been converted into and to have become exchangeable, as of the Effective
Time, for the right to receive, without any interest thereon, Acquiror Shares as
contemplated by this Agreement (subject to Section 2.1(c) and Section 2.3), upon
-------------- -----------
surrender of the Company Common Stock Certificate or Company Common Stock
Certificates.
(b) The Company shall give Acquiror (i) prompt notice of any written
demands for payment of any shares of Company Common Stock, withdrawals of such
demands, and any other instruments served pursuant to the DGCL and received by
the Company and (ii) the opportunity to participate in all negotiations and
proceedings with respect to demands for appraisal under the DGCL. The Company
shall not, except with the prior written consent of Acquiror, which consent
A-9
<PAGE>
shall not be unreasonably withheld, voluntarily provide any consideration with
respect to any demands for fair value of Company Common Stock or offer to settle
or settle any such demands.
SECTION 2.6. Stock Transfer Books.
At the Effective Time, the stock transfer books of the Company with
respect to all shares of capital stock of the Company shall be closed and no
further registration of transfers of such shares of capital stock shall
thereafter be made on the records of the Company.
SECTION 2.7. Company Stock Options.
(a) As of the Effective Time, each outstanding unexpired and
unexercised option to purchase shares of Company Common Stock described in
Schedule 3.4 hereto held by a person who shall become an employee of Acquiror or
- ------------
any of its subsidiaries as of the Effective Time (each a "Company Stock
Option"), shall automatically be converted into an option (each a "New Option")
to purchase a number of whole Acquiror Shares equal to the number of shares of
Company Common Stock that could have been purchased (assuming full vesting)
under such Company Stock Option multiplied by the Option Exchange Ratio defined
below. The exercise price of each New Option shall equal the per-share option
exercise prices specified in such Company Stock Option multiplied by the
Exercise Price Multiple. Nothing in this Section 2.7 shall affect the vesting
-----------
schedule in effect for each Company Stock Option as of the date hereof, and each
New Option shall have the same vesting schedule as in effect for the
corresponding Company Stock Option as of the date hereof (provided no vesting
that is based on any criteria other than time of employment with the Company and
the successor corporation (except with respect to certain options held by
Richard J. Santillo) shall be used and, provided further, that the Company shall
not have accelerated the vesting of the Company Stock Options prior to the
Effective Time). As of the Effective Time, the Company shall effect the
termination of each other outstanding unexpired and unexercised option to
purchase shares of Company Common Stock.
The "Option Exchange Ratio" shall be the quotient obtained by dividing
---------------------
the Option Per Share Price by the Determination Price.
"Initial Option Consideration" shall mean Twenty-Three Million Six
----------------------------
Hundred Thousand Dollars ($23,600,000).
"Option Per Share Price" shall mean the quotient obtained by dividing
----------------------
the Initial Option Consideration by the Fully Diluted Company Stock.
A-10
<PAGE>
"Exercise Price Multiple" shall equal (a) the Determination Price
-----------------------
divided by (b) the quotient of (i) Thirty Three Million Six Hundred Thousand
Dollars ($33,600,000) divided by (ii) the Fully Diluted Company Stock.
"Fully Diluted Company Stock" shall mean the Total Converted Company
---------------------------
Stock plus the number of shares of Company Common Stock issuable at any time
pursuant to the Company Stock Options exchanged pursuant to this Section 2.7
-----------
which are not immediately vested prior to the Effective Time.
(b) Upon determination of the Earnout Shares pursuant to Section 2.8
-----------
below, the holder of each Company Stock Option immediately prior to the
Effective Time shall be entitled to receive an additional New Option equal to
the number of shares of Company Common Stock that could have been purchased
(assuming full vesting at the Effective Time) by such holder under such Company
Stock Option multiplied by the Option Exchange Ratio; provided however, for
-------- -------
purposes of calculating the Option Exchange Ratio under this Section 2.7(b)
--------------
only, the Initial Option Consideration shall equal the Earnout Amount.
(c) Upon the release of the Escrow Stock to the Company Stockholders,
the holder of each Company Stock Option immediately prior to the Effective Time
shall be entitled to receive an additional New Option equal to the number of
shares of Company Common Stock that could have been purchased (assuming full
vesting at the Effective Time) under such Company Stock Option multiplied by the
Option Exchange Ratio; provided, however, for purposes of calculating the Option
-------- --------
Exchange Ratio under this Section 2.7(c) only, the Initial Option Consideration
--------------
shall equal the product of (i) the sum of the number of shares of Escrow Stock
so released multiplied by (ii) the Determination Price.
(d) Notwithstanding the foregoing, the granting of any New Options
under this Section 2.7 shall be subject to increasing the employee stock option
-----------
pool of Acquiror at the next annual meeting of its shareholders.
SECTION 2.8. Earnout Shares.
(a) Subject to the terms of this Section 2.8, the Company Stockholders
-----------
shall have a contingent right to received from Acquiror an aggregate number of
Acquiror Shares (the "Earnout Shares") as determined in accordance with this
--------------
Section 2.8. Each share of Company Common Stock shall be entitled to receive a
- -----------
number of Earnout Shares equal to the quotient obtained by dividing the Earnout
Per Share Price (as defined below) by the Determination Price. The contingent
right to receive Earnout Shares is personal to each Company Stockholder and
shall not be transferable.
A-11
<PAGE>
(b) Subject to the terms of this Section 2.8, delivery of the Earnout
-----------
Shares due pursuant to this Section 2.8 shall be made at a closing (the "Earnout
----------- -------
Closing") to be held on a date, agreed in writing between the Stockholder
- -------
Representative and the Acquiror, on or prior to March 15, 2000. At the Earnout
Closing, Acquiror shall deliver to each Company Stockholder the number of
Earnout Shares to which such Company Stockholder is entitled.
(c) The Earnout Amount shall be determined by the Acquiror's auditors
promptly following the end of calendar year 1999. Thirty (30) days prior to the
Earnout Closing, Acquiror shall deliver, or cause to be delivered to the
Stockholder's Representative, the calculation of the Earnout Amount. The
Stockholder's Representative shall have an opportunity to review such
determination and object to the calculations made. If an agreement by the
parties is not reached regarding such calculation, the parties shall select a
mutually agreed-upon nationally recognized accounting firm to compute the
Earnout Amount, whose calculation of the Earnout Amount shall be final and
binding on the parties. In the event that the parties cannot agree upon a
nationally recognized accounting firm within fifteen (15) days prior to the
Earnout Closing, either party may apply to the Atlanta office of the American
Arbitration Association to determine such nationally recognized accounting firm
(which shall be a firm which is not regularly employed by Acquiror and was not
regularly employed by the Company). The decision of the Atlanta office of the
American Arbitration Association shall be final and binding on the parties. The
expenses for the independent accounting firm shall be shared equally by the
Company Stockholders, on the one hand, and the Acquiror, on the other hand.
(d) The "Earnout Amount" shall equal the sum of the Direct Recurring
Revenue Earnout Amount, Non-Recurring Revenue Earnout Amount, and VSAT Customer
Revenue Earnout Amount as follows:
(i) Direct Recurring Revenue.
------------------------
(A) If the Direct Recurring Revenue equals or exceeds
$322,373 but is less than $347,089, the Direct Recurring Revenue Earnout Amount
shall be an amount equal to the product of (1) $2,850,000 and (2) a fraction,
the numerator of which shall be the result of subtracting $322,373 from the
Direct Recurring Revenue and the denominator of which shall be $24,716. There
shall be no Direct Recurring Revenue Earnout Amount if the Direct Recurring
Revenue does not equal or exceed $322,373.
(B) If the Direct Recurring Revenue equals or exceeds
$347,089 but is less than $404,759, the Direct Recurring Revenue Earnout Amount
shall be $2,850,000 plus an amount equal to the product of (1) $2,850,000 and
(2) a
A-12
<PAGE>
fraction, the numerator of which shall be the result of subtracting $347,089
from the Direct Recurring Revenue and the denominator of which shall be $57,670.
(C) If the Direct Recurring Revenue equals or exceeds
$404,759 but is less than $487,145, the Direct Recurring Revenue Earnout Amount
shall be $5,700,000 plus an amount equal to the product of (1) $3,600,000 and
(2) a fraction, the numerator of which shall be the result of subtracting
$404,759 from the Direct Recurring Revenue and the denominator of which shall be
$82,386.
(D) If the Direct Recurring Revenue equals or exceeds
$487,145, the Direct Recurring Revenue Earnout Amount shall be $9,300,000.
(ii) Non-Recurring Revenue. If Non-Recurring Revenue equals or
----------------------
exceeds $7,700,000, the Non-Recurring Revenue Earnout Amount shall be $350,000.
There shall be no Non-Recurring Earnout Amount if the Non-Recurring Revenue is
less than $7,700,000.
(iii) VSAT Customer Revenue. If the VSAT Customer Revenue for the
----------------------
month of December 1999 equals or exceeds $684,705, the VSAT Customer Revenue
Earnout Amount shall be $350,000. There shall be no VSAT Customer Revenue
Earnout Amount if the VSAT Customer Revenue for the month of December 1999 is
less than $684,705.
(f) Definitions. For purposes of this Article II:
----------
(i) "Direct Recurring Revenue" shall mean the following: for the
------------------------
month of December, 1999 revenues derived from (A) the Company's terrestrial
recurring revenue base as of the Effective Time, (B) all new sales made by
Company sales professionals of Acquiror's recurring revenue products, including
without limitation, local, long-distance, frame-relay, point-to-point data
circuits, Internet access and other new recurring revenue products which
Acquiror makes available, if any, prior to the end of 1999 and (C) all new sales
made by Company sales professionals of the Company's recurring revenue products,
with the exception of VSAT products. In the event that the Direct Recurring
Revenue does not equal or exceed $487,145, there shall be added to the Direct
Recurring Revenue for purposes of calculating the Direct Recurring Revenue
Earnout Amount an amount (not to exceed $32,954) equal to the amount by which
the New Recurring Channel Sales for the month of December 1999 exceed the
budgeted New Recurring Channel Sales of $125,985 for the month of December 1999.
For purposes of calculating the Direct Recurring Revenue, if a customer using a
VSAT product is converted to a recurring revenue terrestrial product during
1999, and as a result the total recurring revenue from such customer for
December 1999 exceeds the VSAT product revenue for December 1999 reasonably
expected from such customer, an amount equal to the excess shall be added to the
Direct Recurring Revenue.
A-13
<PAGE>
(ii) "Earnout Per Share Price" shall mean the quotient obtained
-----------------------
by dividing the Earnout Amount by the Total Converted Company Stock.
(iii) "New Recurring Channel Sales" shall mean the amount of sales
---------------------------
of new recurring revenue products by third party distribution channels (other
than Acquiror) established from time to time.
(iv) "Non-Recurring Revenue" shall mean the following: for
---------------------
calendar year 1999 all revenue derived from non-recurring revenue products sold
by Company sales professionals.
(v) "VSAT Customer Revenue" shall mean the following: for the
---------------------
month of December 1999 revenues derived from (A) the Company's VSAT recurring
revenue base as of the Effective Time, and (B) all new sales made by Company
sales professionals of the Company's VSAT recurring revenue products. For
purposes of calculating the VSAT Customer Revenue, if a customer using a VSAT
product is converted to a recurring revenue terrestrial product during 1999 and,
as a result, reduces its use of the VSAT product which it previously used, an
amount equal to the revenue shortfall with respect to such VSAT product
reasonably attributable to such customer's conversion to the terrestrial product
shall be added to the VSAT Customer Revenue.
(vi) "Company" shall mean the Company and any successor
-------
corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Acquiror and Merger Sub as
follows:
SECTION 3.1. Organization and Qualification.
The Company is a corporation duly organized, validly existing and in
good standing under the Laws of the State of Delaware. The Company has the
requisite power and authority to own, lease and operate its business as it is
now being conducted and to perform the terms of this Agreement and the
transactions contemplated hereby. Except as set forth on Schedule 3.1, the
------------
Company is duly qualified to conduct its business as a foreign corporation, and
is in good standing, in each jurisdiction in which the failure to be so
qualified and in good standing would reasonably be expected to cause a Company
Material Adverse Effect.
A-14
<PAGE>
SECTION 3.2. Subsidiaries.
Except as set forth on Schedule 3.2, the Company has no Subsidiaries
------------
(as defined in Section 11.2) and no equity interest or other investment in, nor
------------
has the Company made advances or loans to, any person other than (a) travel
advances to employees made in the ordinary course of business, and (b) loans or
advances made to employees which do not exceed $3,000 individually, or together
with all loans and advances made by the Company, exceed $50,000 in the
aggregate.
SECTION 3.3. Certificate of Incorporation and Bylaws.
The Company has heretofore delivered to Acquiror a complete and
correct copy of each of the certificate of incorporation and bylaws of the
Company, each as in effect on the date hereof, certified by the Company's
corporate secretary. Such certificate of incorporation and bylaws are in full
force and effect. The Company is not in violation of any of the provisions of
its certificate of incorporation or bylaws.
SECTION 3.4. Capitalization.
The authorized capital stock of the Company consists of 45,000,000
shares of Company Common Stock, of which 30,772,170 shares are issued and
outstanding, 10,000,000 shares of Preferred Stock, of which no shares are issued
and outstanding and 30,000,000 shares of Serial Preferred Shares, of which no
shares are issued and outstanding. All of the outstanding shares of capital
stock of the Company are owned beneficially and of record by the Company
Stockholders as set forth in Schedule 3.4. The Company has provided to Acquiror
------------
a complete, accurate and correct schedule of all options, warrants or other
rights, agreements (including, without limitation, voting trusts or voting
agreements), arrangements or commitments of any character relating to the issued
or unissued capital stock of the Company or obligating the Company to issue or
sell any shares of capital stock of, or other equity interests in the Company,
including any securities directly or indirectly convertible into or exercisable
or exchangeable for any capital stock or other equity securities of the Company.
Except as set forth on Schedule 3.4, there are no outstanding obligations of the
------------
Company to repurchase, redeem or otherwise acquire any shares of its capital
stock or make any investment (in the form of a loan, capital contribution or
otherwise) in any other person. All of the issued and outstanding shares of
Company Common Stock have been duly authorized and validly issued in accordance
with applicable Laws and are fully paid and nonassessable and not subject to
preemptive rights. Except shares reserved for issuance upon the exercise of
options, no shares of capital stock of the Company have been reserved for any
purpose.
A-15
<PAGE>
SECTION 3.5. Authority.
The Company has the necessary corporate power and authority to enter
into this Agreement and to perform its obligations hereunder and to consummate
the transactions contemplated hereby. Except as described in Section 8.1(a),
--------------
the execution and delivery of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by the Company and, assuming the due authorization,
execution and delivery by Acquiror and Merger Sub, constitutes a legal, valid
and binding obligation of the Company, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar Laws of general applicability
relating to or affecting creditors' rights generally and by the application of
general principles of equity.
SECTION 3.6. No Conflict; Required Filings and Consents.
(a) Except as set for on Schedule 3.6(a), the execution and delivery
---------------
of this Agreement by the Company do not, and the performance by the Company of
its obligations under this Agreement will not, (i) conflict with or violate the
certificate of incorporation, bylaws or other organizational document of the
Company, (ii) conflict with or violate any Laws applicable to the Company or to
its Assets, or (iii) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default) under
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company is a
party or by which the Company is bound or to which any of its Assets is subject.
(b) Except as set forth on Schedule 3.6(b), the Company's execution
---------------
and delivery of this Agreement does not, and the Company's performance of this
Agreement will not, (i) require any consent, approval, authorization or permit
of, or filing with or notification to, any third party or any court, arbitral
tribunal, administrative agency or commission, whether national or foreign, or
Government Entity, except for (A) the filing and recordation of appropriate
merger documents as required by the DGCL and (B) pursuant to applicable
requirements, if any, of the HSR Act and the Communications Act; and (ii) result
in or give rise to any penalty, forfeiture, termination of any agreement to
which the Company is a party, rights of termination, amendment or cancellation,
or restriction on business operations of Acquiror, the Company, or the Surviving
Corporation that would have a Company Material Adverse Effect.
A-16
<PAGE>
(c) Except as set forth on Schedule 3.6(c), the Company is in
---------------
possession of all Licenses necessary for the Company to own, lease and operate
its Assets and to carry on its business as it is now being conducted (the
"Company Licenses") other than those which the failure to possess would not
- -----------------
reasonably be expected to have a Company Material Adverse Effect. All Company
Licenses that are FCC or state utilities Licenses or municipal franchises, and
all other Company Licenses are listed and described in Schedule 3.6(c). All
---------------
Company Licenses are valid and in full force and effect through the respective
dates indicated in such Company Licenses and no suspension, cancellation,
complaint, proceeding, order or investigation of or with respect to any Company
License (or operations thereunder) is pending or, to the Knowledge of the
Company, threatened and, to the Company's Knowledge, no state of facts exists
which would reasonably be expected to lead to any of the same. The Company has
indicated on Schedule 3.6(c) those Company Licenses which expire within 12
---------------
months from the date of this Agreement. The Company is not in violation of or
default under any Company License. Except as set forth on Schedule 3.6(c),
---------------
since December 31, 1998, the Company has not received written or, to the
Knowledge of the Company, oral notice from any Government Entity or any other
person of any allegation of any such violation or default under a Company
License.
(d) Except as described in Schedule 3.6, all material returns,
------------
reports, statements and other documents required to be filed by the Company with
any Government Entity (excluding, for purposes of this Section 3.6(d), all Tax
--------------
returns) have been filed in a timely manner and complied with and are true,
correct and complete in all material respects (and the related fees identified
in such returns, reports, statements or other documents required to be paid have
been paid in full). All material records of every type and nature relating to
the Company Licenses or the business, operations or Assets of the Company have
been maintained in all material respects in accordance with good business
practices and the rules of any Government Entity by which the Company is
governed and are maintained at the Company.
(e) The Company has no interest in any License (including both any
Company License and any License held by third parties in which the Company has
an interest) the loss of which would have a Company Material Adverse Effect and
that is subject to restrictions on assignment or transfer based on the
circumstances under which the License was granted (such as eligibility or
auction rules), the status of construction and operation (such as rules
restricting resale for a certain period after construction), or any other
restrictions other than an ordinary course requirement for prior approval of
transactions such as the Merger contemplated herein.
A-17
<PAGE>
(f) The Company is not aware of any fact or circumstance related to it
that would reasonably be expected to cause the filing of any objection to any
application for any Government Entity consent required hereunder, lead to any
delay in processing such application, or require any waiver of any Government
Entity rule, policy or other applicable Law.
SECTION 3.7. The Company Financial Statements; No Liabilities.
(a) The Company has prepared and furnished to Acquiror (i) the audited
balance sheet of Company for its fiscal year ended December 31, 1998, and the
audited statements of income, stockholders' equity and changes in financial
position for the fiscal year then ended, each accompanied by the related report
of Arthur Andersen LLP, independent certified public accountants, and (ii) the
unaudited balance sheet of Company as of February 28, 1999, and the unaudited
statements of income, stockholders' equity and changes in financial position for
the two (2) month period then ended (collectively, the "Financial Statements").
All of the financial statements, including, without limitation, the notes
thereto, referred to in this Section or furnished to Buyer after the date hereof
pursuant to this Agreement: (A) are in accordance with the books and records of
the Company, (B) present fairly in all material respects the financial position
of the Company as of the respective dates and the results of operations and
changes in financial position for the respective periods indicated, and (C) have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as otherwise noted in the notes thereto),
subject, in the case of unaudited statements, to normal year-end adjustments.
Schedule 3.7(a) sets forth all changes in accounting methods (for financial
- ---------------
accounting purposes) made, agreed to, requested or required with respect to
Company during the past seven years.
(b) Except as reflected in the balance sheet of the Company (the
"Company Balance Sheet") as at December 31, 1998 (the "Balance Sheet Date") and
- ---------------------- ------------------
as disclosed on Schedule 3.7(b), the Company has no liabilities, contingent or
---------------
absolute, matured or unmatured, except for liabilities (i) incurred in the
ordinary course of business since the Balance Sheet Date, and (ii) which would
not have a Company Material Adverse Effect.
SECTION 3.8. Accounts Receivable.
The accounts receivable of the Company shown on the Company Balance
Sheet, or acquired by the Company after the Balance Sheet Date, have been
collected or are collectible in amounts not less than the amounts thereof
carried on the books of the Company, except to the extent of the allowance for
doubtful accounts shown on the Company Balance Sheet and with respect to those
accounts accruing after the Balance Sheet Date, in amounts not greater than 7.6%
A-18
<PAGE>
of the total accounts receivable accruing during the period following the
Balance Sheet Date through the Effective Date.
SECTION 3.9. Absence of Certain Changes or Events.
Since the Balance Sheet Date, to the Company's Knowledge, there has
been no event or occurrence which has had or would have a Company Material
Adverse Effect. Except as set forth on Schedule 3.9, since the Balance Sheet
------------
Date, the Company has conducted its business in the ordinary course, and the
Company has not (a) paid any dividend or distribution in respect of, or redeemed
or repurchased any of, its capital stock; (b) issued any capital stock, bonds or
other corporate securities or debt instruments, granted any options, warrants or
other rights calling for the issuance thereof, or borrowed any funds; (c)
incurred loss of, or significant injury to, any of its Assets as the result of
any fire, explosion, flood, windstorm, earthquake, labor trouble, riot,
accident, act of God or public enemy or armed forces, or other casualty; (d)
incurred, or become subject to, any obligation or liability (absolute or
contingent, matured or unmatured, known or unknown), except current liabilities
incurred in the ordinary course of business; (e) mortgaged, pledged or subjected
to any Encumbrance any of its Assets; (f) sold, exchanged, transferred or
otherwise disposed of any of its Assets or canceled any debts or claims except
dispositions or transfers in the ordinary course of business; (g) written down
the value of any of its Assets or written off as uncollectible any accounts
receivable, except write downs and write-offs in the ordinary course of
business, none of which, individually or in the aggregate, are material; (h)
entered into any transactions other than in the ordinary course of business and
consistent with past practices; (i) made any change in any method of accounting
or accounting practice; or (j) made any agreement, or otherwise becomes legally
obligated, to do any of the foregoing.
SECTION 3.10. Assets.
The Company is the sole and exclusive legal and equitable owner of,
and has good and marketable title to, its Assets free and clear of all
Encumbrances, except as set forth in Schedule 3.10. No person or Government
-------------
Entity has an option to purchase, a right of first refusal or other similar
right with respect to all or any part of the Company's Assets. All of the
personal property of the Company is in good working order and repair, ordinary
wear and tear excepted, and is suitable and adequate for the uses for which it
is intended or is being used.
SECTION 3.11. Leases.
Schedule 3.11 lists and describes all material leases and other
-------------
agreements under which the Company is lessee or lessor of any Asset, or holds,
A-19
<PAGE>
manages or operates any Asset owned by any third party, or under which any Asset
owned by the Company is held, operated or managed by a third party. Each such
lease and other agreement is in full force and effect and constitutes a legal,
valid and binding obligation of, and is legally enforceable against, the Company
and, to the Knowledge of the Company, the other party or respective parties
thereto and grants the leasehold estate it purports to grant free and clear of
all Encumbrances. With respect to each such lease and other agreement, (a) all
necessary governmental approvals with respect thereto required to be obtained by
the Company have been obtained, (b) all necessary filings or registrations
therefor required to be made by the Company have been made, unless the failure
to make such filing or registration would not be reasonably expected to have a
Company Material Adverse Effect and (c) there have been no threatened
cancellations thereof and no outstanding disputes thereunder. The Company has
performed in all material respects all obligations thereunder required to be
performed by the Company to date. To the Knowledge of the Company, (i) no other
party is in default under any of the foregoing, and (ii) there has not occurred
any event which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute such a default.
SECTION 3.12. Contracts.
(a) Schedule 3.12 sets forth a complete and correct list of all
-------------
material agreements, contracts and commitments (whether written or oral) to
which the Company is a party or by which the Company or any of its Assets are
bound (collectively, the "Contracts"), including, without limitation, the
---------
following types of contracts and agreements: (i) employment, severance,
termination, consulting and retirement agreements; (ii) license agreements or
distributor, dealer, manufacturer's representative, sales agency and advertising
agreements; (iii) agreements with any labor organization or other collective
bargaining unit; (iv) agreements for the future purchase of materials, supplies,
services, merchandise or equipment involving payments of more than One Thousand
Dollars ($1,000) individually (or Five Thousand Dollars ($5,000) in the
aggregate for all such agreements) over its remaining term (including, without
limitation, periods covered by any option to renew by either party); (v)
agreements for the purchase, sale or lease of any real estate or other Assets;
(vi) agreements for the sale of Assets other than in the ordinary course of
business or the grant of any preferential rights to purchase Assets; (vii)
agreements which contain provisions requiring the Company to indemnify any
person; (viii) joint venture agreements or other agreements involving the
sharing of profits; (ix) outstanding loans to any persons or entities or
receivables due from any stockholders or any affiliates of the Company; (x)
agreements (including, without limitation, agreements not to compete and
exclusivity agreements) that reasonably could be interpreted to impose any
restriction on any business operations of the Company; (xi) customer and client
A-20
<PAGE>
contracts; and (xii) any other agreement which by its terms does not terminate
or is not terminable by the Company within thirty (30) days or upon thirty (30)
days' (or less) notice. Schedule 3.12 includes a brief description of all oral
-------------
Contracts of the types described in clauses (i) through (xii) above.
(b) Except as set forth on Schedule 3.12(b), all the Contracts are
----------------
valid and in full force and effect and constitute legal, valid and binding
obligations of, and are legally enforceable against, the Company and, to the
Knowledge of the Company, the other party or respective parties thereto. With
respect to each such Contract, (i) all necessary governmental approvals with
respect thereto required to be obtained by the Company have been obtained, (ii)
all necessary filings or registrations therefor required to be made by the
Company have been made, and (iii) there have been no cancellations thereof
threatened in writing and, to the Knowledge of Company, no outstanding disputes
thereunder. The Company has performed in all material respects the obligations
thereunder required to be performed by the Company to date. The Company is not
and, to the Knowledge of the Company, no other party is, in default under any of
the Contracts, and there has not occurred any event which (whether with or
without notice, lapse of time or the happening or occurrence of any other event)
would constitute such a default. True and complete copies of all Contracts have
been made available to Acquiror. The consummation of the transactions
contemplated herein will not constitute a breach or default under, or give rise
to the ability of any party to terminate any Contract.
SECTION 3.13. Debt Instruments.
Schedule 3.13 lists all mortgages, indentures, notes, guarantees and
-------------
other agreements for or relating to borrowed money (including, without
limitation, conditional sales agreements and capital leases) to which the
Company is a party or which have been assumed by the Company or to which any
Assets of the Company are subject that evidences an indebtedness in excess of
$25,000. The Company is not in default under any of such mortgages, indentures,
notes, guarantees and other agreements, and there has not occurred any event
which (whether with or without notice, lapse of time or the happening or
occurrence of any other event) would constitute such a default.
SECTION 3.14. Real Property.
Schedule 3.14 contains a list and brief description of all leasehold
-------------
interests in real estate, easements, rights to access, rights-of-way and other
real property interests which are owned, leased, used or held for use by the
Company (collectively, the "Real Property"). The Company does not hold any fee
-------------
simple interest in any real estate. The Real Property described in Schedule
--------
3.14 constitutes all real property interests necessary to conduct the business
- ----
A-21
<PAGE>
and operations of the Company as now conducted and is suitable and adequate for
the uses for which it is currently devoted.
SECTION 3.15 Intellectual Property.
(a) Schedule 3.15 sets forth: (i) all registered and unregistered
-------------
trademarks, service marks, trade names, maskworks, registered and, to the
Company's Knowledge, all unregistered copyrights, including the jurisdictions in
which each such Intellectual Property right has been registered or in which any
application for such registration has been filed, and (ii) all current written,
and to the best of the Company's Knowledge, oral licenses, sublicenses,
franchises and other agreements under which the Company licenses the Company's
Intellectual Property to third parties or pursuant to which the Company is
authorized to use a third party's Intellectual Property. Schedule 3.15 sets
-------------
forth whether the Company is the sole owner or joint owner or licensee of each
item of Intellectual Property identified therein, and any license fees,
royalties or similar compensation which, are payable to or are due in the future
from the Company.
(b) The Company either owns or has adequate rights to use all of the
Intellectual Property that is necessary for, and currently used for, its
business as now conducted, and the Company's Intellectual Property is free and
clear of Encumbrances. The Company has previously furnished to Acquiror
evidence of either ownership by the Company of or license rights to use its
Intellectual Property.
(c) There are no pending or, to the Company's Knowledge, threatened
claims against the Company alleging that the conduct of its business infringes
any Intellectual Property rights of others. The Intellectual Property of the
Company is not subject to any outstanding injunction, judgment, order, decree,
ruling or charge in any such case binding upon the Company. To the Company's
Knowledge, the Company has not engaged in unfair competition against any third
party and the business of the Company as now conducted does not infringe any
third party Intellectual Property rights.
(d) To the Company's Knowledge, no third party is infringing upon any
of the Company's Intellectual Property, and the Company has not notified any
third party that it believes such third party is interfering with, infringing,
or misappropriating any of the Company's Intellectual Property or engaging in
any act of unfair competition. To the Company's Knowledge, the Company has the
right to bring an action for the infringement of all of its Intellectual
Property.
(e) [OMITTED]
(f) [OMITTED]
A-22
<PAGE>
(g) Except as set forth on Schedule 3.15, to the Company's Knowledge,
any hardware, software or firmware licensed or purchased by the Company from
third parties, and all Company Software, accurately processes date/time data, to
the extent such date/time data processes contained in the hardware, software,
firmware or Company software (x) are used by the Company and (y) the failure of
which would reasonably be expected to cause a Company Material Adverse Effect on
the services provided to the Company's customers (including but not limited to,
calculating, comparing, and sequencing) from, into, and between the twentieth
and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations when either (i) used as a standalone application, or (ii)
integrated into or otherwise used in conjunction with third party hardware,
software, firmware and data ("Third Party Products") with which such Company
--------------------
Software was designed or intended to operate at the time such Company Software
was (A) developed for internal use or (B) provided to the Company's customers or
tested by the Company for such customers, whichever is later ("Year 2000
---------
Ready").
(h) (i) The Company has a compliance program in place to evaluate and
address issues regarding whether its computer systems and software, including
without limitation Third Party Products and the Company Software (collectively,
the "Software") are Year 2000 Ready; (ii) the Company has taken, is taking, and
--------
will take all measures it reasonably believes are necessary to make the
Software, particularly the operating systems and software upon which the Company
will rely to provide services to its customers, Year 2000 Ready, including
remediation and the use of contingency plans, if necessary, should a year 2000
problem arise from any cause within the Company's control which may affect those
services; and (iii) the Company has requested or is in the process of requesting
from those third-party vendors and suppliers of the Company that directly
support the services that the Company provides to customers reasonable
assurances that their computer systems and related software are Year 2000 Ready,
and that they are taking or have taken adequate measures to prevent problems
caused by the year 2000 that may impact the services and products they provide
to the Company. The Company has previously furnished Acquiror with copies of
all year 2000 warranties that the Company has provided, and currently provides,
to its customers.
SECTION 3.16. Environmental Matters.
(a) The Company is in material compliance with all Environmental Laws
(as defined below). The Company does not have any material liability under any
Environmental Law, nor is the Company responsible for any liability of any other
person under any Environmental Law. There are no pending or, to the Knowledge
of the Company, threatened actions, suits, claims, legal proceedings or other
proceedings based on, and the Company has not directly or indirectly received
any notice of any complaint, order, directive, citation, notice of
responsibility, notice of potential responsibility, or information request from
A-23
<PAGE>
any Government Entity or any other person arising out of or attributable to:
(i) the current or past presence at any part of the Real Property of Hazardous
Materials (as defined below) or any substances that pose a hazard to human
health or an impediment to working conditions; (ii) the current or past release
or threatened release into the environment from the Real Property (including,
without limitation, into any storm drain, sewer, septic system or publicly owned
treatment works) of any Hazardous Materials or any substances that pose a hazard
to human health or an impediment to working conditions; (iii) the off-site
disposal of Hazardous Materials originating on or from the Real Property; or
(iv) any violation of Environmental Laws at any part of the Real Property or
otherwise arising from the Company's activities involving Hazardous Materials.
(b) As used herein, these terms shall have the following meanings:
(i) "Environmental Laws" means all applicable federal, state and
------------------
local Laws (including the common law), rules, requirements and regulations
relating to pollution, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
protection of human health as it relates to the environment including, without
limitation, Laws and regulations relating to releases of Hazardous Materials, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials or relating to
management of asbestos in buildings.
(ii) "Hazardous Materials" means wastes, substances, or materials
-------------------
(whether solids, liquids or gases) that are deemed hazardous, toxic, pollutants,
or contaminants, including without limitation, substances defined as "hazardous
substances", "toxic substances", "radioactive materials", or other similar
designations in, or otherwise subject to regulation under, any Environmental
Laws.
SECTION 3.17 Absence of Litigation.
Except as set forth on Schedule 3.17, there are (i) no claims,
-------------
actions, suits, investigations, or proceedings pending or, to the Company's
Knowledge, threatened against the Company or any of its properties or Assets
before any court, administrative, governmental, arbitral, mediation or
regulatory authority or body, domestic or foreign which, if determined adversely
to the Company, would have a Company Material Adverse Effect, and (ii) no
judgments, decrees, injunctions or orders of any Government Entity or arbitrator
outstanding against the Company or any of its properties or Assets.
A-24
<PAGE>
SECTION 3.18. Books and Records.
The books of account, stock records, minute books and other records of
the Company are true and complete in all material respects, and the matters
contained therein are appropriately and accurately reflected in the financial
statements to the extent required to be reflected therein.
SECTION 3.19. Taxes and Assessments.
(a) Except as set forth on Schedule 3.19(a), the Company has (or, in
----------------
the case of returns becoming due after the date hereof and on or before the
Effective Time, will have prior to the Effective Time) duly filed all Tax
returns required to be filed by Company on or before the Effective Time with
respect to all applicable Taxes (as defined below). Except as set forth on
Schedule 3.19(a), no penalties or other charges are or will become due with
- ----------------
respect to any of the Company's Tax returns as the result of the late filing
thereof. All of the Company Tax returns are (or, in the case of returns
becoming due after the date hereof and on or before the Effective Time, will be)
true and complete in all respects. The Company: (i) has paid all Taxes due or
claimed to be due by any taxing authority in connection with any of the Company
Tax returns (without regard to whether or not such Taxes are shown as due on
such Company Tax returns); or (ii) has established (or, in the case of amounts
becoming due after the date hereof, prior to the Effective Time will have paid
or established) in its financial statements provided to Acquiror adequate
reserves (in conformity with generally accepted accounting principles
consistently applied) for the payment of such Taxes. The amounts set up as
reserves for Taxes on the financial statements of the Company furnished to
Acquiror are sufficient for the payment of all unpaid Taxes, whether or not such
Taxes are disputed or are yet due and payable, for or with respect to the
period, and for which the Company may be liable or as a transferee of the assets
of, or successor to, any corporation, person, association, partnership, joint
venture or other entity.
(b) Except as set forth on Schedule 3.19(b), the Company, either in
----------------
its own right or as a transferee, has no, and on the Effective Time will not
have, any material liability for Taxes payable for or with respect to any
periods prior to and including the Effective Time in excess of the amounts
actually paid prior to the Effective Time or reserved for in financial
statements furnished to Acquiror.
(c) There is no action, suit, proceeding, audit, investigation or
claim pending or, to the Knowledge of the Company, threatened in respect of any
Taxes for which the Company is or may become liable, nor has any deficiency or
claim for any such Taxes been proposed, asserted or, to the Knowledge of the
Company, threatened. The Company has not consented to any waivers or extensions
of any statute of limitations with respect to any taxable year of the Company.
Except as set forth on Schedule 3.19(c), there is no agreement, waiver or
----------------
A-25
<PAGE>
consent providing for an extension of time with respect to the assessment or
collection of any Taxes against the Company, and no power of attorney granted by
the Company with respect to any tax matters is currently in force.
(d) The Company has furnished or will, within three days, hereafter
furnish to Acquiror true and complete copies of all Company Tax returns for the
period beginning January 1, 1993 through December 31, 1998 and, to the Knowledge
of the Company, all written communications contained in the files of the
Company, by or to the Company relating to any such Company Tax returns or to any
deficiency or claim proposed and/or asserted, irrespective of the outcome of
such matter, but only to the extent such items relate to tax years (i) which are
subject to an audit, investigation, examination or other proceeding, or (ii)
with respect to which the statute of limitations has not expired.
(e) Schedule 3.19(e) sets forth (i) all federal tax elections that
----------------
currently are in effect with respect to Company, and (ii) all elections for
purposes of foreign, state or local Taxes and all consents or agreements for
purposes of federal, foreign, state or local Taxes in each case that reasonably
could be expected to affect or be binding upon Company or its assets or
operations after the Effective Time. Schedule 3.19(e) sets forth all changes in
----------------
accounting methods for Tax purposes at any time made, agreed to, requested or
required with respect to the Company.
(f) Except as set forth in Schedule 3.19(f), the Company (i) is not
----------------
and never has been a partner in a partnership or an owner of an interest in an
entity treated as a partnership for federal income tax purposes; (ii) has not
executed or filed with the Internal Revenue Service any consent to have the
provisions of Section 341(f) of the Code apply to it; (iii) is not subject to
Section 999 of the Code; (iv) is not a passive foreign investment company as
defined in Section 1296(a) of the Code; and (v) except as set forth on Schedule
--------
3.19(f), is not a party to an agreement relating to the sharing, allocation or
- -------
payment of, or indemnity for, Taxes.
SECTION 3.20. Customers.
To the Knowledge of the Company, the relationships of the Company with
its customers are generally good commercial working relationships. Except as
set forth on Schedule 3.20, during the twelve (12) months prior to the date of
-------------
this Agreement, no customer of the Company which accounted for in excess of
$120,000 of the revenues of the Company during such twelve (12) months has
canceled or otherwise terminated its relationship with the Company.
SECTION 3.21. Certain Business Practices.
Neither the Company nor, to the Knowledge of the Company, any of its
officers, directors, employees or agents (or stockholders, distributors,
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<PAGE>
representatives or other persons acting on the express, implied or apparent
authority of the Company) have paid, given or received or have offered or
promised to pay, give or receive, any bribe or other unlawful payment of money
or other thing of value, any unlawful discount, or any other unlawful
inducement, to or from any person or Government Entity in the United States or
elsewhere in connection with or in furtherance of the business of the Company
(including, without limitation, any offer, payment or promise to pay money or
other thing of value (a) to any foreign official or political party (or official
thereof) for the purposes of influencing any act, decision or omission in order
to assist the Company in obtaining business for or with, or directing business
to, any person, or (b) to any person, while knowing that all or a portion of
such money or other thing of value will be offered, given or promised to any
such official or party for such purposes). The business of the Company is not
in any manner dependent upon the making or receipt of such payments, discounts
or other inducements.
SECTION 3.22. Employment Matters.
(a) The Company has provided to Acquiror a true and complete list of
names, positions and annual rates of compensation (including bonuses and other
special compensation arrangements) of all current directors, officers and
employees of the Company. Schedule 3.22 identifies the Company's key employees
-------------
(i) whose skills are important to the operation of the Company's business in the
ordinary course and (ii) are not readily replaceable within a reasonable time
and without an unreasonable amount of cost to the Company (together the "Key
---
Employees"). With respect to any persons employed by the Company, the Company
- ---------
is in compliance in all material respects with all Laws respecting employment
conditions and practices and has withheld all amounts required by any applicable
Laws to be withheld from wages and has no liability, except as accrued for on
the Company Balance Sheet, for any Taxes or penalties for failure to comply with
any of the foregoing.
(b) There are no collective bargaining agreements applicable to any
Company employees and the Company does not have a duty to bargain with any labor
organization with respect to any such persons. There is not pending any demand
for recognition or any other request or demand from a labor organization for
representative status with respect to any persons employed by the Company.
(c) With respect to any persons employed by the Company, (i) the
Company has not engaged in any unfair labor practice within the meaning of the
National Labor Relations Act and has not violated any legal requirement
prohibiting discrimination on the basis of race, color, national origin, sex,
religion, age, marital status, or disability in its employment conditions or
practices; and (ii) there are no pending or, to the Knowledge of the Company,
threatened unfair labor practice charges or discrimination complaints relating
to race, color, national origin, sex,
A-27
<PAGE>
religion, age, marital status, or disability against the Company before any
Government Entity nor, to the Knowledge of the Company, does any basis therefor
exist.
SECTION 3.23. Employee Benefit Plans.
(a) Schedule 3.23 sets forth a list of all of the pension, retirement,
-------------
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, sabbatical, vacation, bonus, loans, medical, dental, vision care,
disability, life insurance or other employee programs, arrangements or
agreements and all other material employee benefit plans or fringe benefit
plans, including, without limitation, all "employee benefit plans" as that term
is defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), currently adopted, maintained by, sponsored in whole
-----
or in part by, or contributed to by the Company or for which the Company could
incur a liability for any entity required to be aggregated with the Company
(each, a "Commonly Controlled Entity") pursuant to Section 414 of the Code for
--------------------------
the benefit of present and former employees or directors of the Company or their
beneficiaries, or providing benefits to such persons in respect of services
provided to any such entity (collectively, the "Benefit Plans"). Any of the
-------------
Benefit Plans which is an "employee pension benefit plan", as that term is
defined in Section 3(2) of ERISA, is referred to herein as an "ERISA Plan".
----------
(b) Each of the Benefit Plans intended to be "qualified" within the
meaning of Section 401(a) or 501 of the Code has been issued an opinion letter
by the Internal Revenue Service as to the acceptability of the Plan under the
Internal Revenue Code and to the Company's Knowledge, no circumstances exist
that could reasonably be expected by the Company to result in the revocation of
such determination. Except as set forth on Schedule 3.23(b), each of the
----------------
Benefit Plans is in compliance with their terms and the applicable terms of
ERISA and the Code and any other applicable Laws, rules and regulations the
breach or violation of which could result in a material liability to the Company
or any Commonly Controlled Entity.
(c) The Company has not, at any time, maintained or contributed to any
ERISA Plan which is a defined benefit pension plan. All contributions, premiums
and other payments with respect to each ERISA Plan which have become due and
payable have been paid or accrued.
(d) No Benefit Plan is or has been a multiemployer plan within the
meaning of Section 3(37) of ERISA (a "Multiemployer Plan"). Neither the Company
------------------
nor any Commonly Controlled Entity has completely or partially withdrawn from
any Multiemployer Plan. No termination liability to the Pension Benefit
A-28
<PAGE>
Guaranty Corporation or withdrawal liability to any Multiemployer Plan that is
material in the aggregate has been or is reasonably expected to be incurred with
respect to any Multiemployer Plan by the Company or any Commonly Controlled
Entity.
(e) The Company has made available to Acquiror complete copies, as of
the date hereof, of all of the Benefit Plans that have been reduced to writing,
together with all documents establishing or constituting any related trust,
annuity contract, insurance contract or other funding instrument. The Company
has made available to Acquiror complete copies of current plan summaries,
employee booklets, personnel manuals and other material documents or written
materials concerning the Benefit Plans that are in the possession of the Company
as of the date hereof.
(f) No claim, lawsuit, arbitration or other action has been instituted
or, to the Knowledge of the Company, threatened against any Benefit Plan.
(g) Except as contemplated by the terms of this Agreement and as set
forth on Schedule 3.23(g), the consummation of the transactions contemplated by
----------------
this Agreement will not give rise to any liability, including, without
limitation, liability for severance pay or termination pay, or accelerate the
time of payment or vesting or increase the amount of compensation or benefits
due to any employee, director or stockholder of the Company (whether current,
former, or retired) or their beneficiaries solely by reason of such
transactions. No amounts payable under any Benefit Plan will fail to be
deductible for federal income tax purposes by virtue of Section 280G or 162(m)
of the Code.
(h) The Company does not maintain, contribute to, or in any way
provide for any benefits of any kind (other than under Section 4980B of the
Code, the Federal Social Security Act, or a plan qualified under Section 401(a)
of the Code) to any current or future retiree or terminee.
(i) Neither the Company nor any Commonly Controlled Entity has (or
could incur) any liability under Title IV of ERISA.
SECTION 3.24. Transactions with Related Parties.
Except as set forth on Schedule 3.24, no present or former officer,
-------------
director, stockholder or person known by the Company to be an affiliate of the
Company, nor any person known by the Company to be an affiliate of any such
person, is currently a party to any transaction or agreement with the Company,
including any agreement providing for any loans, advances, the employment of,
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furnishing of services by, rental of its Assets from or to, or otherwise
requiring payments to, any such officer, director, stockholder or affiliate.
SECTION 3.25. Insurance.
Schedule 3.25 contains a list of all insurance policies of title,
-------------
property, fire, casualty, liability, life, worker's compensation, libel and
slander, and other forms of insurance of any kind relating to the Assets or the
business and operations of the Company, true and correct copies of which have
been made available to Acquiror. All premiums due with respect to such policies
covering all periods up to and including the date hereof have been paid, and no
notice of cancellation or termination has been received with respect to any such
policy. To the Company's Knowledge, all such policies are (a) in full force and
effect; (b) are sufficient for compliance by the Company with all requirements
of applicable Law and of all licenses, franchises and other agreements to which
the Company is a party; (c) are valid, outstanding and enforceable policies; and
(d) insure against risks of the kind customarily insured against and in amounts
customarily carried by corporations similarly situated and provide adequate
insurance coverage for the respective Assets and the business and operations of
the Company. There are no pending claims under any insurance policies and the
Company is not aware of any facts which would lead the Company to believe that
the Company will likely receive a claim under any insurance policies.
SECTION 3.26. Brokers.
Except as set forth on Schedule 3.26, no broker, finder or investment
-------------
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company or any stockholder of the
Company.
SECTION 3.27. Minute Books.
The minute books of the Company made available to Acquiror contain a
complete and accurate summary of all meetings of directors, committees and
shareholders or actions by written consent since the time of incorporation of
the Company through December 31, 1998, and reflect all transactions referred to
in such minutes accurately in all material respects, except to the extent that
the failure of the record of the committee meetings to be complete and accurate
would not reasonably be expected to cause a Company Material Adverse Effect.
Nothing which has taken place in any such meeting held since December 31, 1998
which would reasonably be expected to have a Company Material Adverse Effect.
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SECTION 3.28. Reorganization Treatment.
The Company has not taken, has not agreed to take, is not obligated to
take, and does not intend to take any action that would cause the Merger to fail
to qualify as a reorganization within the meaning of Section 368 of the Code.
SECTION 3.29. Board Recommendation.
The Board of Directors of the Company has adopted, in compliance with
Delaware Law, a resolution approving and adopting this Agreement and the
transactions contemplated hereby and recommending approval and adoption of this
Agreement and the transactions contemplated hereby by the Company Stockholders.
SECTION 3.30. Vote Required.
The affirmative vote of the holders of a majority of the voting power
attributable to the outstanding shares of Company Common Stock is the only vote
of the holders of any class or series of capital stock of the Company necessary
to approve the transactions contemplated by this Agreement.
SECTION 3.31. State Takeover Statutes; Certain Charter Provisions.
The Board of Directors of the Company has, to the extent such statutes
are applicable, taken all action (including appropriate approvals of the Board
of Directors of the Company) necessary to exempt the Company, the Merger, this
Agreement and the transactions contemplated hereby and thereby from Section 203
of DGCL. To the Knowledge of the Company, no other state takeover statutes or
charter or bylaw provisions are applicable to the Merger or this Agreement and
the transactions contemplated hereby or thereby.
SECTION 3.32. Disclosure.
No representations or warranties by the Company in this Agreement and
no statement or information contained in the Schedules hereto prepared by or on
behalf of Acquiror or any certificate furnished or to be furnished by the
Company to Acquiror pursuant to the provisions of this Agreement, contains or
will contain any untrue statement of a material fact or omits or will omit to
state any fact necessary, in light of the circumstances under which it was made,
in order to make the statements herein or therein not misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to the Company as follows:
SECTION 4.1. Organization and Qualification.
Acquiror is a corporation duly organized, validly existing and in good
standing under the Laws of the State of Delaware. Acquiror has the requisite
power and authority to own, lease and operate its Assets and properties and to
carry on its business as it is now being conducted and to perform the terms of
this Agreement and the transaction contemplated hereby. Acquiror is duly
qualified to conduct its business, and is in good standing, in each jurisdiction
in which the failure to be so qualified and in good standing would reasonably be
expected to have an Acquiror Material Adverse Effect.
SECTION 4.2. Certificate of Incorporation and Bylaws.
Acquiror has heretofore delivered to the Company a complete and
correct copy of the certificate of incorporation and the bylaws of Acquiror,
each as amended to date. Such certificate of incorporation and bylaws are in
full force and effect. Acquiror is not in violation of any of the provisions of
its certificate of incorporation or bylaws.
SECTION 4.3. Capitalization.
The authorized capital stock of Acquiror consists of: (a) ninety
million (90,000,000) Acquiror Shares, of which, as of April 13, 1999, fifty-one
million six hundred seventy seven thousand six hundred and five (51,677,605)
shares are issued and outstanding; and (b) five million (5,000,000) shares of
Preferred Stock, par value $0.01 per share, $7.40 liquidation preference, of
which, as of April 13, 1999, one million four hundred eighty thousand seven
hundred seventy (1,480,770) shares are issued and outstanding. Other than the
Acquiror's 1997 Stock Option Plan which may be amended from time to time, there
are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
Acquiror or obligating Acquiror to issue or sell any shares of capital stock of,
or other equity interests in Acquiror, including any securities directly or
indirectly convertible into or exercisable or exchangeable for any capital stock
or other equity securities of Acquiror. There are no outstanding obligations of
Acquiror to repurchase, redeem or otherwise acquire any shares of its capital
stock or make any investment (in the form of a loan, capital contribution or
otherwise) in any other person. All of the issued and outstanding Acquiror
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Shares have been, and the Acquiror Shares to be issued in the Merger will be,
duly authorized and validly issued in accordance with applicable Laws and are
and will be fully paid and nonassessable and not subject to preemptive rights.
Except for shares reserved pursuant to the Acquiror's 1997 Stock Option Plan
which may be amended from time to time, no shares of capital stock of Acquiror
have been reserved for any purpose.
SECTION 4.4. Authority.
Acquiror has the necessary corporate power and authority to enter into
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. Except as described in Section 8.2(d) and
--------------
8.2(e), the execution and delivery of this Agreement by Acquiror and the
- ------
consummation by Acquiror of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action and no other corporate
proceedings on the part of Acquiror are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Acquiror and, assuming the due authorization,
execution and delivery by the Company, constitutes a legal, valid and binding
obligation of Acquiror, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar Laws of general applicability relating to or
affecting creditors' rights generally and by the application of general
principles of equity.
SECTION 4.5. No Conflict; Required Filings and Consents.
(a) Except as required in Section 8.2(d) and 8.2(e), the execution and
-------------- ------
delivery of this Agreement by Acquiror do not, and the performance by Acquiror
of its obligations under this Agreement will not, (i) conflict with or violate
the certificate of incorporation or bylaws of Acquiror, (ii) conflict with or
violate any Laws applicable to Acquiror or its Assets, or (iii) result in any
breach of or constitute a default under any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Acquiror is a party or by which Acquiror is bound, or by
which any of its Assets is subject.
(b) The execution and delivery of this Agreement by Acquiror does not,
and the performance of this Agreement by Acquiror will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
Government Entity, except for (A) the filing and recordation of appropriate
merger documents as required by the DGCL, and (B) pursuant to applicable
requirements, if any, of the HSR Act and the Communications Act.
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SECTION 4.6. Brokers.
No broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Acquiror.
SECTION 4.7. Reorganization Treatment.
Neither Acquiror nor the Merger Sub has taken, agreed to take, or
intends to take any action that would cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368 of the Code.
SECTION 4.8. Disclosure.
No representations or warranties by Acquiror in this Agreement and no
statement or information contained in the Schedules hereto prepared by or on
behalf of Acquiror or any certificate furnished or to be furnished by Acquiror
to the Company pursuant to the provisions of this Agreement, or the most recent
Acquiror's 10-K (and any proxy statements, annual reports or any other documents
incorporated therein, if any) filed pursuant to the Exchange Act contains or
will contain any untrue statement of a material fact or omits or will omit to
state any fact necessary, in light of the circumstances under which it was made,
in order to make the statements herein or therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF ACQUIROR AND MERGER SUB
Acquiror and Merger Sub jointly and severally represent and warrant to
the Company as follows:
SECTION 5.1. Organization and Qualification.
Merger Sub is a corporation duly organized, validly existing and in
good standing under the Laws of the State of Delaware. Merger Sub has the
requisite power and authority to own, lease and operate its Assets and
properties and to carry on its business as it is now being conducted and to
perform the terms of this Agreement and the transaction contemplated hereby.
Merger Sub is duly qualified to conduct its business, and is in good standing,
in each jurisdiction in which the failure to be so qualified an in good standing
would reasonably be expected to cause an Acquiror Material Adverse Effect.
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SECTION 5.2. Certificate of Incorporation and Bylaws.
Merger Sub has heretofore made available to the Company a complete and
correct copy of the certificate of incorporation and the bylaws of Merger Sub,
each as amended to date. Such certificate of incorporation and bylaws are in
full force and effect. Merger Sub is not in violation of any of the provisions
of its certificate of incorporation or bylaws or other organizational or
governing document.
SECTION 5.3. Authority.
Merger Sub has the necessary corporate power and authority to enter
into this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. Except as described in Section 8.2(d) and
--------------
8.2(e), the execution and delivery of this Agreement by Merger Sub and the
- ------
consummation by Merger Sub of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action and no other
corporate proceedings on the part of Merger Sub are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by Merger Sub and, assuming the due
authorization, execution and delivery by the Company and Acquiror, constitutes a
legal, valid and binding obligation of Merger Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar Laws of general
applicability relating to or affecting creditors' rights generally and by the
application of general principles of equity.
SECTION 5.4. No Conflict; Required Filings and Consents.
(a) Except as required in Section 8.2(d) and 8.2(e), the execution and
-------------- ------
delivery of this Agreement by Merger Sub do not, and the performance by Merger
Sub of its obligations under this Agreement will not, (i) conflict with or
violate the certificate of incorporation or bylaws of Merger Sub, (ii) conflict
with or violate any Laws applicable to Merger Sub or its Assets, or (iii) result
in any breach of or constitute a default under any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Merger Sub is a party or by which Merger Sub
is bound, or by which any of its Assets is subject.
(b) The execution and delivery of this Agreement by Merger Sub does
not, and the performance of this Agreement by Merger Sub will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any Government Entity, except for (A) the filing and recordation of
appropriate merger documents as required by the DGCL, and (B) pursuant to
applicable requirements, if any, of the HSR Act and the Communications Act.
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ARTICLE VI
COVENANTS
SECTION 6.1. Affirmative Covenants of the Company.
The Company hereby covenants and agrees that, prior to the Effective
Time, unless otherwise expressly contemplated by this Agreement or consented to
in writing by Acquiror, the Company shall (a) operate its business in the usual
and ordinary course consistent with past practices and in accordance with
applicable Laws; (b) preserve intact its business organization, maintain its
rights and contracts, use its commercially reasonable efforts to retain the
services of its principal officers and Key Employees and maintain its
relationship with its respective suppliers, contractors, distributors, customers
and others having business relationships with it; (c) keep its Assets in as good
repair and condition as at present, ordinary wear and tear excepted; and (d)
keep in full force and effect insurance comparable in amount and scope of
coverage to that currently maintained.
SECTION 6.2. Negative Covenants of the Company.
Except (i) as expressly contemplated by this Agreement or otherwise
consented to in writing by Acquiror (which consent, for purposes of Section
-------
6.2(a) only, will not be unreasonably withheld) and (ii) with respect to matters
- ------
disclosed in Schedules to this Agreement which require continued performance
pursuant to a contract existing as of the date of this Agreement (but not
including any modification made after the date of this Agreement) or pursuant to
Laws, from the date hereof until the Effective Time, the Company shall not do
any of the following:
(a) (i) increase in any manner the compensation or fringe benefits of,
or pay any bonus to, any director, officer or employee; (ii) grant any severance
or termination pay (other than pursuant to the normal severance practices or
existing agreements of the Company in effect on the date of this Agreement) to,
or enter into any severance agreement with, any director, officer or employee,
or enter into any employment agreement with any director, officer or employee
other than a severance agreement entered into pursuant to a valid employment
agreement listed on Schedule 3.12 or otherwise with the prior written consent of
-----------
Acquiror; (iii) establish, adopt, enter into or amend any ERISA Plan or other
arrangement, except as may be required to comply with applicable Law; (iv) pay
any benefit not provided for under any ERISA Plan or other arrangement; (v)
grant any awards under any bonus, incentive, performance or other compensation
plan or arrangement or ERISA Plan or other arrangement (including the grant of
stock options, stock appreciation rights, stock-based or stock-related awards,
performance units or restricted stock, or the removal of existing restrictions
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in any ERISA Plan or other arrangement or agreement or awards made thereunder),
(vi) take any action to fund or in any other way secure the payment of
compensation or benefits under any agreement or (vii) promote or fire any
director, officer or employee;
(b) declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock other than
capital stock repurchased from departing employees in the ordinary course of
business;
(c) (i) redeem, purchase or otherwise acquire any shares of capital
stock of the Company or any securities or obligations convertible into or
exchangeable for any shares of capital stock of the Company, or any options,
warrants or conversion or other rights to acquire any shares of capital stock of
the Company or any such securities or obligations, or any other securities
thereof, other than (x) redemption and purchases from departing employees in the
ordinary course of business or (y) stock acquired by the Company from current
employees pursuant to historic Company practices in connection with the exercise
of such employees' stock options; (ii) effect any reorganization or
recapitalization; or (iii) split, combine or reclassify any of its capital stock
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, shares of its capital stock.
(d) issue, deliver, award, grant or sell, or authorize the issuance,
delivery, award, grant or sale (including the grant of any limitations in voting
rights or other Encumbrances) of, any shares of any class of its capital stock
(including shares held in treasury but excluding shares issuable upon the
exercise of options outstanding on the date hereof in accordance with their
terms as of the date hereof), any securities convertible into or exercisable or
exchangeable for any such shares, or any rights, warrants or options to acquire,
any such shares, or amend or otherwise modify the terms of any such rights,
warrants or options the effect of which shall be to make such terms more
favorable to the holders thereof;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the Assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any Assets of any other person (other than the purchase of assets from
suppliers or vendors in the ordinary course of business);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
subject to any Encumbrance or dispose of, or agree to sell, lease, exchange,
mortgage, pledge, transfer or otherwise subject to any Encumbrance or dispose
of, any of its Assets, except for sales, dispositions or transfers in the
ordinary course of business;
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(g) propose or adopt any amendments to its articles or certificate of
incorporation, bylaws or other comparable charter or organizational documents;
(h) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes which would
reasonably be expected to result in a Company Material Adverse Effect, or change
any of its methods of reporting income or deductions for federal income tax
purposes from those employed in the preparation of the federal income tax
returns for the taxable year ended December 31, 1997, except in either case as
may be required by Law, the Internal Revenue Service or generally accepted
accounting principles.
(i) make or agree to make any new capital expenditures which are not
included in the Company's 1999 capital budget, a copy of which was furnished to
Acquiror, to the extent that such new capital expenditures exceed in the
aggregate $25,000;
(j) (i) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company,
guarantee any debt securities of another person, enter into any "keep well" or
other agreement to maintain any financial statement condition of another person
or enter into any agreement having the economic effect of any of the foregoing,
except for borrowings incurred in the ordinary course of business, or (ii) make
any loans, advances or capital contributions to, or investments in, any other
person other than travel and payroll advances made to employees in the ordinary
course of business.
(k) pay, discharge, settle or satisfy any claims, liabilities or
obligations (whether absolute or contingent, matured or unmatured, known or
unknown), other than the payments, discharges or satisfactions, in the ordinary
course of business which are materially in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the most
recent Financial Statements or waive any material benefits of, or agree to
modify in any material respect, any confidentiality, standstill or similar
agreements to which the Company is a party;
(l) waive, release or assign any rights or claims, or modify, amend or
terminate any agreement to which the Company is a party;
(m) make any change in any method of accounting or accounting practice
or policy other than those required by generally accepted accounting principles
or a Government Entity;
(n) take any action or fail to take any action that would have a
Company Material Adverse Effect prior to or after the Effective Time or a
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material adverse effect after the Effective Time, or that would adversely affect
the ability of the Company prior to the Effective Time, or Acquiror or any of
its subsidiaries after the Effective Time, to obtain consents of third parties
or approvals of Government Entities required to consummate the transactions
contemplated in this Agreement; or
(o) authorize, or commit or agree to do any of the foregoing.
SECTION 6.3. Certain Tax Matters.
From the date hereof until the Effective Time, the Company (a) will
prepare and timely file with the relevant Taxing authority all Company Tax
returns ("Post-Signing Returns") required to be filed, which Post-Signing
--------------------
Returns shall be accurate in all material respects, (b) will timely pay all
Taxes due and payable with respect to such Post-Signing Returns, (c) will pay or
otherwise make adequate provision for all Taxes payable by the Company for which
no Post-Signing Return is due prior to the Effective Time, and (d) will promptly
notify Acquiror of any action, suit, proceeding, claim or audit pending against
or with respect to the Company in respect of any Taxes.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1. Registration Statement; Proxy Statement.
(a) As promptly as practicable after the execution of this Agreement,
Acquiror shall prepare and file with the SEC a registration statement on Form
S-4 (such registration statement, together with the amendments thereto being the
"Registration Statement"), containing a proxy statement/prospectus, in
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connection with (i) the registration under the Securities Act of 1933, as
amended (the "Securities Act") of the Acquiror Shares issuable pursuant to
--------------
Section 2.1, (ii) the vote or consent of the Company Stockholders with respect
- -----------
to the Merger (such proxy statement/prospectus, together with any amendments
thereof or supplements thereto, in each case in the form or forms delivered to
the Company Stockholders, being the "Proxy Statement"), (iii) and the other
---------------
transactions contemplated by this Agreement. Acquiror agrees to provide the
Company with an opportunity to review and comment on the Registration Statement
and the Proxy Statement before filing. Acquiror agrees promptly to provide the
Company with copies of all correspondence from and all responsive correspondence
to the SEC regarding the Registration Statement and Proxy Statement. Acquiror
agrees promptly to notify the Company of all stop orders or threatened stop
orders of which it becomes aware with respect to the Registration Statement.
Each of Acquiror and the Company will use all reasonable best efforts to have or
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cause the Registration Statement to become effective as promptly as practicable,
and shall take any action required to be taken under any applicable federal or
state securities Laws in connection with the issuance of Acquiror Shares in the
Merger. Each of Acquiror and the Company shall furnish all information
concerning it and the holders of its capital stock as the other may reasonably
request in connection with such actions. As promptly as practicable after the
Registration Statement shall have become effective, the Company shall mail or
otherwise deliver the Proxy Statement to its stockholders, and the Company shall
comply with the proxy solicitation rules and regulations under the DGCL in
connection with the solicitation of such stockholders. The Proxy Statement
shall include the recommendation of the Company's Board of Directors to the
Company Stockholders to vote for or consent to the approval of this Agreement
and the transactions contemplated hereby.
(b) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by the
Company for inclusion in the Proxy Statement to be sent to the Company
Stockholders in connection with securing the vote or consent of the Company
Stockholders to consider the Merger shall not, at the date the Proxy Statement
(or any amendment thereof or supplement hereto) is first delivered to
stockholders, at the time the vote or consent is secured or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading. If at any time prior to the Effective Time any event or
circumstance relating to the Company or any of its affiliates, or its or their
respective officers or directors, should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform Acquiror.
All documents that the Company is responsible for filing with the SEC in
connection with the transactions contemplated herein will comply as to form and
substance in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules and
------------
regulations thereunder. The Company's liability pursuant to this Section shall
not be reduced or diminished in any manner by the fact that a third party,
including, but not limited to, Company's counsel, Company's banker, Acquiror, or
Acquiror's counsel, assisted in the presentation of such information or
statements in the Proxy Statement or Registration Statement, or any amendments
or supplements thereto.
(c) The information supplied by Acquiror for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
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declared effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by
Acquiror for inclusion in the Proxy Statement to be sent to the Company
Stockholders in connection with securing the vote or consent shall not, at the
date the Proxy Statement (or any amendment thereof or supplement thereto) is
first delivered to stockholders, at the time the vote or consent is secured or
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they are made, not misleading. If at any time prior to the Effective Time any
event or circumstance relating to Acquiror or any of its respective affiliates,
or its or their respective officers or directors, should be discovered by
Acquiror which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, Acquiror shall promptly inform the
Company. All documents that Acquiror is responsible for filing with the SEC in
connection with the transactions contemplated herein will comply as to form and
substance in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Exchange Act and
the rules and regulations thereunder.
(d) The Company and Acquiror each hereby (i) consents to the use of
its name and, on behalf of its subsidiaries and affiliates, the names of such
subsidiaries and affiliates and to the inclusion of financial statements and
business information relating to such party and its subsidiaries and affiliates
(in each case, to the extent required by applicable securities Laws) in any
registration statement or proxy statement prepared by the Company or Acquiror
pursuant to this Agreement; (ii) agrees to use its reasonable commercial efforts
to obtain the written consent of any person retained by it which may be required
to be named (as an expert or otherwise) in such registration statement or proxy
statement; and (iii) agrees to cooperate, and to use its reasonable commercial
efforts to cause its subsidiaries and affiliates to cooperate, with any legal
counsel, investment banker, accountant or other agent or representative retained
by any of the parties specified in clause (i) in connection with the preparation
of any and all information required, as determined after consultation with each
party's counsel, to be disclosed by applicable securities Laws in any such
registration statement or proxy statement.
SECTION 7.2. Company Stockholder Approval.
As promptly as practicable after the Registration Statement has become
effective, the Company shall submit this Agreement and the transactions
contemplated hereby to the Company Stockholders for approval and adoption as
provided by the DGCL and its certificate of incorporation and bylaws. The
Company shall use its best efforts to solicit and obtain the consent of the
Company Stockholders sufficient to approve the Merger and this Agreement and to
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enable the Closing to occur as promptly as practicable. The materials submitted
to the Company Stockholders shall be subject to review and approval by Acquiror
and include information regarding the Company and Acquiror, the terms of the
Merger and this Agreement and the recommendation of the Board of Directors of
the Company in favor of the Merger and this Agreement.
SECTION 7.3. Appropriate Action; Consents; Filings.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, the Company and Acquiror shall use their reasonable commercial
efforts to take, or cause to be taken, all appropriate action, and do, or cause
to be done, and to assist and cooperate with the other parties in doing all
things necessary, proper or advisable under applicable Law or otherwise to
consummate and make effective the transactions contemplated by this Agreement as
promptly as practicable, including (i) executing and delivering any additional
instruments necessary, proper or advisable to consummate the transactions
contemplated by, and to carry out fully the purposes of, this Agreement, (ii)
obtaining from any Government Entities any material Licenses required to be
obtained or made by Acquiror or the Company or any of their subsidiaries in
connection with the authorization, execution and delivery of this Agreement and
the consummation of the transactions contemplated herein, including, without
limitation, the Merger, and (iii) making all necessary filings, and thereafter
making any other required submissions, with respect to this Agreement and the
Merger required under (A) the Securities Act, the Exchange Act and any other
applicable federal or state securities Laws, (B) the HSR Act and (C) any other
applicable Law; provided that Acquiror and the Company shall cooperate with each
--------
other in connection with the making of all such filings, including providing
copies of all such documents to the non-filing party and its advisors prior to
filing and discussing all reasonable additions, deletions or changes suggested
in connection therewith. The Company and Acquiror shall furnish to each other
all information required for any application or other filing to be made pursuant
to the rules and regulations of any applicable Law in connection with the
transactions contemplated by this Agreement.
(b) (i) The Company and Acquiror shall give (or shall cause their
respective subsidiaries to give) any notices to third parties, and use, and
cause their respective subsidiaries to use, their reasonable commercial efforts
to obtain any third party consents, approvals or waivers (A) necessary, proper
or advisable to consummate the transactions contemplated in this Agreement, (B)
disclosed or required to be disclosed in the Schedules, as the case may be, or
(C) required to prevent a Company Material Adverse Effect from occurring prior
to or after the Effective Time or an Acquiror Company Material Adverse Effect
from occurring prior to or after the Effective Time.
A-42
<PAGE>
(ii) In the event that either the Company or Acquiror shall fail
to obtain any third party consent, approval or waiver described in subsection
(b)(i) above, such party shall use its reasonable commercial efforts, and shall
take any such actions reasonably requested by the other parties hereto, to
minimize any adverse effect upon the Company and Acquiror, their respective
subsidiaries, and their respective businesses resulting, or which could
reasonably be expected to result after the Effective Time, from the failure to
obtain such consent, approval or waiver.
(c) From the date of this Agreement until the Effective Time, the
Company and Acquiror shall promptly notify each other in writing of any pending
or, to the Knowledge of the Company or Acquiror (or their respective
subsidiaries), threatened action, proceeding or investigation by any Government
Entity or any other person (i) challenging or seeking damages in connection with
the Merger or the conversion of the Company Capital Stock into Acquiror Shares
pursuant to the Merger or (ii) seeking to restrain or prohibit the consummation
of the Merger or otherwise limit the right of Acquiror or its subsidiaries to
own or operate all or any portion of the businesses or Assets of the Company.
The Company and Acquiror shall cooperate with each other in defending any such
action, proceeding or investigation, including seeking to have any stay or
temporary restraining order entered by any court or other Government Entity
vacated or reversed.
SECTION 7.4. Update Disclosure; Breaches.
From and after the date of this Agreement until the Effective Time,
each party hereto shall promptly notify the other parties hereto by written
update to its Disclosure Schedule of (i) any representation or warranty made by
it in connection with this Agreement becoming untrue or inaccurate, (ii) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which reasonably could be expected to cause any condition to the obligations
of any party to effect the Merger and the other transactions contemplated by
this Agreement not to be satisfied, or (iii) the failure of the Company,
Acquiror or Merger Sub, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it pursuant
to this Agreement which reasonably could be expected to result in any condition
to the obligations of any party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied; provided, however, the
-------- -------
delivery of any notice pursuant to this Section 7.4 shall not cure any breach of
-----------
any representation or warranty requiring disclosure of such matter prior to the
date of this Agreement or otherwise limit or affect the rights and remedies
available hereunder to the party receiving such notice.
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<PAGE>
SECTION 7.5. Public Announcements.
The Company shall not issue or approve any news releases or other
public announcement concerning the transactions contemplated by this Agreement
without the written prior approval of the Acquiror.
SECTION 7.6. Unaudited Financial Information.
The Company will cause to be prepared and will furnish to Acquiror as
promptly as possible an unaudited balance sheet of the Company as of the last
day of each month ending after December 31, 1998 and the related unaudited
statements of income of the Company for the one-month period then ended. The
Company will ensure that such unaudited statements are complete and correct in
all material respects, have been prepared in accordance with the books and
records of the Company, and present fairly the consolidated financial position
of the Company and its results of operations and cash flows as of and for the
respective dates and time periods in accordance with generally accepted
accounting principles applied on a basis consistent with prior accounting
periods, except as noted thereon and subject to the absence of footnotes and a
statement of cash flows and normal and recurring year-end adjustments which are
not expected to be material in amount.
SECTION 7.7. Access to Information.
The Company has afforded and shall afford Acquiror and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel of the
Company and as Acquiror may reasonably request. The Company agrees to provide
to Acquiror and its accountants, counsel and other representatives copies of
internal financial statements promptly upon request. No information or
knowledge obtained in any investigation pursuant to this Section 7.7 shall
-----------
affect or be deemed to modify any representation or warranty of the Company
contained herein. In the event of the termination of this Agreement, Acquiror
shall destroy or deliver to the Company all confidential documents, work papers
and other materials, and all copies thereof, obtained by Acquiror from the
Company as a result of this Agreement or in connection herewith, whether
obtained before or after the execution and delivery of this Agreement.
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<PAGE>
SECTION 7.8. Confidentiality.
Each of the parties hereto hereby agrees that any and all information
or knowledge obtained pursuant to this Agreement, or pursuant to the negotiation
and execution of this Agreement or the effectuation of the transactions
contemplated hereby shall be subject to the confidentiality agreement dated
January 15, 1999 (the "Confidentiality Agreement"), the terms of which are
-------------------------
incorporated herein by reference.
SECTION 7.9. No Solicitation.
(a) Company shall not initiate or solicit or take any other action to
promote, any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Competing Transaction (as such term is
defined below), or enter into discussions or furnish any information or
negotiate with any person or entity or otherwise cooperate in any way in
furtherance of such inquiries or to obtain a Competing Transaction, or agree to
or endorse any Competing Transaction, or authorize any of its officers,
employees, agents, representatives or directors to take any such action, and
Company shall direct and instruct and use its reasonable efforts to cause its
directors, officers, employees, agents and representatives (including, without
limitation, any investment banker, financial advisor, attorney or accountant
retained by Company) not to take any such action, and Company shall promptly
notify Acquiror if any such inquiries or proposals are received by Company or
any of its officers, directors, employees, agents, investment bankers, financial
advisors, attorneys, accountants or other representatives, and Company shall
promptly inform Acquiror as to the material terms of such inquiry or proposal
and, if in writing, promptly deliver or cause to be delivered to Acquiror a copy
of such inquiry or proposal, and Company shall keep Acquiror informed, on a
current basis, of the nature of any such inquiries and the status and terms of
any such proposals; provided, however, that nothing contained in this Section
-------- ------- -------
7.9 shall prohibit the board of directors of the Company from furnishing
- ---
information to, or entering into discussions or negotiations with, or agreeing
to or endorsing any Competing Transaction with, any person or entity that makes
a bona fide proposal to acquire Company pursuant to a merger, consolidation,
share exchange, business combination or other similar transaction (a "Bona Fide
---------
Proposal"), if, and only to the extent that, (A) the board of directors of the
- --------
Company, after consultation with outside counsel, determines in good faith that
such action is required for the board of directors of the Company to comply with
its fiduciary duties to the Company Stockholders imposed by the DGCL, (B) prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, it provides written notice to Acquiror to the
effect that Company is furnishing information to, or entering into discussions
or negotiations with, such person or entity, (C) prior to furnishing such
information to such person or entity, Company receives from such person or
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<PAGE>
entity an executed confidentiality agreement with terms no less favorable to
Company than those contained in the confidentiality agreement executed by
Acquiror dated January 15, 1999 and (D) Company keeps Acquiror informed, on a
current basis, of the status and content of any such discussions or
negotiations.
(b) For purposes of this Agreement, a "Competing Transaction" shall
---------------------
mean any of the following involving Company (other than the transactions
contemplated by this Agreement): (i) any merger, consolidation, share exchange,
business combination, or other similar transaction; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of ten percent (10%)
or more of the assets of Company, other than sales in the ordinary course of
business, or issuance of twenty percent (20%) or more of the outstanding voting
securities of Company in a single transaction or series of transactions; (iii)
any tender offer or exchange offer for twenty percent (20%) or more of the
outstanding shares of capital stock of Company; (iv) any solicitation of proxies
in opposition to approval by Company's stockholders of the Merger; or (v) any
agreement to, or public announcement by Company or any other person of a
proposal, plan or intention to do any of the foregoing.
SECTION 7.10. Employees.
(a) Within thirty (30) days from the date hereof, Acquiror and Merger
Sub shall notify the Company which employees will not be retained after the
Effective Time. The Company shall, subject to the terms and conditions of this
Agreement, use its reasonable efforts to encourage the employees of the Company
to continue their employment and relationship with the Company following the
Effective Time.
(b) Immediately following the Closing, all employees of the Company
that become employees of Acquiror or its subsidiaries ("Merger Employees") and
their dependents and beneficiaries, as applicable, during such time as
employment with the Acquiror and its affiliates is continued, shall be eligible
to participate in the employee benefit plans of the Acquiror and its affiliates
("Merger Sub Benefit Plans") on the same terms and conditions as similarly
situated employees of the Acquiror and its affiliates are eligible to
participate therein but not subject to any preexisting condition exclusions.
Merger Sub Benefit Plans shall recognize prior service of a Merger Employee with
the Company to the extent recognized under the corresponding Company benefit
plans prior to the Closing as service with the Acquiror and its affiliates for
(i) any Merger Sub Benefit Plan that is not an employee pension benefit plan for
all purposes and (ii) any Merger Sub Benefit Plan that is an employee pension
benefit plan, for all purposes other than benefit accrual. Except as provided
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<PAGE>
above, the benefit coverage which Acquiror or its affiliates will provide to the
Merger Employees under Merger Sub Benefit Plans shall commence immediately
following the Closing.
(c) As soon as practicable before Closing, but in no event less than
one (1) day prior to Closing, Company shall adopt all corporate resolutions
necessary to: (i) freeze participation and benefit accruals under the Company
401(k) Plan, effective no later than one (1) day prior to Closing; and (ii)
terminate the Company 401(k) Plan, effective no later than one (1) day prior to
Closing. As soon as practicable prior to Closing, Company shall contribute to
each Plan all contributions, including but not limited to employee deferrals and
related matching contributions, required or necessary under the terms of such
Plan covering the benefits that have accrued as of Closing. Following the
Closing, Acquiror and Merger Sub shall take all steps necessary to obtain a
favorable determination letter with respect to the termination of the Company's
401(k) Plan. Distribution of all Company 401(k) Plan assets not otherwise
distributable shall be made following receipt of such favorable determination
letter, and the 401(k) Plan maintained by Acquiror or its affiliates shall
accept such distributions from Merger Employees in the form of rollover
contributions.
SECTION 7.11. Company Affiliate Agreements.
The Company acknowledges and agrees that the Acquiror Shares issuable
to affiliates of the Company (the "Company Affiliates") will be subject to Rule
------------------
145(d) of the rules and regulations of the SEC under the Securities Act.
Accordingly, the Company agrees to use reasonable efforts to deliver or cause to
delivered to Acquiror, on or prior to the Effective Time, from each of the
Company Affiliates, a written agreement in form and substance reasonably
satisfactory to Acquiror (each an "Affiliate Agreement"), which will, among
-------------------
other things, contain (a) a covenant of each Company Affiliate to transfer his
or her Acquiror Shares in accordance with Rule 145(d) of the Securities Act and
any other applicable state and federal securities Laws, and (b) an appropriate
legend to be placed on such Company Affiliate's stock certificate with respect
to the foregoing restrictions.
ARTICLE VIII
CLOSING CONDITIONS
SECTION 8.1. Conditions to Obligations of the Parties.
The respective obligations of the parties hereto to effect the Merger
and the other transactions contemplated herein shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions,
which may be waived, in whole or in part, to the extent permitted by applicable
Law:
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<PAGE>
(a) Stockholder Approval. This Agreement and the Merger shall have
--------------------
been approved and adopted by the requisite vote of the Company Stockholders.
(b) No Order. No Government Entity or federal or state court of
--------
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in any
case which is in effect and which prevents or prohibits consummation of the
Merger; provided, however, that each of the parties shall use its reasonable
-------- -------
best efforts to cause any such decree, judgment, injunction or other order to be
vacated or lifted and provided further, that the failure to obtain a required
consent or approval of a Government Entity (other than those specified in
Section 8.1(c) and Section 8.1(d)) shall not form the basis for an assertion
- -------------- --------------
that this condition is not satisfied.
(c) HSR Act. The applicable waiting period with respect to the Merger
-------
and the other transactions contemplated hereby, together with any extensions
thereof, under the HSR Act shall have expired or been terminated.
(d) Certain Governmental Approvals. All consents, waivers, approvals
------------------------------
and authorizations required to be obtained, and all filings or notices required
to be made, by Acquiror or the Company prior to consummation of the transactions
contemplated in this Agreement (other than the filing of the Certificate of
Merger in accordance with Delaware Law) shall have been obtained from and made
with the FCC.
(e) Effectiveness of the Registration Statement. The Registration
-------------------------------------------
Statement shall have been declared effective by the SEC under the Securities
Act. No stop order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and no proceedings for that purpose shall have
been initiated or, to the Knowledge of Acquiror or the Company, threatened by
the SEC. Acquiror shall have received all other federal or state securities
permits and other authorizations necessary to issue Acquiror Shares in exchange
for Company Common Stock and to consummate the Merger.
(f) Legal Proceedings. No action or proceeding before any Government
-----------------
Entity shall have been instituted or threatened (and not subsequently settled,
dismissed, or otherwise terminated) which is reasonably expected to restrain,
prohibit or invalidate the Merger or other transactions contemplated by this
Agreement other than an action or proceeding instituted or threatened by a party
hereto.
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<PAGE>
SECTION 8.2. Additional Conditions to Obligations of Acquiror.
The obligations of Acquiror and Merger Sub to effect the Merger and
the other transactions contemplated in this Agreement are also subject to the
fulfillment at or prior to the Effective Time of the following conditions, any
or all of which may be waived, in whole or in part, to the extent permitted by
applicable Law:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company made in this Agreement shall be true and correct in
all material respects, on and as of the Effective Time with the same effect as
though such representations and warranties had been made on and as of the
Effective Time (provided that any representation or warranty contained therein
that is qualified by a materiality standard shall not be further qualified
hereby), except for representations and warranties that speak as of a specific
date or time (which need only be true and correct in all material respects as of
such date or time). Acquiror shall have received a certificate signed by the
chief executive officer of the Company in the name of the Company to that effect
with respect to the Company's representations and warranties.
(b) Agreements and Covenants. The agreements and covenants of the
------------------------
Company required to be performed on or before the Effective Time shall have been
performed in all material respects. Acquiror shall have received a certificate
signed on behalf of the Company by the chief executive officer of the Company to
that effect with respect to the Company's covenants.
(c) No Company Material Adverse Change. There shall have not occurred
----------------------------------
a material adverse change in the business, operations, financial condition,
Assets or liabilities of the Company (regardless of whether or not such events
or changes are inconsistent with the representations and warranties given herein
by the Company), except changes contemplated by this Agreement.
(d) Board Approval. Acquiror and Merger Sub shall have obtained
--------------
approval of this Agreement by the Boards of Directors of Acquiror and Merger
Sub, respectively.
(e) Lender Approval. Acquiror shall have obtained approval of this
---------------
Agreement by the Majority Lenders as such term is defined in the First Amended
and Restated Credit Agreement dated as of February 24, 1998 by and among Merger
Sub, NationsBank, N.A., as a Lender and Administrative Lender, and the other
Lenders party thereto, as further amended.
(f) Required Consents. The Company shall have delivered to Acquiror
-----------------
at or before Closing all consents or notices necessary to be obtained or made by
the Company in connection with the transactions contemplated by this Agreement.
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<PAGE>
(g) Company Securities. Other than 30,772,170 shares of Company
------------------
Common Stock and 122 options to purchase 1,936,500 shares of Company Stock,
there shall be no other securities of the Company outstanding that are
securities convertible into or exchangeable for Company Common Stock or any
other equity securities of the Company and no outstanding options, rights
(preemptive or otherwise), or warrants to purchase or to subscribe for any
shares of such stock or other equity securities of the Company.
(h) Accountant Letters. Acquiror shall have received from the Company
------------------
"cold comfort" letters of Arthur Andersen LLP dated the date on which the
Registration Statement shall become effective and the Effective Time,
respectively, and addressed to Acquiror, reasonably customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement and
transactions such as those contemplated by this Agreement.
(i) Escrow Agreement. Acquiror, Merger Sub, the Escrow Agent and the
----------------
Stockholders' Representative shall have entered into the Escrow Agreement at or
before Closing.
(j) Legal Opinion. Acquiror shall have received an opinion from
-------------
Sutherland, Asbill & Brennan, LLP, counsel to the Company, in form and substance
reasonably satisfactory to Acquiror and its counsel.
(k) Noncompetition Agreement. Acquiror shall have entered into a
------------------------
Noncompetition Agreement duly executed by James H. Black, Jr. in form, scope and
substance reasonably acceptable to Acquiror (the "Noncompetition Agreement").
(l) Company Affiliate Agreements. Acquiror shall have received an
----------------------------
executed Affiliate Agreement from each of the Company Affiliates.
(m) Other Closing Documents. The Company shall have executed and/or
-----------------------
delivered to Acquiror such additional documents, certificates, opinions and
agreements as Acquiror may reasonably request.
(n) [OMITTED]
(o) Appraisal Rights. The number of Dissenting Shares shall not be so
----------------
large that the Merger would fail to qualify as a reorganization within the
meaning of Section 368 of the Code.
(p) [OMITTED]
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<PAGE>
(q) Employees. The employees identified on Schedule 8.2 shall have
--------- ------------
agreed to become employees of ITC/\DeltaCom Communications, Inc. following the
Effective Time and shall have executed a Confidentiality and Nonsolicitation
Agreement, substantially in the form of Exhibit B hereto (the "Nondisclosure
--------
Agreement").
(r) Employee Loans. All loans listed Schedule 3.2 items (a) and (b)
-------------- ------------
shall be paid in full. With respect to the loan listed in Schedule 3.2 items
------------
(c), such loan will be secured by Acquiror Shares subject to documentation
reasonably acceptable to Acquiror.
SECTION 8.3. Additional Conditions to Obligations of the Company.
The obligations of the Company to effect the Merger and the other
transactions contemplated in this Agreement are also subject to the fulfillment
at or prior to the Effective Time of the following conditions any or all of
which may be waived, in whole or in part, to the extent permitted by applicable
Law:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Acquiror and Merger Sub made in this Agreement shall be true and
correct in all material respects, on and as of the Effective Time with the same
effect as though such representations and warranties had been made on and as of
the Effective Time (provided that any representation or warranty contained
herein that is qualified by a materiality standard shall not be further
qualified hereby), except for representations and warranties that speak as of a
specific date or time other than the Effective Time (which need only be true and
correct in all material respects as of such date or time). The Company shall
have received a certificate signed on behalf of Acquiror by the chief executive
officer of Acquiror to that effect.
(b) Agreements and Covenants. The agreements and covenants of
------------------------
Acquiror and Merger Sub required to be performed on or before the Effective Time
shall have been performed in all material respects. The Company shall have
received a certificate of the chief executive officer of Acquiror to that
effect.
(c) Required Consents. The Acquiror and Merger Sub shall have
-----------------
delivered to Company at or before Closing all consents or notices necessary to
be obtained or made by Acquiror and Merger Sub, as the case may be, in
connection with the transactions contemplated by this Agreement.
(d) Escrow Agreement. Acquiror, Merger Sub, the Escrow Agent and the
----------------
Stockholders' Representative shall have entered into the Escrow Agreement at or
before Closing.
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<PAGE>
(e) Legal Opinion. Company shall have received an opinion from Hogan
-------------
& Hartson L.L.P., counsel to the Acquiror and Merger Sub, in form and substance
reasonably satisfactory to Company and its counsel.
(f) Shareholder Approval. Company shall have obtained approval of
--------------------
this Agreement and the transactions contemplated hereunder by the Company
Stockholders.
(g) Amend 401(k) Plan. Acquiror or its affiliate shall have amended
-----------------
its 401(k) Plan so as to permit the transfer of the existing loans which certain
Merger Employees have under the Company's 401(k) Plan.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1. Termination.
This Agreement may be terminated at any time prior to the Effective
Time:
(a) by mutual written consent of Acquiror and the Company;
(b) by Acquiror if (i) the Company shall have breached in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement, or any such representation or warranty shall have
become untrue in any material respect, in any such case such that the conditions
precedent to the obligations of Acquiror to close specified in Section 8.2 will
-----------
not be satisfied and such breach has not been promptly cured within thirty (30)
days following receipt by the Company of written notice of such breach or (ii)
the closing price of the Acquiror Shares on Nasdaq is less than $11.50 as of the
day immediately preceding the Effective Time (or if such date is not a Trading
Day, the Trading Day immediately preceding such date);
(c) by either the Company if either Acquiror or Merger Sub shall have
breached in any material respect any of its representations, warranties,
covenants or agreements contained in this Agreement, or any such representation
or warranty shall have become untrue in any material respect, in any such case
such that the conditions precedent to the obligation of the Company to close
specified in Section 8.3, will not be satisfied and such breach has not been
-----------
promptly cured within thirty (30) days following receipt by Acquiror of written
notice of such breach;
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(d) by either Acquiror or the Company if any decree, permanent
injunction, judgment, order or other action by any court of competent
jurisdiction or any Government Entity preventing or prohibiting consummation of
the Merger shall have become final and nonappealable;
(e) by either Acquiror or the Company if the Effective Time has not
occurred on or prior to June 30, 1999 (unless such date shall be extended by the
mutual written consent of the parties); provided, that the right to terminate
--------
this Agreement under this Section 9.1(e) shall not be available to any party
--------------
whose breach of representations, warranties, covenants or agreements contained
in this Agreement has been the sole cause of, or resulted in, the failure of the
Effective Time to occur by such date or the inability of such condition to be
satisfied;
(f) by Acquiror, if (i) the board of directors of the Company shall
withdraw, modify or change its recommendation of this Agreement or the Merger in
a manner adverse to Acquiror or shall have resolved to do any of the foregoing;
(ii) the board of directors of the Company shall have recommended to the Company
Stockholders (A) any merger, consolidation, share exchange, business
combination, or other similar transaction, (B) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of ten percent (10%) or more of
the assets of Company or issuance of twenty percent (20%) or more of the
outstanding voting securities of Company in a single transaction or series of
transactions; (C) any tender offer or exchange offer for twenty percent (20%) or
more of the outstanding shares of capital stock of Company; or (iii) Company
shall have entered into any agreement, commitment or understanding regarding a
Competing Transaction, or endorsed or publicly announced any proposal, plan or
intention to enter into a Competing Transaction;
(g) by Company, if the board of directors of the Company (i) fails to
make or withdraws or modifies its recommendation referred to in Section 7.2 if
-----------
there exists at such time a tender offer or exchange offer or a Bona Fide
Proposal or (ii) recommends to the Company Stockholders approval or acceptance
of a Bona Fide Proposal, in each case only if the board of directors of the
Company, after consultation with outside legal counsel, determines in good faith
that such action is necessary for the board of directors of the Company to
comply with its fiduciary duties to the Company Stockholders under the DGCL;
(h) by the Company if the Agreement shall fail to receive the
requisite vote for approval and adoption by the Company Stockholders at the
Company Stockholders' meeting called to comply with Section 7.2; or
-----------
(i) by Acquiror, within fourteen (14) days after the date of this
Agreement, upon Acquiror's determination in its sole discretion, based on its
due diligence investigation and review of the Company, that any development has
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occurred or information has been discovered that indicates a liability of the
Company not disclosed on the Financial Statements or the Schedules to this
Agreement which would reasonably be expected to exceed One Million Dollars
($1,000,000).
SECTION 9.2. Effect of Termination.
If this Agreement is terminated pursuant to Section 9.1, this
-----------
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of any party hereto, except that the provisions of
Sections 7.8, 9.5 and 11.11 shall not be extinguished but shall survive such
- ---------------------------
termination, and nothing herein shall relieve any party from liability for any
breach hereof and each party shall be entitled to any remedies at Law or in
equity for such breach.
SECTION 9.3. Amendment.
This Agreement may not be amended except by an instrument in writing
signed by the Company, Acquiror, Merger Sub and the Stockholders'
Representative.
SECTION 9.4. Waiver.
At any time prior to the Effective Time, one party may (a) extend the
time for the performance of any of the obligations or other acts of the other
party, (b) waive any inaccuracies in the representations and warranties
contained in this Agreement or in any document delivered pursuant to this
Agreement of the other party and (c) waive compliance by the other party with
any of the agreements or conditions contained in this Agreement. Any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
SECTION 9.5. Expenses.
(a) Subject to subsection (b) of this Section 9.5 and Section 11.11,
----------- -------------
whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transaction, contemplated hereby shall be
paid by the party incurring such expense.
(b) If this Agreement is terminated pursuant to Section 9.1(f) or (g)
-------------- ---
then the Company shall promptly pay to Acquiror a termination fee of One Million
Dollars ($1,000,000) for the reasonable fees and expenses incurred by Acquiror
in connection with this Agreement and the transactions contemplated hereby.
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<PAGE>
ARTICLE X
SURVIVAL OF REPRESENTATIONS; REMEDIES
SECTION 10.1. Survival of Representations.
All representations, warranties, covenants, indemnities and other
agreements made by any party to this Agreement herein, shall be deemed made on
and as of the Effective Time as though such representations, warranties,
covenants, indemnities and other agreements were made on and as of such date,
and all such representations, warranties, covenants, indemnities and other
agreements shall survive for a period of twenty-four (24) months after the
Effective Time. Notwithstanding anything herein to the contrary, any
representation, warranty, covenant, agreement or indemnity which is the subject
of a claim which is asserted in writing prior to the expiration of the
applicable period set forth above shall survive solely with respect to such
claim until the final resolution thereof.
SECTION 10.2. Indemnification by the Company Stockholders.
(a) Each Company Stockholder severally hereby agrees to indemnify,
defend and hold Acquiror, the Surviving Corporation and their respective
officers and directors, and each person, if any, who controls or may control
Acquiror or the Surviving Corporation within the meaning of the Securities Act
(all such persons hereinafter are referred to individually as an "Acquiror
--------
Indemnified Person" and collectively as "Acquiror Indemnified Persons," but in
- ------------------ ----------------------------
no event shall any stockholder of the Company be such an Acquiror Indemnified
Person) harmless against all Losses resulting from, imposed upon or incurred by
any Acquiror Indemnified Person, directly or indirectly, as a result of (i) any
inaccuracy or breach of a representation or warranty of the Company given or
made by the Company in this Agreement, in the certificate of merger or in the
Exhibits or Schedules hereto or in any certificate or document delivered by or
on behalf of the Company pursuant hereto, (ii) any failure by the Company to
perform or comply with any covenant or agreement contained in this Agreement, in
the certificate of merger or in the Exhibits or Schedules hereto or in any
certificate or document delivered by or on behalf of the Company pursuant
hereto, (iii) the matters set forth in Schedule 3.17 (Company's Litigation)
-------------
hereto, (iv) the matters set forth in Schedule 3.19 (Taxes and Assessments)
-------------
hereto, (v) the matters set forth in Schedule 3.23(b) (Compliance of Plan Terms)
----------------
or (vi) the failure of the customer to make payment in full within one hundred
twenty days of the date the goods and services were delivered by the Company
prior to the Effective Time or by Acquiror and its Subsidiaries following the
Effective Time pursuant to the contract identified in Schedule 3.6(b), item E
and F, and any obligations entered into after the Effective Time with such
customer which were contemplated in the business plan of the Company dated
January 26, 1999 delivered to Acquiror prior to the date hereof (the
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<PAGE>
"Contract Risk"). Notwithstanding anything in this Agreement to the contrary,
the Company Stockholders shall not be responsible for indemnification with
respect to (w) the first $100,000 of any Losses (other than for Identified
Liabilities), (x) the first $60,000 of Losses incurred with respect to the
matters set forth in Schedule 3.23(b), (y) the first $220,000 of any Losses
----------------
incurred with respect to the matter set forth in Schedule 3.19(a), item A and
----------------
(z) any Loss resulting from a breach of Section 3.8 hereof to the extent that
-----------
the Company Stockholders are responsible for such Loss pursuant to clause (vi)
of this Section 10.2. Any payment for indemnification under this Section 10.2
------------ ------------
shall be made from the Escrow Stock.
(b) Anything to the contrary in this Agreement notwithstanding,
(i) the maximum aggregate amount for which the Company
Stockholders may be liable to the Acquiror Indemnified
Persons or any other person pursuant to or in connection to
this Agreement or the transactions contemplated hereby shall
not exceed an amount equal to the Stockholder's Percentage
multiplied by $5,000,000;
(ii) the maximum amount for which any one Company Stockholder may
be liable to the Acquiror Indemnified Persons or any other
person pursuant to or in connection to this Agreement or the
transactions contemplated hereby shall not, with respect to
any Loss, exceed a percentage of such Loss determined by
dividing the number of shares of Company Common Stock held
by such Company Stockholder immediately prior to the
Effective Time by the Total Converted Company Stock;
(iii)subsequent to the Effective Time, the indemnification
rights provided in this Section 10.2 shall be the sole and
------------
exclusive remedy available under contract, tort or any other
legal theory to any Acquiror Indemnified Person or any other
person with respect to any Loss incurred or sustained
pursuant to or in connection with this Agreement or the
transactions contemplated hereby; and the only source of
indemnification or payment for or with respect to any such
Loss shall be recourse to the Escrow Stock.
(c) Any payment to be made to an Acquiror Indemnified Person from
Escrow Stock shall be made by delivering to the Acquiror Indemnified Persons
such number of shares of the Escrow Stock as shall equal the amount of the Loss
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<PAGE>
or Losses for which indemnification or payment is being made. Any payment to be
made to an Acquiror Indemnified person by a Company Stockholder under Section
-------
10.2 may be made in cash or, in whole or in part, in Acquiror Shares, having a
- ----
value per share equal to the average daily price thereof on the NASDAQ for the
five (5) consecutive Trading Days preceding the date of such payment.
(d) In the event that an Acquiror Indemnified Person receives payment
with respect to a Loss pursuant to this Section 10.2, and such Acquiror
------------
Indemnified Person subsequently recovers the amount of such Loss from a third
party then such Acquiror Indemnified Person shall pay such recovery to the
Company Stockholders as soon as reasonably practicable.
SECTION 10.3. Third Party Claims.
The obligations and liabilities of the parties hereto with respect to
their respective indemnities pursuant to this Article X, resulting from any
---------
Third Party Claim shall be subject to the following terms and conditions:
(a) The party seeking indemnification (the "Indemnified Party") must
-----------------
give the other party (the "Indemnifying Party"), notice of any Third Party Claim
------------------
which is asserted against, resulting to, imposed upon or incurred by the
Indemnified Party and which may give rise to liability of the Indemnifying Party
pursuant to this Article X, stating (to the extent known or reasonably
---------
anticipated) the nature and basis of such Third Party Claim and the amount
thereof; provided that the failure to give such notice shall not affect the
--------
rights of the Indemnified Party hereunder except to the extent (i) that the
Indemnifying Party shall have suffered actual damage by reason of such failure,
or (ii) such failure or delay materially adversely affects the ability of the
Indemnifying Party to defend, settle or compromise such Third Party Claim.
(b) Subject to Section 10.3(c) below, if the Indemnifying Party
---------------
assumes responsibility for Losses arising out of such Third Party Claim, then
the Indemnifying Party shall have the right to undertake, by counsel or other
representatives of its own choosing, the defense of such Third Party Claim at
the Indemnifying Party's risk and expense.
(c) In the event that (i) the Indemnifying Party shall elect not to
undertake such defense, (ii) within a reasonable time after notice from the
Indemnified Party of any such Third Party Claim, the Indemnifying Party shall
fail to undertake to defend such Third Party Claim, (iii) there is a reasonable
probability that such Third Party Claim may materially and adversely affect the
Indemnified Party other than as a result of money damages or other money
payments, or (iv) there is a reasonable probability that the amount of Losses
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<PAGE>
asserted under such Third Party Claim may exceed the Indemnifying Party's
obligations under this Article X, then the Indemnified Party (upon further
---------
written notice to the Indemnifying Party) shall have the right to undertake the
defense, compromise or settlement of such Third Party Claim, by counsel or other
representatives of its own choosing, on behalf of and for the account and risk
of the Indemnifying Party. In the event that the Indemnified Party undertakes
the defense of a Third Party Claim under this Section 10.3(c), the Indemnifying
---------------
Party shall pay to the Indemnified Party, in addition to the other sums required
to be paid hereunder, the reasonable costs and expenses incurred by the
Indemnified Party in connection with such defense, compromise or settlement as
and when such costs and expenses are so incurred.
(d) Anything in this Section 10.3 to the contrary notwithstanding, (i)
------------
neither Party shall, without the other party's written consent (which consent
shall not be unreasonably withheld or delayed), settle or compromise such Third
Party Claim or consent to entry of any judgment which does not include as an
unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnified Party of a release from all liability in respect of such Third Party
Claim in form and substance satisfactory to the Indemnified Party; (ii) in the
event that a party hereto undertakes defense of such Third Party Claim in
accordance with this Section 10.3, the other parties, by counsel or other
------------
representative of their own choosing and at their sole cost and expense, shall
have the right to participate in the defense, compromise or settlement thereof
and each party and its counsel and other representatives shall cooperate with
the other party and its counsel and representatives in connection therewith; and
(iii) the party that undertakes the defense of such Third Party Claim in
accordance with this Section 10.3 shall have an obligation to keep the other
------------
parties informed of the status of the defense of such Third Party Claim and
furnish the other parties with all documents, instruments and information that
the other parties shall reasonably request in connection therewith; provided,
--------
however, Acquiror shall have the absolute right to settle or compromise any
- -------
Sales Tax Matter relating to sales previously made to the customer identified in
item E and F of Schedule 3.6(b) after the eighteenth month from the date hereof.
---------------
(e) Anything in this Section 10.3 to the contrary notwithstanding, the
------------
Stockholder's Representative on behalf of the Company Common Stockholders shall
be permitted to negotiate, settle or compromise or otherwise dispose of any
Third Party Claim that relates to an Identified Liability (other than the Sales
Tax Matter relating to sales previously made to the customer identified in item
E and F of Schedule 3.6(b) after the eighteenth month from the date hereof);
---------------
provided, however, the Losses for all such matters do not exceed the fair market
- -------- -------
value of the Escrow Stock then held by the Escrow Agent. The reasonable
expenses necessary to settle the Third Party Claims and Identified Liabilities
which are incurred after the Effective Time shall include the reasonable
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<PAGE>
expenses of the Stockholder's Representative and his or her accountant and legal
counsel in resolving such claims, which such expenses shall initially be paid by
the Surviving Corporation and then reimbursed to the Surviving Corporation by
the Escrow Agent from the Escrow Stock.
(f) The parties acknowledge the existence of certain potential
liabilities relating to the Sales Tax Matters. The parties further agree that
Acquiror shall have the absolute right to resolve such issues with the
respective customer and/or governmental entities relating to sales previously
made to the customer identified in item E and F of Schedule 3.6(b) after the
---------------
eighteenth month from the date hereof and that Acquiror shall be entitled to
indemnification with respect to any Losses resulting from or arising out of the
foregoing.
SECTION 10.4. [OMITTED]
SECTION 10.5. Subrogation
Each Company Stockholder hereby irrevocably waives any and all rights
to recourse against Company with respect to any representation, warranty,
indemnity or other agreement or action made or taken by or pursuant to this
Agreement. No Company Stockholder shall be entitled to any contribution from,
subrogation to or recovery against the Company with respect to any liability of
such Company Stockholder that may arise under or pursuant to this Agreement or
the transactions contemplated hereby.
SECTION 10.6. Remedies Cumulative
Subject to the limitations and qualifications set forth in this
Article X, the remedies provided herein shall be cumulative and shall not
- ---------
preclude the assertion by the parties hereto of any other rights or the seeking
of any other remedies against the other parties, or their respective successors
or assigns.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.1. Notices.
All notices, demands, requests, or other communications which may be
or are required to be given, served, or sent by any party to any other party
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<PAGE>
pursuant to this Agreement shall be in writing and shall be hand delivered, sent
by overnight courier or mailed by first-class, registered or certified mail,
return receipt requested, postage prepaid, or transmitted by telegram, telecopy
or telex, addressed as follows:
(a) If to Acquiror:
ITC/\DeltaCom, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Telecopier No.: (706) 645-8989
Attention: Mr. Douglas A. Shumate
With a copy (which shall not constitute notice) to:
ITC/\DeltaCom, Inc.
700 Boulevard South
Suite 101
Huntsville, Alabama 35802
Telecopier No.: (256) 650-3936
Attention: J. Thomas Mullis, Esq.
General Counsel
With a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
8300 Greensboro Drive
Suite 1100
McLean, Virginia 22102
Telecopier No.: (703) 610-6200
Attention: Richard K.A. Becker, Esq.
(b) If to the Company:
AvData Systems, Inc.
55 Marietta Street
Atlanta, Georgia 30303
Telecopier No.: (404) 479-4501
Attention: James H. Black, Jr.
A-60
<PAGE>
With a copy (which shall not constitute notice) to:
Sutherland, Asbill & Brennan L.L.P.
999 Peachtree Street, NE
Atlanta, Georgia 30309
Telecopier No.: (404) 853-8806
Attention: Charles D. Ganz, Esq.
(c) If to the Stockholders' Representative:
Kenneth F. Leddick
6085 Barfield Road, Suite 122
Atlanta, GA 30328
Telecopier No.: (404) 257-3341
Each party may designate by notice in writing a new address to which
any notice, demand, request or communication may thereafter be so given, served
or sent. Each notice, demand, request, or communication which shall be hand
delivered, sent, mailed, telecopied or telexed in the manner described above, or
which shall be delivered to a telegraph company, shall be deemed sufficiently
given, served, sent, received or delivered for all purposes at such time as it
is delivered to the addressee (with the return receipt, the delivery receipt, or
(with respect to a telecopy or telex) the answerback being deemed conclusive,
but not exclusive, evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
SECTION 11.2. Certain Definitions.
For purposes of this Agreement, the term:
(a) "Acquiror Material Adverse Effect" means any material adverse
--------------------------------
effect on the Assets or the business, financial condition or results of
operations of Acquiror.
(b) "affiliate" means a person that directly or indirectly, through
---------
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person.
(c) "Assets" shall mean the assets, rights and properties, whether
------
owned, leased or licensed, real, personal or mixed, tangible or intangible, that
are used, useful or held for use in connection with the business of an entity.
(d) "business day" shall mean any day other than a day on which
------------
banks in the City of New York are authorized or obligated to be closed.
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<PAGE>
(e) "Communications Act" shall mean the Communications Act of 1934,
------------------
as amended, and all Laws promulgated pursuant thereto or in connection
therewith.
(f) "Company Material Adverse Effect" means any material adverse
-------------------------------
effect on the Assets or the business, financial condition or results of
operations of the Company.
(g) "Company Software" means the software developed by employees,
----------------
consultants, and independent contractors of the Company which is provided by the
Company to the Company's customers and/or is for the Company's internal use,
including any documentation relating to such software.
(h) "Company Stockholders" means the holders of Company Common
--------------------
Stock.
(i) "control" (including the terms "controlled by" and "under
------- ------------- -----
common control with") means the possession, directly or indirectly or as trustee
- -------------------
or executor, of the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of stock or as trustee or
executor, by contract or credit arrangement or otherwise.
(j) "Encumbrances" means mortgages, liens, pledges, encumbrances,
------------
security interests, deeds of trust, options, encroachments, reservations,
orders, decrees, judgments, restrictions, charges, contract rights, claims or
equity of any kind.
(k) "FCC" means the United States Federal Communications Commission
---
and its successors.
(l) "Government Entity" means any United States or other national,
-----------------
state, municipal or local government, domestic or foreign, any subdivision,
agency, entity, commission or authority thereof, or any quasi-governmental or
private body exercising any regulatory, taxing, importing or other governmental
or quasi-governmental authority.
(m) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
-------
Act of 1976, as amended, and all Laws promulgated pursuant thereto or in
connection therewith.
(n) "Identified Liabilities" means, collectively, (i) the state
----------------------
sales and use taxes identified on Schedule 3.19, item I (the "Sales Tax
-------------
Matter"), (ii) the matters identified on Schedule 3.23(b), and (iii) and the
----------------
Contract Risk.
A-62
<PAGE>
(o) "Intellectual Property" means all inventions, improvements
---------------------
thereto, patents, patent applications, patent disclosures, trademarks, service
marks, trade dress, logos, trade names, and corporate names, domain names,
copyrights, maskworks, moral rights, know-how, computer software, formulas,
compositions, manufacturing and production processes and techniques, technical
data, designs, drawings, specifications, customer and supplier lists, business
and marketing plans and proposals, and general intangibles of a like nature,
trade secrets, licenses, and rights and filings with respect to the foregoing,
and all reissues, extensions and renewals thereof of the Company.
(p) "Knowledge" of any person (including references to the best of
---------
any person's knowledge) shall refer to actual knowledge of such person at the
time of determination, or the knowledge which such person, in the normal
exercise of his relevant functions and duties, would reasonably be expected to
have, and, with respect to any corporation, shall mean only such actual
knowledge possessed at such time by the Chairman, the President, the chief
financial officer and any other executive officer, or director level employee,
or the knowledge which such person, in the normal exercise of his relevant
functions and duties, would reasonably be expected to have.
(q) "Laws" means all foreign, federal, state and local Laws,
----
statutes, regulations and rules applicable to the specified person or entity,
and all resolutions, orders, determinations, writs, injunctions, awards
(including, without limitation, awards of any arbitrator), judgments and decrees
applicable to the specified persons or entities.
(r) "Licenses" means any franchise, grant, authorization, license,
--------
tariff, permit, exemption, consent, certificate, approval or order of any
Government Entity.
(s) "Losses" means all demands, losses, claims, actions or causes
------
of action, assessments, damages, liabilities, costs and expenses, including,
without limitation, interest, penalties and reasonable attorneys' fees and
disbursements.
(t) "person" means an individual, corporation, partnership,
------
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act).
(u) "SEC" means the United States Securities and Exchange
---
Commission.
(v) "Stockholders' Percentage" means a fraction, the numerator of
------------------------
which shall be the number of shares of Company Common Stock (other than treasury
stock) issued and outstanding immediately prior to the Effective Time and the
denominator of which shall be the Total Converted Company Stock.
A-63
<PAGE>
(w) "Subsidiary" means any corporation, partnership, joint venture
----------
or other legal entity of which such person (either alone or through or together
with any other Subsidiary) (i) owns, directly or indirectly, fifty percent (50%)
or more of the stock, partnership interests or other equity interests the
holders of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation, partnership, joint
venture or other legal entity; or (ii) possesses, directly or indirectly,
control over the direction of management or policies of such corporation,
partnership, joint venture or other legal entity (whether through ownership of
voting securities, by agreement or otherwise).
(x) "Taxes" shall mean all federal, state, local and foreign taxes
-----
(including income, profit, franchise, sales, use, real property, personal
property, ad valorem, excise, employment, social security and wage withholding
taxes) and installments of estimated taxes, assessments, deficiencies, levies,
imports, duties, license fees, registration fees, withholdings or other similar
charges of every kind, character or description imposed by any governmental
authorities, and any interest, penalties or additions to tax imposed thereon or
in connection therewith.
(y) "Third Party Claim" means any claim or other assertion of
-----------------
liability by any third party.
SECTION 11.3. Headings.
The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
SECTION 11.4. Severability.
If any term or other provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of Law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 11.5. Entire Agreement.
This Agreement (together with the Exhibits, the Schedules and the
other documents delivered pursuant hereto), together with the Confidentiality
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<PAGE>
Agreement, constitutes the entire agreement of the parties and supersede all
prior agreements and undertakings, both written and oral, between the parties,
or any of them, with respect to the subject matter hereof and, except as
otherwise expressly provided herein, are not intended to confer upon any other
person any rights or remedies hereunder.
SECTION 11.6. Specific Performance.
The transactions contemplated by this Agreement are unique.
Accordingly, each of the parties acknowledges and agrees that, in addition to
all other remedies to which it may be entitled, each of the parties hereto is
entitled to a decree of specific performance, provided such party is not in
material default hereunder.
SECTION 11.7. Assignment.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of Law or otherwise) without the prior written consent of the other parties;
provided, however, that Acquiror and Merger Sub shall have the right to assign
- -------- -------
this Agreement without the prior written consent of the Company to a direct or
indirect subsidiary of Acquiror, but no such assignment shall relieve Acquiror
or Merger Sub, as the case may be, of its obligations hereunder. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties and their respective successors and
assigns.
SECTION 11.8. Third Party Beneficiaries.
This Agreement shall be binding upon and inure solely to the benefit
of each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.
SECTION 11.9. Governing Law.
This Agreement shall be governed by, and construed in accordance with,
the Laws of the State of Delaware, regardless of the Laws that might otherwise
govern under applicable principles of conflicts of law.
SECTION 11.10. Counterparts.
This Agreement may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts, each
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<PAGE>
of which when executed and delivered shall be deemed to be an original but all
of which taken together shall constitute one and the same agreement.
SECTION 11.11. Fees and Expenses.
Except as otherwise provided for in this Agreement, each party hereto
shall pay its own fees, costs and expenses incurred in connection with this
Agreement and in the preparation for and consummation of the transactions
provided for herein, but in no event shall such fees and expenses (including
without limitation the fees and expenses described in Schedule 3.26) incurred by
-------------
or on behalf of the Company exceed $500,000.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT AND
PLAN OF MERGER to be executed and delivered as of the date first written above.
ITC/\DELTACOM, INC.
By: /s/ Andrew M. Walker
-----------------------------
Andrew M. Walker,
Vice Chairman and Chief
Executive Officer
INTERSTATE FIBERNET, INC.
By: /s/ Andrew M. Walker
-----------------------------
Andrew M. Walker,
Director and Chief Executive
Officer
AVDATA SYSTEMS, INC.
By: /s/ James H. Black, Jr.
-----------------------------
James H. Black, Jr.,
Chief Executive Officer
The undersigned hereby acknowledges his appointment as the
Stockholders' Representative and his willingness to fulfill the duties of the
Stockholders' Representative as contemplated by this Agreement.
/s/ Kenneth F. Leddick
-----------------------------
Kenneth F. Leddick
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<PAGE>
APPENDIX B
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS - (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to (S)228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to (S)251(g)
of this title), (S)252, (S)254, (S)257, (S)258,(S)263 or (S)264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to (SS)251, 252, 254,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
B-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to (S)228
or (S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the
B-2
<PAGE>
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
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<PAGE>
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
<PAGE>
APPENDIX C
OPINION OF BOWLES HOLLOWELL
CONNER & CO.
April 15, 1999
The Board of Directors
AvData Systems, Inc.
55 Marietta Street
Atlanta, GA 30303
Members of the Board:
You have asked us to advise you with respect to the fairness, from a financial
point of view, to the stockholders of AvData Systems, Inc. ("AvData") of the
consideration to be received by such stockholders pursuant to the terms of the
Agreement and Plan of Merger, dated as of April 15, 1999 (the "Merger
Agreement"), among AvData, ITC Deltacom, Inc ("ITCD") and Interstate Fibernet,
Inc., a wholly-owned subsidiary of ITCD ("ITCD Sub"). As more fully described in
the Merger Agreement, (i) AvData will be merged with and into ITCD Sub (the
"Merger") and (ii) each outstanding share of the Common Stock, par value $0.01
per share, of AvData ("AvData Common Stock") will be converted into and
exchanged for the right to receive (a) the number of fully paid and
nonassessable shares of the Common Stock, par value $.01 per share, of ITCD
("ITCD Common Stock") equal to the Exchange Ratio as defined in Section 2.1(a)
--------------
of the Merger Agreement and (b) the right to receive the number of Earnout
Shares as identified in Section 2.8 in the Merger Agreement, subject to the
-----------
terms and conditions of the Merger Agreement (the "Merger Consideration").
In arriving at our opinion, we have, among other things:
. Reviewed the financial terms of the Merger, as set forth in the Merger
Agreement;
. Reviewed certain historical business, financial and other information
regarding AvData and ITCD that was publicly available or furnished to us by
members of AvData or ITCD management;
. Reviewed certain financial forecasts and other data provided to us by members
of AvData or ITCD management relating to their respective business;
. Conducted discussions with members of AvData and ITCD management with respect
to their respective business, financial and other information, including
their respective business prospects and financial forecasts;
. Conducted discussions with members of AvData regarding various strategic and
operating benefits anticipated from the Merger;
C-1
<PAGE>
AvData Systems, Inc.
April 15, 1999
Page 2
. Reviewed certain financial terms of the Merger in relation to the current and
historical market prices and trading volumes of ITCD Common Stock;
. Compared the financial position and operating results of AvData with those of
publicly traded companies we deemed relevant;
. Compared the financial terms of the Merger with certain of the financial
terms of other similar transactions we deemed relevant; and
. Conducted such other financial studies, analyses and investigations as we
deemed appropriate.
In connection with our review, we have relied upon the accuracy and completeness
of the foregoing financial and other information, and we have not assumed any
responsibility for any independent verification of such information. With
respect to AvData's financial projections, we have assumed that they have been
reasonably prepared and reflect the best current estimates and judgement of
AvData's management as to the future financial performance of AvData. We have
discussed AvData's financial projections with management of AvData, but we
assume no responsibility for and express no view as to AvData's financial
projections or the assumptions upon which they are based. In arriving at our
opinion, we have not conducted any physical inspection of the properties or
facilities of AvData or ITCD and have not made or been provided with any
evaluations or appraisals of the assets or liabilities of AvData or ITCD.
Our opinion is necessarily based on economic, market, financial and other
conditions and the information made available to us as of the date hereof. It
should be understood that, although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion.
In rendering our opinion, we have assumed that the Merger will be consummated
on the terms described in the Merger Agreement that we reviewed, without any
waiver of any material terms or conditions, and with your permission, we have
further assumed that, on the Closing Date (as defined in the Merger Agreement)
the price per share of ITCD Common Stock will not be less than $11.50. Our
opinion does not address the relative merits of the Merger and the other
business strategies considered by AvData's Board of Directors, nor does it
address AvData's Board of Directors' decision to proceed with the Merger.
Bowles Hollowell Conner, a division of First Union Capital Markets Corp., is an
investment banking firm and an affiliate of First Union Corporation. We have
been engaged to render financial advisory services to AvData in connection with
the Merger
C-2
<PAGE>
AvData Systems, Inc.
April 15, 1999
Page 3
and will receive a fee upon the delivery of this opinion. In the ordinary course
of our business, we and our affiliates may actively trade or hold the securities
of ITCD for our own account or for the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
We or our affiliates have in the past provided investment banking and financial
advisory services to AvData and ITCD unrelated to the Merger, for which services
we have received compensation. In addition, Bowles Hollowell Conner and its
affiliates (including First Union Corporation and its affiliates) may maintain
relationships with AvData and ITCD.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of AvData in its evaluation of the Merger
and do not constitute a recommendation to any holder of AvData Common Stock as
to how such holder should vote with respect to the Merger. Our opinion may not
be published or otherwise used or referred to, nor shall any public reference to
Bowles Hollowell Conner, First Union Capital Markets Corp. or First Union
Corporation be made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Merger Consideration is fair, from a
financial point of view, to the holders of AvData Common Stock.
Very truly yours,
BOWLES HOLLOWELL CONNER
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of ITC DeltaCom (the
"ITC DeltaCom Certificate") contains provisions that provide that no director of
ITC DeltaCom shall be liable for breach of fiduciary duty as a director except
for (1) any breach of the directors' duty of loyalty to ITC DeltaCom or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director derived
an improper personal benefit. The ITC DeltaCom Certificate contains provisions
that further provide for the indemnification of directors and officers to the
fullest extent permitted by the DGCL. Under the Bylaws of ITC DeltaCom, ITC
DeltaCom is required to advance expenses incurred by an officer or director in
defending any such action if the director or officer undertakes to repay such
amount if it is determined that the director or officer is not entitled to
indemnification. In addition, ITC DeltaCom has entered into indemnity agreements
with each of its directors pursuant to which ITC DeltaCom has agreed to
indemnify the directors as permitted by the DGCL. ITC DeltaCom has obtained
directors and officers liability insurance against certain liabilities,
including liabilities under the Securities Act.
II-1
<PAGE>
ITEM 21. EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
3.1 Certificate of Incorporation of ITC DeltaCom, Inc.
(filed as Exhibit 3.1 to Registration Statement on Form
S-1, as amended, File No. 333-36683 ("Form S-1") and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of ITC DeltaCom, Inc.
(filed as Exhibit 3.2 to Form S-1 and incorporated
herein by reference).
4 Form of Common Stock Certificate of ITC DeltaCom, Inc.
(filed as Exhibit 4.1 to Form S-1 and incorporated
herein by reference).
5 Opinion of Hogan & Hartson L.L.P. as to the validity of
the securities registered hereunder, including the
consent of that firm.+
8 Form of opinion of Hogan & Hartson L.L.P. as to certain
tax matters, including the consent of that firm.+
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Bowles Hollowell Conner & Co.
24 Power of Attorney (included in signature page)
99.1 Form of AvData proxy card
99.2 Fairness Opinion of Bowles Hollowell Conner & Co.
(attached as Appendix C)
_________________
+ To be filed by amendment.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved
II-2
<PAGE>
therein, that was not the subject of and included in this Registration Statement
when it became effective.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement when it becomes
effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by Form S-4 with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
Form S-4.
The undersigned registrant hereby undertakes that every prospectus (i)
that is filed pursuant to the immediately preceding paragraph, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-3
<PAGE>
The undersigned hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of West Point, State of Georgia, on this 12th day of
May, 1999.
ITC DELTACOM, INC.
By: /s/ Douglas A. Shumate
-------------------------------
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Campbell B. Lanier, III, Andrew M. Walker and
Douglas A. Shumate, jointly and severally, each in his own capacity, his true
and lawful attorneys-in-fact, with full power of substitution, for him and his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents with full power and authority to do so and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons, in the
capacities indicated below, on this 12th day of May, 1999.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Campbell B. Lanier, III Chairman, Director May 12, 1999
--------------------------------
Campbell B. Lanier, III
/s/ Andrew M. Walker Chief Executive Officer, May 12, 1999
--------------------------------
Andrew M. Walker Vice Chairman and Director
(Principal executive officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Douglas A. Shumate Senior Vice President and Chief May 12, 1999
--------------------------------
Douglas A. Shumate Financial Officer (Principal
financial officer and principal
accounting officer)
/s/ Donald W. Burton Director May 12, 1999
--------------------------------
Donald W. Burton
/s/ Malcolm C. Davenport, V Director May 12, 1999
--------------------------------
Malcolm C. Davenport, V
/s/ Robert A. Dolson Director May 12, 1999
--------------------------------
Robert A. Dolson
/s/ O. Gene Gabbard Director May 12, 1999
--------------------------------
O. Gene Gabbard
/s/ William T. Parr Director May 12, 1999
--------------------------------
William T. Parr
/s/ William H. Scott, III Director May 12, 1999
--------------------------------
William H. Scott, III
/s/ William B. Timmerman Director May 12, 1999
--------------------------------
William B. Timmerman
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1 Certificate of Incorporation of ITC DeltaCom, Inc. (filed as
Exhibit 3.1 to Registration Statement on Form S-1, as amended,
File No. 333-36683 ("Form S-
1") and incorporated herein by reference).
3.2 Amended and Restated Bylaws of ITC DeltaCom, Inc. (filed as
Exhibit 3.2 to Form S-1 and incorporated herein by reference).
4 Form of Common Stock Certificate of ITC DeltaCom, Inc. (filed as
Exhibit 4.1 to Form S-1 and incorporated herein by reference).
5 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder, including the consent of that
firm.+
8 Form of opinion of Hogan & Hartson L.L.P. as to certain tax
matters, including the consent of that firm.+
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Bowles Hollowell Conner & Co.
24 Power of Attorney (included in signature page)
99.1 Form of AvData proxy card
99.2 Fairness Opinion of Bowles Hollowell Conner & Co. (attached as
Appendix C)
- -------------------------
+ To be filed by amendment.
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our reports dated
February 12, 1999 included in ITC DeltaCom, Inc.'s Form 10-K for the year ended
December 31, 1998 and to all references to our Firm included in this
registration statement.
Atlanta, Georgia
May 10, 1999
<PAGE>
Exhibit 23.2
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 12, 1999 on the financial statements of AvData Systems, Inc.
(and to all references to our Firm) included in this registration statement.
Atlanta, Georgia
May 11, 1999
<PAGE>
Exhibit 23.3
------------
May 13, 1999
Board of Directors
AvData Systems, Inc.
55 Marietta Street
Atlanta, Georgia 30303
Members of the Board:
In accordance with the terms of our letter to you dated April 15, 1999 (the
"Letter"), you have requested our written consent to quote or refer to the
Letter and the opinion expressed therein with respect to the fairness, from a
financial point of view, to the stockholders of AvData Systems, Inc. ("AvData")
of the consideration to be received by such stockholders pursuant to the
Agreement and Plan of Merger, dated as of April 15, 1999, among ITC/\DeltaCom,
Inc., Interstate Fibernet, Inc. and AvData.
We hereby consent to the reproduction in full of the Letter and to the reference
to the Letter and Bowles Hollowell Connor in the prospectus and proxy statement
you distribute to the stockholders of AvData in connection with the proposed
merger.
Very truly yours,
BOWLES HOLLOWELL CONNER
A division of First Union Capital Markets Corp.
<PAGE>
Exhibit 99.1
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REVOCABLE PROXY
AVDATA SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of AvData Systems, Inc. ("AvData") hereby
appoints James H. Black, Jr., Kenneth F. Leddick or Campbell B. Lanier III, or
any of them, with full power of substitution in each, as proxies to cast all
votes which the undersigned stockholder is entitled to cast at the special
meeting of stockholders to be held at 10:00 a.m. on ______ __, 1999 at AvData's
offices located at 55 Marietta Street, 18th Floor, Atlanta, Georgia, 30303 and
at any adjournments or postponements thereof, upon the following matters. The
undersigned stockholder hereby revokes any proxy or proxies heretofore given.
This proxy will be voted as directed by the undersigned stockholder.
UNLESS CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED: (1) TO APPROVE AND
ADOPT AN AGREEMENT AND PLAN OF MERGER, DATED AS OF APRIL 15, 1999, BETWEEN ITC
DELTACOM, INC., INTERSTATE FIBERNET, INC., AND AVDATA SYSTEMS, INC., PURSUANT TO
WHICH AVDATA WILL MERGER WITH AND INTO INTERSTATE FIBERNET, AND THE OTHER
TRANSACTIONS CONTEMPLATED THEREBY AND (2) OTHERWISE IN ACCORDANCE WITH THE
DETERMINATION OF A MAJORITY OF THE AVDATA BOARD OF DIRECTORS. The undersigned
stockholder may revoke this proxy at any time before it is voted by (i)
delivering to the Secretary of AvData a written notice of revocation before the
stockholder meeting, (ii) delivering to AvData a duly executed proxy bearing a
later date before the stockholder meeting, or (iii) attending the stockholder
meeting and voting in person. The undersigned stockholder hereby acknowledges
receipt of the Notice of Special Meeting of AvData and the Proxy
Statement/Prospectus.
If you receive more than one proxy card, please sign and return all
cards in the accompanying envelope.
(continued and to be signed and dated on reverse side)
--------------------------
SEE
REVERSE SIDE
--------------------------
<PAGE>
--------------
X
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Please mark your
votes as this.
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COMMON
Proposal 1: To approve and adopt an Agreement and Plan of Merger, dated as of
April 15, 1999, between ITC DeltaCom, Interstate FiberNet and
AvData, pursuant to which AvData will merge with and into
Interstate FiberNet, and the other transactions contemplated by
the Agreement and Plan of Merger.
FOR AGAINST ABSTAIN
|_| |_| |_|
Other Matters: The proxies are authorized to vote upon such other business as
may properly come before the stockholder meeting, or any
adjournments or postponements of the meeting, including, without
limitation, a motion to adjourn the stockholder meeting to
another time and/or place for the purpose of soliciting
additional proxies in order to approve the Agreement and Plan of
Merger and the merger provided for therein or otherwise, in
accordance with the determination of a majority of the AvData
board of directors.
Date: __________________
__________________
________________
Signature of Stockholder or
Authorized Representative
Please date and sign exactly as name appears hereon. Each executor,
administrator, trustee, guardian, attorney-in-fact and other fiduciary should
sign and indicate his or her full title. When stock has been issued in the name
of two or more persons, all should sign.
