<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-23253
ITC/\DELTACOM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2301135
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1791 O.G. Skinner Drive, West Point, GA 31833
- ---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 385-8000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at November 8, 1999
-------------------------------
Common Stock at $.01 par value 59,431,747 Shares
<PAGE>
ITC/\DELTACOM, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1998 and September 30, 1999......................... 3
Consolidated Statements of Operations
Three months ended September 30, 1998
and 1999 and nine months ended
September 30, 1998 and 1999...................................... 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998
and 1999......................................................... 6
Notes to Consolidated Financial Statements....................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 27
Part II. Other Information
Item 1. Legal Proceedings................................................. 28
Item 2. Changes in Securities and Use of Proceeds......................... 28
Item 6. Exhibits and Reports on Form 8-K.................................. 28
Signatures................................................................... 28
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1 - Financial Statements
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $289,464 $184,167
Restricted assets.......................................... 13,709 14,300
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$2,028 and $1,260 in 1999 and 1998, respectively......... 47,790 34,219
Affiliate................................................. 3,491 3,307
Inventory.................................................. 4,365 1,635
Prepaid expenses........................................... 2,721 591
Federal income tax refunds receivable...................... 3,939 3,939
-------- --------
Total current assets.................................... 365,479 242,158
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net......................... 348,762 262,050
-------- --------
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of
$8,623 and $6,303 in 1999 and 1998, respectively.......... 88,509 63,160
Restricted assets.......................................... - 5,735
Other long-term assets..................................... 15,779 14,414
-------- --------
Total other long-term assets............................ 104,288 83,309
-------- --------
Total assets............................................ $818,529 $587,517
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade.......................................................... $ 17,410 $ 12,810
Construction................................................... 9,855 7,233
Accrued interest.................................................. 12,527 8,049
Accrued compensation.............................................. 5,023 2,998
Unearned revenue.................................................. 13,633 11,457
Other accrued liabilities......................................... 9,296 8,418
Current portion of long-term debt and capital lease
obligations...................................................... 760 1,075
-------- --------
Total current liabilities............................... 68,504 52,040
-------- --------
LONG-TERM LIABILITIES:
Deferred income taxes............................................. 512 418
Long-term debt and capital lease obligations...................... 516,329 416,859
------- -------
Total long-term liabilities.................................... 516,841 417,277
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; $7.40 liquidation
preference; 5,000,000 shares authorized; 1,480,771 shares
issued and outstanding in 1999 and 1998, respectively............ 15 15
Common Stock, $.01 par value; 90,000,000 shares
authorized; 59,397,810 and 51,339,838 shares issued and
outstanding in 1999 and 1998, respectively....................... 594 513
Additional paid-in-capital........................................ 321,401 167,023
Accumulated deficit............................................... (88,826) (49,351)
-------- --------
Total stockholders' equity.............................. 233,184 118,200
-------- --------
Total liabilities and stockholders' equity.............. $818,529 $587,517
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues.................................. $ 65,811 $ 45,676 $ 176,221 $ 123,222
Cost of services.................................... 31,542 22,485 86,562 58,619
----------- ----------- ----------- -----------
Gross margin........................................ 34,269 23,191 89,659 64,603
----------- ----------- ----------- -----------
Operating expenses:
Selling, operations and administration........... 26,212 17,253 68,592 46,290
Depreciation and amortization.................... 14,382 8,192 37,860 21,435
----------- ----------- ----------- -----------
Total operating expenses...................... 40,594 25,445 106,452 67,725
----------- ----------- ----------- -----------
Operating loss...................................... (6,325) (2,254) (16,793) (3,122)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense................................. (11,806) (7,884) (33,401) (23,322)
Interest income.................................. 4,588 2,005 10,268 7,359
Other income (expense), net...................... 15 (599) 545 (2,825)
----------- ----------- ----------- -----------
Total other expense, net..................... (7,203) (6,478) (22,588) (18,788)
----------- ----------- ----------- -----------
Loss before income taxes and
extraordinary item............................... (13,528) (8,732) (39,381) (21,910)
Income tax (benefit) expense........................ - (1,916) 94 (5,611)
----------- ----------- ----------- -----------
Loss before extraordinary item...................... (13,528) (6,816) (39,475) (16,299)
Extraordinary item -- loss on early extinguishment
of debt (less related income tax benefit of
$2,133 in 1998).................................. - - - (8,436)
----------- ----------- ----------- -----------
Net loss............................................ $ (13,528) $ (6,816) $ (39,475) $ (24,735)
=========== =========== =========== ===========
Basic and diluted net loss per common share:
Before extraordinary loss........................ $ (0.23) $(0.13) $(0.71) $ (0.32)
Extraordinary loss............................... - - - (0.17)
----------- ----------- ----------- -----------
Net loss......................................... $ (0.23) $(0.13) $(0.71) $ (0.49)
=========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding............................... 59,180,843 51,243,579 55,321,483 50,861,035
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (39,475) $ (24,735)
--------- ---------
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization............... 37,860 21,435
Amortization of bond issue costs............ 1,546 1,154
Deferred income taxes....................... 94 (6,041)
Extraordinary item--loss on early
extinguishment of debt..................... - 10,569
Changes in current operating assets and
liabilities, net of acquisitions:
Accounts receivable, net.................... (12,580) (7,179)
Inventory................................... (1,459) (869)
Prepaid expenses............................ (1,804) (195)
Income tax refunds receivable from ITC
Holding.................................... - 2,448
Income tax receivable....................... - (3,880)
Accounts payable............................ 2,035 991
Accrued interest............................ 4,478 4,169
Unearned revenue............................ (7) 2,540
Accrued compensation and other accrued
liabilities................................ 1,844 7,238
Income tax payable - Affiliate.............. - 748
--------- ---------
Total adjustments........................ 32,007 33,128
--------- ---------
Net cash (used in) provided by operating
activities.............................. (7,468) 8,393
--------- ---------
Cash flows from investing activities:
Capital expenditures........................... (117,865) (100,525)
Change in accrued construction costs........... 2,622 4,970
Change in restricted assets.................... 6,326 23,684
Purchase of AvData Systems, Inc., net of cash
received...................................... 2,881 -
Other.......................................... (554) (390)
--------- ---------
Net cash used in investing activities.... (106,590) (72,261)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of 4 1/2% Notes, net of
issuance costs................................ 96,954 -
Proceeds from issuance of 8 7/8% Senior Notes,
net of issuance costs....................... - 155,170
Repayment of 11% Senior Notes.................. - (70,000)
Premium paid on early retirement of 11% Senior
Notes......................................... - (7,700)
Repayment of debt assumed in IT Group
Communications acquisition.................. - (760)
Repayment of other long-term debt and
capital lease obligations................... (860) (654)
Proceeds from issuance of common stock, net of
offering expenses............................. 120,929 -
Proceeds from exercise of common stock options. 2,231 1,207
Other.......................................... 101 (119)
-------- ---------
Net cash provided by financing activities 219,355 77,144
------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Increase in cash and cash equivalents............. $ 105,297 $ 13,276
Cash and cash equivalents at beginning of period.. 184,167 94,374
--------------- -------------
Cash and cash equivalents at end of period........ $ 289,464 $ 107,650
=============== =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest............................ $ 28,303 $ 17,943
================ =============
Cash paid (refunds received) for income taxes,
net.............................................. $ 64 $ (1,664)
================ =============
NONCASH TRANSACTIONS:
Acquisitions:
Note payable and capital lease obligation
assumed........................................ $ 63 $ 974
================ =============
Issuance of common stock....................... $ 31,190 $ 2,793
================ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE>
ITC/\DELTACOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
Organization
ITC/\DeltaCom, Inc. ("ITC/\DeltaCom" or the "Company") was incorporated on
March 24, 1997 under the laws of the State of Delaware, as a wholly-owned
subsidiary of ITC Holding Company, Inc., to acquire and operate selected wholly
owned subsidiaries of ITC Holding. On July 25, 1997, upon receipt of regulatory
approvals and other consents, ITC Holding completed the reorganization of the
subsidiaries that became wholly owned by ITC/\DeltaCom.
Effective October 20, 1997, as part of a further reorganization of ITC
Holding, ITC Holding transferred all of its assets, other than stock in
ITC/\DeltaCom, and all of its liabilities to another entity and then merged with
and into ITC/\DeltaCom. ITC/\DeltaCom was the surviving corporation in the
merger.
Nature of Business
ITC/\DeltaCom is a full service provider of integrated voice and data
telecommunications services on a retail basis to mid-sized and major regional
businesses in the southern United States. These services, which are called its
"retail services," include:
. local exchange telephone services;
. long distance services;
. calling card and operator services;
. Asynchronous Transfer Mode, or ATM, frame relay and high capacity
broadband private line services;
. Internet, Intranet and web page hosting services;
. primary rate interface connectivity and collocation services to
Internet service providers, or "ISPs";
. customer premise equipment sale, installation and repair;
. enhanced services, including conference calling, fax broadcasting and
pre-paid calling cards;
. consulting, integration, operation and proactive management of data
networks; and
. in-depth network performance analysis and implementation and design
services for data network deployment.
ITC/\DeltaCom is also a leading regional provider of wholesale long-haul
services to other telecommunications companies, which means it sells capacity on
its network to, and switches and transports telecommunications traffic for,
those companies. These wholesale long-haul services are referred to as
ITC/\DeltaCom's "carriers' carrier services."
In connection with these businesses, ITC/\DeltaCom owns, operates and
manages an extensive fiber optic network in the southern United States.
Basis of Presentation
The accompanying interim consolidated financial statements are unaudited
and have been prepared by Company management according to the rules and
regulations of the SEC. In the opinion of management, all adjustments
considered necessary for the fair presentation of the unaudited, consolidated
financial statements have been included, and the unaudited, consolidated
financial statements present fairly the financial position and results of
operations for the interim periods presented. These unaudited, consolidated
financial statements should be read in conjunction with the audited,
consolidated financial statements and related footnotes included in
ITC/\DeltaCom's Annual Report on Form 10-K, as filed with the SEC on March 25,
1999 and as amended by ITC/\DeltaCom's Form 10-K/A filed with the SEC on April
30, 1999 (File No. 0-23252).
8
<PAGE>
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt and capital lease obligations at September 30, 1999 and
December 31, 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
4-1/2% Convertible Subordinated Notes $ 100,000 $ 0
11% Senior Notes 130,000 130,000
8-7/8% Senior Notes 159,865 159,853
9-3/4% Senior Notes 125,000 125,000
Capital lease obligations at varying interest
rates, maturing through June 2006 2,169 2,643
Other 55 438
---------- ---------
Total long-term debt and capital lease obligations 517,089 417,934
Less current maturities (760) (1,075)
---------- ---------
Total $ 516,329 $ 416,859
========== =========
</TABLE>
On May 12, 1999, ITC/\DeltaCom completed a private offering and sale of $100
million aggregate principal amount of its 4-1/2% Convertible Subordinated Notes
due May 15, 2006 (the "Notes"), yielding net proceeds to ITC/\DeltaCom of
approximately $97.0 million. The Notes bear interest at an annual rate of 4-1/2%
payable each May 15 and November 15 beginning November 15, 1999. The Notes are
unsecured general obligations of ITC/\DeltaCom and are convertible into common
stock at any time after August 10, 1999, at a conversion price of $26.67 per
share, subject to adjustment in certain events. ITC/\DeltaCom may redeem the
Notes or make the Notes nonconvertible under certain circumstances before May
17, 2002. ITC/\DeltaCom intends to use the net proceeds from this private
offering primarily (1) to fund an accelerated expansion of its fiber optic
network and (2) to purchase switching equipment, inventory and other electronics
and network assets related to its fiber optic network and to its provision of
primary rate interface connectivity to ISPs.
In May 1999, ITC/\DeltaCom amended its secured revolving credit facility
with NationsBank, N.A. to permit (1) the merger with AvData (see Note 5), (2)
the issuance of the common stock in the May 1999 common stock offering (see Note
3) and (3) the issuance of and payment of interest on the Notes, the redemption
of the Notes and the issuance of common stock upon conversion of the Notes.
3. EQUITY INTERESTS
Public Offering of Common Stock
On May 12, 1999, ITC/\DeltaCom completed an underwritten public offering and
sale of 6,037,500 shares of its common stock, yielding net proceeds to
ITC/\DeltaCom of approximately $120.9 million. ITC/\DeltaCom intends to use the
net proceeds from this offering (1) to fund an accelerated market expansion of
its telecommunications business, including expansion of its fiber optic network,
expansion of its ISP local telecommunications services and the opening of new
sales offices, and (2) for additional working capital and other general
corporate purposes.
9
<PAGE>
Amendment to Employee Stock Option Plan
On May 13, 1999, ITC/\DeltaCom's stockholders approved an increase in the
number of options authorized to be granted under the ITC/\DeltaCom, Inc. 1997
Stock Option Plan from 4,815,000 to 7,815,000.
4. COMMITMENTS AND CONTINGENCIES
At September 30, 1999, the Company had entered into agreements with vendors
to purchase approximately $81.3 million of equipment related to the improvement
and installation of switches, other network expansion efforts and certain
services.
5. ACQUISITIONS
AvData Systems, Inc.
On July 8, 1999, ITC/\DeltaCom completed its acquisition by merger of
AvData Systems, Inc. ("AvData"), a privately owned data network management
solutions provider in Atlanta, Georgia. ITC/\DeltaCom issued 983,511 shares of
common stock to consummate the merger, of which 171,898 shares are being held by
a trustee in a two-year escrow to protect against certain contingencies. The
transaction is subject to an earnout, which, if certain performance objectives
are met, could require ITC/\DeltaCom to issue up to an additional 336,730 shares
of common stock in 2000.
Scientific Telecommunications, Inc.
On August 16, 1999, ITC/\DeltaCom completed its acquisition of certain
assets of Scientific Telecommunications, Inc. ("SciTel"), a privately owned
telecommunications equipment provider headquartered in Greenwood, Mississippi.
The Company issued 83,117 shares of common stock to consummate the transaction.
6. SEGMENT REPORTING
As discussed in Note 1, ITC/\DeltaCom operates in two business segments:
retail services and carriers' carrier services. ITC/\DeltaCom also has a
corporate segment which has no operations. Identifiable assets of the corporate
segment include $109.9 million of cash and cash equivalents, $4.1 million of
other current assets and $14.1 million of non-current assets. Summarized
financial data by business segment as of and for the nine months ended September
30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999
-----------------------------------------------
Carriers'
Carrier Retail Corporate
Segment Segment Segment Consolidated
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Operating revenues....................................... $ 53,659 $122,562 $ 0 $176,221
Gross margin............................................. 45,656 44,003 0 89,659
Selling, operations, and administration.................. 17,214 51,378 0 68,592
Depreciation and amortization............................ 20,630 17,169 61 37,860
Other income, net........................................ 10,813
Interest expense......................................... 33,401
--------
Loss before income taxes and extraordinary item.......... $ 39,381
========
Identifiable assets...................................... $401,226 $289,182 $128,121 $818,529
======== ======== ======== ========
Capital expenditures, net................................ $ 50,230 $ 65,013 $ 0 $115,243
======== ======== ======== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------
Carriers'
Carrier Retail Corporate
Segment Segment Segment Consolidated
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Operating revenues.................................... $ 36,531 $ 86,691 $ 0 $123,222
Gross margin.......................................... 31,401 33,202 0 64,603
Selling, operations, and administration............... 10,614 35,676 0 46,290
Depreciation and amortization......................... 13,737 7,637 61 21,435
Other income, net..................................... 4,534
Interest expense...................................... 23,322
--------
Loss before income taxes and extraordinary item....... $ 21,910
========
Identifiable assets................................... $272,893 $179,445 $16,938 $469,276
======== ======== ======= ========
Capital expenditures, net............................. $ 39,906 $ 55,649 $ 0 $ 95,555
======== ======== ======= ========
</TABLE>
7. SUBSEQUENT EVENTS
On October 1, 1999, the SEC declared effective the Company's registration
statement registering for public resale by certain selling holders $100 million
aggregate principal amount of the Notes (see Note 2) and the shares of common
stock into which the Notes are convertible. As of November 8, 1999, none of the
Notes had been converted into shares of common stock. The Company will not
receive any proceeds from resales of the securities covered by this registration
statement.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q contains certain forward-looking
statements that involve risks and uncertainties. In addition, members of
ITC/\DeltaCom's senior management may, from time to time, make forward-looking
statements concerning ITC/\DeltaCom's operations, performance and other
developments. ITC/\DeltaCom's actual results could differ materially from those
anticipated in such forward-looking statements as a result of various factors.
The following analysis should be read in conjunction with ITC/\DeltaCom's Annual
Report on Form 10-K for the year ended December 31, 1998 and the financial
statements and related notes thereto. ITC/\DeltaCom has included data with
respect to EBITDA, as adjusted, in the following analysis because it is a
measure commonly used in the company's industry. EBITDA, as adjusted, represents
earnings before extraordinary item, net interest, other income (expense), income
taxes, and depreciation and amortization. EBITDA, as adjusted, is not a measure
of financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity. EBITDA, as adjusted, is
not necessarily comparable with similarly titled measures for other companies.
Unless otherwise indicated, all dollar amounts in the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations that exceed $1 million have been rounded to the nearest hundred
thousand and all dollar amounts less than $1 million have been rounded to the
nearest thousand.
Overview
We are a full service provider of integrated voice and data
telecommunications services on a retail basis to mid-size and major regional
businesses in the southern United States and 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 had revenues of $65.8 million
and $45.7 million for the three months ended September 30, 1999 and 1998,
respectively, and $176.2 million and $123.2 million for the nine months ended
September 30, 1999 and 1998, respectively.
We provide our wholesale long-haul services, which we refer to as our
"carriers' carrier services," to other telecommunications carriers, including
AT&T, MCI WorldCom, Inc., Sprint Corporation, Cable & Wireless, Qwest
Communications International Inc. and IXC Communications, Inc. Our carriers'
carrier services business generated revenues of $19.0 million and $13.2 million
for the three months ended September 30, 1999 and 1998, respectively, and $53.7
million and $36.5 million for the nine months ended September 30, 1999 and 1998,
respectively.
We are also a full service provider of integrated retail
telecommunications services, which we refer to as our "retail services," to mid-
sized and major regional businesses in a bundled package tailored to the
business customer's specific needs. These retail services include:
. local exchange telephone services;
. long distance services;
. calling card and operator services;
. Asynchronous Transfer Mode, or ATM, frame relay and high capacity
broadband private line services;
. Internet, Intranet and web page hosting services;
. primary rate interface connectivity and collocation services to
Internet service providers;
. customer premise equipment sale, installation and repair;
. enhanced services, including conference calling, fax broadcasting
and pre-paid calling cards;
. consulting, integration, operation and proactive management of data
networks; and
. in-depth network performance analysis and implementation and design
services for data network deployment.
12
<PAGE>
As of September 30, 1999, we provided retail services to approximately
11,900 business customers in 30 metropolitan areas and had sold approximately
91,800 access lines, of which approximately 76,000 had been installed. The
backlog of lines installed, apparent in the difference in total lines sold and
in service, is primarily due to lag times inherent in the ordering and
installation of ILEC interconnection trunks necessary to respond to increasing
demand for primary rate interface services. We intend to provide a full range
of retail services in a total of approximately 47 metropolitan areas throughout
the southern United States over the next two years. Our retail services
business generated revenue of $46.8 million and $32.5 million for the three
months ended September 30, 1999 and 1998, respectively, and $122.6 million and
$86.7 million for the nine months ended September 30, 1999 and 1998,
respectively.
At September 30, 1999, our fiber optics network reached over 90 points of
presence, or "POPs," in the following 10 southern states: Alabama, Arkansas,
Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina,
Tennessee and Texas. Our network extended approximately 8,250 route miles at
that date, of which approximately 4,550 miles are owned by us and approximately
3,700 miles are owned and operated principally by three public utilities, Duke
Power Company, Florida Power & Light Company and Entergy Technology Company, and
managed and marketed by us. We expect to add approximately 150 owned and
operated route miles to our fiber network by the end of 1999 and an additional
1,000 to 1,500 route miles by the end of 2000 through a combination of
construction and long-term dark fiber leases. Completion of the construction of
a 150-mile route has been rescheduled from fourth quarter 1999 to first quarter
2000. At September 30, 1999, our network included eight Nortel DMS-500 and one
Nortel DMS-250 voice switches, seventeen Ascend 9000 frame relay switches and
ten ATM switches. In addition, we had completed physical collocation of
switching equipment in 70 BellSouth markets.
During the three months ended September 30, 1999, our operational
highlights included the following:
. We completed our acquisition by merger of AvData Systems, Inc.
("AvData"), a privately owned data network management solutions provider
in Atlanta, Georgia.
. We completed our acquisition of certain assets of Scientific
Telecommunications, Inc. ("SciTel"), a privately owned
telecommunications equipment provider in Mississippi;
. The United States District Court in Montgomery, Alabama issued an order
requiring BellSouth Telecommunications, Inc. to pay reciprocal
compensation for dial-up calls from BellSouth customers to ISPs served
by ITC/\DeltaCom. That order is currently under review by the District
Court on BellSouth's request.
. We completed the addition of approximately 150 route miles of new fiber
network, increasing the total network to approximately 8,250 route
miles.
. We completed the installation of 34 additional access nodes, raising the
total number to 70 operational BellSouth collocations. We expect over
100 central offices of incumbent local exchange carriers ("ILECs") to be
served with access node collocations by year-end 1999.
. We completed the installation of our eighth Nortel DMS-500 switch, in
Montgomery, Alabama; and
. we opened a branch office in Raleigh, North Carolina, and expanded
former SciTel offices in Tupelo, Greenwood, and Hattiesburg,
Mississippi, to full service ITC/\DeltaCom branches. These openings
increased our market coverage to 31 branch offices operating in 30
markets at the end of the third quarter.
On July 1, 1999, our resale and interconnection agreement with BellSouth
expired. We are currently in arbitration with BellSouth, in all BellSouth
states except Kentucky, regarding certain terms and conditions of the
interconnection agreement. As contemplated by the original interconnection
agreement, we will continue to exchange traffic under substantially the same
terms on a month-to-month basis until such time as renewal terms, conditions and
prices are ordered by a state commission or negotiated by the parties. The new
terms, conditions and prices would then be retroactive to July 1, 1999. We
expect that a final resolution will be reached during the first quarter of 2000.
Pursuant to our interconnection agreement with BellSouth, we continued to
bill BellSouth during the first nine months of 1999 for reciprocal
interconnection charges related to our provision of facilities-based local
exchange services. A significant amount of these charges is attributable to
call terminations by us to customers that are ISPs. BellSouth has stated that
it views termination to ISPs as not included
13
<PAGE>
under the reciprocal charge arrangements set forth in the BellSouth
interconnection agreement, and has refused to pay compensation for such
terminations either to us or to other CLECs operating under similar
interconnection agreements. The Alabama Public Service Commission rendered a
ruling in favor of ITC/\DeltaCom in March 1999 and issued an order requiring
BellSouth to pay all withheld reciprocal compensation sums within 20 days.
BellSouth appealed this ruling to the United States District Court in
Montgomery, Alabama. In August 1999, the United States District Court entered a
decision and ordered BellSouth to pay reciprocal compensation for dial-up calls
from BellSouth customers to ISPs served by us. The funds are currently being
held in escrow by the federal court pending outcome of BellSouth's request for
review of the order by the United States District Court. We have filed a similar
complaint before the South Carolina Public Utilities Commission seeking a ruling
requiring BellSouth to pay the reciprocal compensation with respect to our South
Carolina operations.
We have continued to bill BellSouth the reciprocal compensation rate under
the interconnection agreement which expired July 1, 1999, which rate we believe
will be substantially reduced retroactively to July 1, 1999 pursuant to the
proceedings described above. Such a rate reduction would result in a
substantial reduction in the accounts receivable billed and reserved subsequent
to July 1, 1999. For the three months and nine months ended September 30, 1999,
these charges to BellSouth amounted to approximately $5.9 million and $13.7
million, respectively. We recognized approximately $400,000 and $1.3 million of
these charges as operating revenues during the three months and nine months
ended September 30, 1999, respectively, which represent amounts BellSouth has
actually paid or indicated it will pay, and we reserved against the remaining
$5.5 million and $12.4 million of billings during the three months and nine
months ended September 30, 1999, respectively. As of September 30, 1999, we had
reserved for in excess of $18 million of cumulative local interconnection
billings.
In July 1999, we completed our acquisition, by merger, of AvData, a
privately owned data network management solutions provider in Atlanta, Georgia.
We issued 983,511 shares of our common stock related to this merger, of which
171,898 shares are being held in a two-year escrow account to protect against
certain contingencies. The transaction is subject to an earnout, which, if
certain performance objectives are met, could require us to issue up to an
additional 336,730 shares of common stock in 2000. We believe that this
acquisition has strengthened and enhanced our data service offerings by
expanding our current base of data products to include consulting, integration,
operation and proactive management of data networks, in-depth network
performance analysis, as well as design and implementation services for data
network deployment.
In July 1999, we announced that we would introduce an advanced internet
protocol ("IP") network in the southeast beginning this fall. This network
became operational in October 1999. Through October, we had installed 12 Cisco
GSR routers and 14 Cisco 7513 edge routers at strategic points on this IP
network. The addition of this network should enhance our data product offerings
and allow us to better serve the expanding demand for enhanced IP-based data and
Internet services.
In August 1999, we completed our acquisition of certain assets of SciTel, a
privately owned telecommunications equipment provider headquartered in
Greenwood, Mississippi. We issued 83,117 shares of common stock to consummate
the transaction. This acquisition expanded our physical presence in Mississippi
to include the Hattiesburg, Tupelo and Greenwood markets.
14
<PAGE>
Quarterly Statistical Highlights*
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31,
1999 1999 1999 1998
-------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Statistical Data:
Cumulative markets 30 26 23 22
Business customers served -
Retail Services** 11,900 11,250 11,000 10,500
Route miles 8,250 8,100 7,800 7,800
Collocations 70 36 30 30
Voice switches 9 8 7 7
ATM switches 10 10 7 6
Frame relay switches 17 19 15 14
Number of employees 1,570 1,330 1,170 1,125
Lines sold cumulative 91,800 74,400 60,000 42,000
Lines installed cumulative 76,000 56,000 45,300 32,200
Lines installed/Lines sold percentage 83% 75% 76% 77%
</TABLE>
*Data rounded except as to markets, collocations and switches.
**Reflects the combination of certain customers' multiple accounts into a
single customer profile.
15
<PAGE>
Results of Operations
The following tables set forth, in thousands, certain historical data for
the three and nine month periods ended September 30, 1999 and the three and nine
month periods ended September 30, 1998 for our carriers' carrier services and
retail services segments:
<TABLE>
<CAPTION>
Carriers' Carrier Services
---------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 % 1998 % 1999 % 1998 %
--------- ------- ----------- ----- ------------- ------ -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 19,030 100% $ 13,161 100% $ 53,659 100% $ 36,531 100%
Cost of services 2,593 14% 2,096 16% 8,003 15% 5,130 14%
------- ---- ------- ---- -------- ---- -------- ----
Gross margin 16,437 86% 11,065 84% 45,656 85% 31,401 86%
------- ---- ------- ---- -------- ---- -------- ----
Operating expenses:
Selling, operations
and administration 6,660 35% 3,544 27% 17,214 32% 10,614 29%
Depreciation and
amortization 7,581 40% 5,026 38% 20,630 38% 13,737 38%
------- ---- ------- ---- -------- ---- -------- ----
Total operating expenses 14,241 75% 8,570 65% 37,844 70% 24,351 67%
------- ---- ------- ---- -------- ---- -------- ----
Operating income $ 2,196 11% $ 2,495 19% $ 7,812 15% $ 7,050 19%
======= ==== ======= ==== ======== ==== ======== ====
EBITDA, as adjusted $ 9,777 51% $ 7,521 57% $ 28,442 53% $ 20,787 57%
======= ==== ======= ==== ======== ==== ======== ====
<CAPTION>
Retail Services
------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 % 1998 % 1999 % 1998 %
--------- ------- ----------- ----- ------------- ------ -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 46,781 100% $ 32,515 100% $ 122,562 100% $ 86,691 100%
Cost of services 28,949 62% 20,389 63% 78,559 64% 53,489 62%
------- ---- ------- ---- -------- ---- -------- ----
Gross margin 17,832 38% 12,126 37% 44,003 36% 33,202 38%
------- ---- ------- ---- -------- ---- -------- ----
Operating expenses:
Selling, operations
and administration 19,552 42% 13,709 42% 51,378 42% 35,676 41%
Depreciation and
amortization 6,781 14% 3,145 10% 17,169 14% 7,637 9%
------- ---- ------- ---- ------- ---- -------- ----
Total operating
expenses 26,333 56% 16,854 52% 68,547 56% 43,313 50%
------- ---- ------- ---- ------- ---- -------- ----
Operating loss $(8,501) (18)% $(4,728) (15)% $(24,544) (20)% $(10,111) (12)%
======= ==== ======= ==== ======== ==== ======== ====
EBITDA, as adjusted $(1,720) (4)% $(1,583) (5)% $ (7,375) (6)% $ (2,474) (3)%
======= ==== ======= ==== ======== ==== ======== ====
</TABLE>
16
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues
Total revenue increased $20.1 million, or 44.0%, from $45.7 million for the
three months ended September 30, 1998 to $65.8 million for the three months
ended September 30, 1999. Revenues from our retail services increased $14.3
million, or 44.0%, from $32.5 million for the three months ended September 30,
1998 to $46.8 million for the three months ended September 30, 1999. The
increase in retail services revenue was attributable to:
. the inclusion of revenue from the operations of AvData and SciTel since
the completion of those transaction on July 8, 1999 and August 16, 1999,
respectively;
. increased product diversity;
. a continued increase in the number of business customers;
. continued geographic expansion;
. continued growth in local lines in service;
. continued growth in long distance minutes of use, partially offset by a
decrease in rates per long distance minutes per use; and
. continued stability in the rate of revenue loss from lost customers from
period to period.
We continue to experience revenue growth in our local and data products and
expect this trend, as well as the growth in our minutes of use, to continue
through at least the remainder of 1999.
Revenues from carriers' carrier services increased $5.8 million, or 44.0%,
from $13.2 million for the three months ended September 30, 1998 to $19.0
million for the three months ended September 30, 1999. The increase in revenue
from the carriers' carrier services segment was attributable to:
. the continued increasing demand for bandwidth, partially offset by
continued adjustments of customers' rates to current market rates;
. expansion of owned and operated network routes, including our addition
of 150 route miles during the third quarter of 1999; and
. growth in commissions derived from the managed, monitored and marketed
network routes.
We expect to continue to experience growth in our carrier's carrier services
revenue during the remainder of 1999 and into 2000. This revenue growth is
expected, in part, from the expanded rollout of our wholesale IP backbone
product, even as the rates of a portion of our customer base continue to be
adjusted to current market rates.
Cost of Services
Total cost of services increased $9.0 million, from $22.5 million for the
three months ended September 30, 1998 to $31.5 million for the three months
ended September 30, 1999. Cost of services for retail services increased $8.5
million, from $20.4 million for the three months ended September 30, 1998 to
$28.9 million for the three months ended September 30, 1999. Cost of services
for retail services was 62% as a percentage of revenue for the three months
ended September 30, 1999 compared to 63% for the three months ended September
30, 1998. The decrease in cost of services as a percentage of revenue from the
third quarter of 1998 compared to the third quarter of 1999 was due primarily
to:
. improved off-network long distance termination costs, partially offset
by reduced long distance rates;
. a higher percentage of facilities-based local products; and
. the expansion of our data network service offerings, which carry higher
gross margins.
We expect to experience modest improvements in cost of services as a percentage
of revenues by continuing (1) to move off-network local and long distance
services onto our own facilities and (2) to benefit from
17
<PAGE>
reductions in our off-network costs. We expect that any such improvements will
be partially offset by the initial costs related to the implementation of our
advanced IP network.
Cost of services attributable to carriers' carrier services increased
$500,000, from $2.1 million for the three months ended September 30, 1998 to
$2.6 million for the three months ended September 30, 1999. Cost of services as
a percentage of revenue for carriers' carrier services decreased to 14% for the
three months ended September 30, 1999 from 16% for the three months ended
September 30, 1998. The decrease in cost of services as a percentage of revenue
for the carriers' carrier services was due primarily to (1) moving off-network
traffic onto our network as we added additional fiber routes, which allowed us
to create additional self-healing rings, and (2) favorable competitive market
pressures applied to pricing of off-network circuits.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $8.9
million, from $17.3 million, or 37.8% as a percentage of revenue, for the three
months ended September 30, 1998 to $26.2 million, or 39.8% as a percentage of
revenue, for the three months ended September 30, 1999. Selling, operations and
administration expense attributable to retail services increased $5.9 million,
from $13.7 million, or 42% as a percentage of revenue, for the three months
ended September 30, 1998 to $19.6 million, or 42% as a percentage of revenue,
for the three months ended September 30, 1999. The increase was primarily
attributable to:
. an increase in the number of employees, primarily employees dedicated to
sales, customer support and provisioning;
. the expansion of our customer premises equipment product line into four
additional offices;
. continued geographic expansion, including the conversion of SciTel's
Tupelo, Hattiesburg and Greenwood offices to full service branches; and
. costs associated with the expansion of existing service offerings,
primarily local services.
We expect that selling, operations and administration expense as a percentage of
revenue for our retail services should begin to decline in the fourth quarter.
Selling, operations and administration expense attributable to carriers'
carrier services increased $3.2 million, from $3.5 million, or 27% as a
percentage of revenue, for the three months ended September 30, 1998 to $6.7
million, or 35% as a percentage of revenue, for the three months ended September
30, 1999. The increase in selling, operations and administration expense for
the carriers' carrier segment was primarily due to additions of personnel
resulting from the geographic expansion of our network, costs related to the
infrastructure required to support the IP backbone and an increase in
information systems, research and development, marketing and accounting costs.
Depreciation and Amortization
Total depreciation and amortization expense increased $6.2 million, from
$8.2 million for the three months ended September 30, 1998 to $14.4 million for
the three months ended September 30, 1999. Retail services accounted for $3.6
million of the increase, which was primarily related to the installation of new
central office and related switching equipment. Carriers' carrier services
operations accounted for $2.6 million of the increase, which was primarily due
to the purchase of additional electronic equipment to support the continued
expansion of the fiber optic network. We expect depreciation and amortization to
continue to increase during the remainder of 1999 as we add new switches and
network facilities and expand into new markets.
Interest Expense
Total interest expense increased $3.9 million, from $7.9 million for the
three months ended September 30, 1998 to $11.8 million for the three months
ended September 30, 1999. The $3.9 million increase in interest expense was
primarily attributable to the interest on our 9-3/4% Senior Notes, which we
issued in November 1998, and our 4-1/2% Convertible Subordinated Notes, which we
issued in May 1999.
18
<PAGE>
Interest Income
Total interest income increased $2.6 million, from $2.0 million for the
three months ended September 30, 1998 to $4.6 million for the three months ended
September 30, 1999, as a result of the temporary investment of available cash
balances pending their deployment for operations.
Other Income (Expense)
In March 1998, we reclassified our interest rate swap from a hedge of an
anticipated transaction to a trading security. The reclassification resulted in
a non-cash charge against earnings of approximately $2.5 million. This change in
classification required us to record the interest rate swap agreement on the
consolidated balance sheet at fair market value. The interest rate swap
agreement is marked to market on a monthly basis. For the three months ended
September 30, 1999 and 1998, we recognized income (expense) from the mark-to-
market of the interest rate swap of approximately $15,000 and $(599,000),
respectively.
EBITDA, as adjusted
EBITDA, as adjusted, increased $2.2 million, from $5.9 million for the
three months ended September 30, 1998 to $8.1 million for the three months ended
September 30, 1999. EBITDA, as adjusted, attributable to our retail services for
the three months ended September 30, 1999 was $(1.7) million compared to $(1.6)
million for the three months ended September 30, 1998. EBITDA, as adjusted,
attributable to retail services improved from (4.9)% of revenues for the three
months ended September 30, 1998 to (3.7)% of revenues for the three months ended
September 30, 1999. The improvement in EBITDA, as adjusted, as a percentage of
revenue for the retail services, which was partially offset by the costs
associated with the expansion of our business, was primarily due to:
. continued revenue growth resulting from product and geographic
expansion;
. improved off-network long distance termination costs;
. a higher percentage of facilities-based local products;
. continuous monitoring of our network to ensure maximum cost
efficiencies; and
. the inclusion of higher gross margin products associated with our
expanded data product offerings.
EBITDA, as adjusted, attributable to our carriers' carrier services
increased $2.3 million, from $7.5 million for the three months ended September
30, 1998 to $9.8 million for the three months ended September 30, 1999. The
increase in EBITDA, as adjusted, for the carriers' carrier segment was primarily
attributable to the continued increase in the demand for bandwidth, partially
offset by rate adjustments for customers to current market rates and an increase
in information systems, research and development, marketing and accounting
costs.
Although we expect to continue to experience pricing pressures and incur
additional costs related to the implementation of our advanced IP network, we
expect EBITDA, as adjusted, to increase during the remainder of 1999 as we
benefit from the migration of more of our new and existing traffic onto our own
facilities and as we experience greater penetration of recently expanded
markets.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues
Total revenue increased $53.0 million, or 43.0%, from $123.2 million for
the nine months ended September 30, 1998 to $176.2 million for the nine months
ended September 30, 1999. Revenues from our retail services increased $35.9
million, or 41.4%, from $86.7 million for the nine months ended September 30,
1998 to $122.6 million for the nine months ended September 30, 1999. The
increase in retail services revenue was attributable to:
19
<PAGE>
. continued increase in the number of business customers, from 10,000 as
of September 30, 1998 to over 11,900 as of September 30, 1999;
. the inclusion of revenue from the operations of AvData and SciTel since
the completion of those transactions on July 8, 1999 and August 16,
1999, respectively;
. an increase in product diversity;
. continued geographic expansion, including the addition of 9 new markets;
. continued growth in local lines in service, from 25,500 as of
September 30, 1998 to 76,000 as of September 30, 1999;
. continued growth in long distance minutes of use; and
. continued stability in the rate of revenue loss from lost customers from
period to period.
Revenues from our carriers' carrier services increased $17.2 million, or
47.1%, from $36.5 million for the nine months ended September 30, 1998 to $53.7
million for the nine months ended September 30, 1999. The increase in revenue
from the carriers' carrier services segment was attributable to:
. the continued increasing demand for bandwidth, partially offset by
pricing pressures on certain network routes;
. expansion of the fiber optic network, from approximately 7,000 route
miles as of September 30, 1998 to approximately 8,250 route miles as
of September 30, 1999; and
. growth in commissions derived from our managed, monitored, and marketed
network routes.
We expect to experience continued revenue growth in both our retail
services and our carrier's carrier services during the remainder of 1999 and
into 2000. This growth is expected to be driven primarily by: (1) increased
demand for our diverse retail product mix, especially our local and data
products, and (2) increased demand for bandwidth, including our new wholesale IP
backbone product.
Cost of Services
Total cost of services increased $28.0 million, from $58.6 million for the
nine months ended September 30, 1998 to $86.6 million for the nine months ended
September 30, 1999. Cost of services for retail services increased $25.1
million, from $53.5 million for the nine months ended September 30, 1998 to
$78.6 million for the nine months ended September 30, 1999. Cost of services as
a percentage of revenue for retail services increased to 64% for the nine months
ended September 30, 1999 from 62% for the nine months ended September 30, 1998.
The increase in cost of services as a percentage of revenue from the first nine
months of 1998 compared to the first nine months of 1999 was due primarily to
(1) an increase in sales of the local resale product, which generally has lower
margins, and (2) a decrease in long distance rates. Although we experienced a
slight increase in the cost of services as a percentage of revenues in the first
nine months of 1999 compared to the first nine months of 1998, we had successive
reductions in this percentage in each quarter of 1999. We expect to continue to
experience improvements in the cost of service as a percentage of revenues as we
continue to move local and long distance services to our own facilities and as
we receive reductions in our off-network costs. We expect that such improvements
will continue to be partially offset by costs related to our advanced IP
network.
Cost of services attributable to carriers' carrier services increased $2.9
million, from $5.1 million for the nine months ended September 30, 1998 to $8.0
million for the nine months ended September 30, 1999. Cost of services as a
percentage of revenue for carriers' carrier services increased to 15% for the
nine months ended September 30, 1999 from 14% for the nine months ended
September 30, 1998. The 1% increase in the cost of services as a percentage of
revenue was due primarily to rate adjustments for customers to current market
rates. We believe these pricing pressures will be offset in the future by an
increasing demand for bandwidth.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $22.3
million, from $46.3 million, or 37.6% as a percentage of revenue, for the nine
months ended September 30, 1998 to $68.6 million, or 38.9% as a percentage of
revenue, for the nine months ended September 30, 1999. Selling, operations and
administration expense attributable to retail services increased $15.7 million,
from $35.7 million for the nine months ended September 30, 1998 to $51.4 million
for the nine months ended September 30, 1999,
20
<PAGE>
which represented an increase from 41% to 42% as a percentage of revenue. The
increase in selling, operations and administration expense as a percentage of
revenue for the retail services segment was attributable to:
. an increase in the number of employees, primarily employees dedicated to
sales, customer support and provisioning;
. the expansion of our product lines, especially local and data; and
. continued geographic expansion, including the addition of 9 branch
offices.
Selling, operations and administration expense attributable to carriers'
carrier services increased $6.6 million, from $10.6 million for the nine months
ended September 30, 1998 to $17.2 million for the nine months ended September
30, 1999, representing an increase from 29% to 32% as a percentage of revenue.
The increase in selling, operations and administration expenses for the
carriers' carrier services was primarily due to additions of personnel resulting
from the geographic expansion of our network, the infrastructure required to
support the IP backbone and an increase in information systems, research and
development, marketing and accounting costs.
Depreciation and Amortization
Total depreciation and amortization expense increased $16.4 million, from
$21.4 million for the nine months ended September 30, 1998 to $37.8 million for
the nine months ended September 30, 1999. Retail services accounted for $9.5
million of the increase, which was primarily related to installation of new
central office and other telecommunications equipment. Carriers' carrier
services accounted for $6.9 million of the increase, which was primarily
attributable to network expansion. We expect depreciation and amortization
expense to continue to increase through the remainder of 1999 as we add new
switches and network facilities and expand into new markets.
Interest Expense
Total interest expense increased $10.1 million, from $23.3 million for the
nine months ended September 30, 1998 to $33.4 million for the nine months ended
September 30, 1999. The $10.1 million increase was attributable to interest on
our 8-7/8% Senior Notes, which we issued in March 1998, our 9-3/4% Senior Notes,
which we issued in November 1998, and our 4-1/2% Convertible Subordinated Notes,
which we issued in May 1999. We expect interest expense to increase during the
remainder of 1999 compared to 1998 due to interest on the 9-3/4% Senior Notes
and the 4-1/2% Convertible Subordinated Notes.
Interest Income
Total interest income increased $2.9 million, from $7.4 million for the
nine months ended September 30, 1998 to $10.3 million for the nine months ended
September 30, 1999, as a result of the temporary investment of available cash
balances pending their deployment for operations.
Other Income (Expense)
In March 1998, we reclassified our interest rate swap from a hedge of an
anticipated transaction to a trading security. The reclassification resulted in
a non-cash charge against earnings of approximately $2.5 million. This change
in classification required us to record the interest rate swap agreement on the
consolidated balance sheet at fair market value. The interest rate swap
agreement is marked to market on a monthly basis. For the nine months ended
September 30, 1999 and 1998, we recognized income (expense) from the mark-to-
market of the interest rate swap of approximately $545,000 and $(2.8) million,
respectively.
Extraordinary Loss
During the nine months ended September 30, 1998, we incurred a pre-tax
extraordinary loss of $10.6 million, or $8.4 million after tax, related to the
redemption of $70 million of our 11% Senior Notes. The extraordinary loss
consisted of $7.7 million redemption premium and a $2.9 million write-off of
related debt-issuance costs.
21
<PAGE>
EBITDA, as adjusted
EBITDA, as adjusted, increased $2.8 million, from $18.3 million for the
nine months ended September 30, 1998 to $21.1 million for the nine months ended
September 30, 1999. EBITDA, as adjusted, attributable to our retail services for
the nine months ended September 30, 1999 was $(7.4) million compared to $(2.5)
million for the nine months ended September 30, 1998. EBITDA, as adjusted,
attributable to retail services decreased from (2.9)% of revenues for the nine
months ended September 30, 1998 to (6.0)% of revenues for the nine months ended
September 30, 1999. The decrease in EBITDA, as adjusted, for the retail services
was primarily due to increases in local services provided on a resale basis, an
increase in the costs associated with the expansion of new sales offices and the
employment of additional personnel to support growth and expansion of this
segment.
EBITDA, as adjusted, attributable to our carriers' carrier services
increased $7.6 million, from $20.8 million for the nine months ended September
30, 1998 to $28.4 million for the nine months ended September 30, 1999. The
increase in EBITDA, as adjusted, for the carriers' carrier segment was primarily
attributable to the increased demand for bandwidth, partially offset by rate
adjustments for customers to current market rates.
Liquidity and Capital Resources
We generated net cash from operating activities of $(7.5) million and $8.4
million for the nine months ended September 30, 1999 and 1998, respectively.
Changes in working capital were $(7.5) million and $6.0 million for the nine
months ended September 30, 1999 and 1998, respectively. The change for the nine
months ended September 30, 1999 resulted primarily from an increase in accounts
receivable, inventory, and prepaid expenses, partially offset by an increase in
accounts payable, accrued interest and accrued compensation and other accrued
liabilities. For the nine months ended September 30, 1998, such changes were
primarily due to an increase in accrued interest, unearned revenue, accrued
compensation and other accrued liabilities and accounts payable and a decrease
in income tax refund receivable from ITC Holding, partially offset by increases
in accounts receivable, income tax refund receivable, inventory and prepaid
expenses.
Cash used for investing activities was $106.6 million and $72.3 million for
the nine months ended September 30, 1999 and 1998, respectively. The cash used
in investing activities in the nine months ended September 30, 1999 and 1998 was
primarily for the funding of capital expenditures. We made net capital
expenditures of $115.2 million and $95.6 million for the nine months ended
September 30, 1999 and 1998, respectively. Of the $115.2 million of net capital
expenditures for the nine months ended September 30, 1999, $50.2 million related
to carriers' carrier services and $65.0 million related to retail services. Of
the $95.6 million of net capital expenditures for the nine months ended
September 30, 1998, $40.0 million related to carriers' carrier services and
$55.6 million related to retail services. The increase in cash used in
investing activities results from our commitment to expand our existing network
and facilities as we implement and execute our business plan.
Cash provided by financing activities was $219.4 million and $77.1 million
for the nine months ended September 30, 1999 and 1998, respectively. Cash
provided by financing activities for the nine months ended September 30, 1999
consisted primarily of net proceeds of $97.0 million from the sale of the 4-1/2%
Convertible Subordinated Notes and $120.9 million from the issuance of common
stock in May 1999. Cash provided by financing activities for the nine months
ended September 30, 1998 consisted primarily of net proceeds of $155.2 million
from the sale of the 8-7/8% Senior Notes, less $70.0 million repayment of
principal on the 11% Senior Notes and $7.7 million premium payment on the early
extinguishment of debt.
In May 1999, we completed an underwritten public offering and sale of
6,037,500 shares of our common stock, yielding net proceeds to us of
approximately $120.9 million. We intend to use the net proceeds from this
offering (1) to fund an accelerated market expansion of our telecommunications
business, including expansion of our fiber optic network, expansion of our local
ISP telecommunications services and the opening of new sales offices and (2) for
additional working capital and other general corporate purposes.
22
<PAGE>
In May 1999, we completed a private offering and sale of $100 million
aggregate principal amount of our 4-1/2% Convertible Subordinated Notes due
2006, yielding net proceeds to us of approximately $97.0 million. The 4-1/2%
Convertible Subordinated Notes bear interest at an annual rate of 4-1/2%
payable each May 15 and November 15, beginning November 15, 1999. These notes
are unsecured general obligations of ITC/\DeltaCom and are convertible into
common stock at any time after August 10, 1999, at a conversion price of $26.67
per share, subject to adjustment in certain events. We may redeem the notes or
make the notes nonconvertible under certain circumstances before May 17, 2002.
We intend to use the net proceeds from this private offering (1) to fund an
accelerated expansion of our fiber optic network and (2) to purchase switching
equipment, inventory, and other electronics and network assets related to our
fiber optic network and to our provision of primary rate interface connectivity
to ISPs.
In May 1999, we amended our secured revolving credit facility with
NationsBank, N.A. to permit (1) the acquisition of AvData, (2) the issuance of
the common stock in the May 1999 common stock offering and (3) the issuance of
and payment of interest on the 4-1/2% Convertible Subordinated Notes, the
redemption of those notes and the issuance of common stock upon conversion of
those notes. No amounts are outstanding under the credit facility.
At September 30, 1999, we had entered into agreements with vendors to
purchase approximately $81.3 million of equipment and services. For the nine
months ended September 30, 1999, we had made capital expenditures of
approximately $115.2 million. We currently estimate that our aggregate capital
requirements through 2000 will total approximately $250.0 to $300.0 million
(inclusive of the approximately $81.3 million in commitments as of September 30,
1999). We expect to make substantial capital expenditures thereafter. Capital
expenditures through 2000 will be primarily for the following:
. accelerated expansion of our fiber optic network in Texas, including
Austin and San Antonio, and in Tennessee, including Memphis, Nashville,
Chattanooga and Knoxville;
. continued addition of facilities-based local telephone service to our
bundle of integrated telecommunications services, including acquisition
and installation of switches and related equipment;
. continued addition of switching capacity, electrical equipment and
additional collocation space in connection with the expansion of our ISP
local telecommunications services;
. market expansion; and
. infrastructure enhancements, principally for information systems.
The actual amount and timing of our capital requirements may differ
materially from the foregoing estimate as a result of regulatory, technological
and competitive developments (including market developments and new
opportunities) in our industry, or if we decide to make acquisitions or enter
into joint ventures and strategic alliances.
In July 1999, we completed our acquisition of AvData. We issued 983,511
shares of our common stock to consummate the merger, of which 171,898 shares are
being held by a trustee in escrow for two years to protect against certain
contingencies. The transaction is subject to an earnout, which, if certain
performance objectives are met, could require us to issue up to an additional
336,730 shares of common stock in 2000.
In August 1999, we completed our acquisition of certain assets of SciTel.
We issued 83,117 shares of common stock to consummate the transaction. This
acquisition expanded our physical presence in Mississippi to include the
Hattiesburg, Tupelo and Greenwood markets.
As of September 30, 1999, we had $289.5 million of cash and cash
equivalents, excluding restricted investments. We believe that proceeds from
the May 1999 common stock offering, proceeds from the May 1999 convertible
subordinated notes offering, cash on hand and cash flow from operations will
provide sufficient funds to enable us to expand our business as currently
planned. In addition, subject to compliance with applicable covenants in the
credit agreement, we may borrow funds under our credit facility to supplement
the capital we need to expand our business as currently planned. In the event
that our plans or assumptions change or prove to be inaccurate, the foregoing
sources of funds may prove to be insufficient to fund our currently planned
growth and operations. In addition, if we successfully complete any
acquisitions, we may be required to seek additional capital sooner than
currently anticipated.
23
<PAGE>
Additional sources may include equity and debt financing and other financing
agreements, such as vendor financing. We cannot assure you that we will be able
to generate sufficient cash flow from operations or that additional financing
arrangements will be available or, if available, that they can be concluded on
terms acceptable to us. Our inability to generate or obtain sufficient funds
would result in delay or abandonment of some or all of our development and
expansion plans, which could have a material adverse effect on us.
Although our liquidity has improved, our level of indebtedness and debt
service obligations significantly increased as a result of our issuance of the
11% Senior Notes, the 8-7/8% Senior Notes, the 9-3/4% Senior Notes, and the
4-1/2% Convertible Subordinated Notes. The successful implementation of our
strategy, including expansion of our network and obtaining and retaining a
significant number of customers, and significant and sustained growth in our
cash flow are necessary for us to be able to meet our debt service requirements.
We cannot assure you that we will successfully implement our strategy or that we
will be able to generate sufficient cash flow from operating activities to
improve our earnings before fixed charges, or to meet our debt service
obligations and working capital requirements. Our ability to meet our
obligations will be dependent upon our future performance, which will be subject
to prevailing economic conditions and to financial, business and other factors.
Year 2000
The Year 2000 Issue. The Year 2000 issue is the result of a computer
--------------------
programming practice first utilized during the 1960s when storage space was very
expensive and processing capability was limited. By shortening the year portion
of date field entries to two digits rather than four, programmers could save
valuable storage space and increase data processing speeds. This method of date
entry became the standard method for programmers for mainframes, personal
computers, and hardware, including processor chips. Because of this programming
convention, software, hardware, or firmware may recognize a date field using
"00" as the year 1900 rather than the year 2000. If left uncorrected, this
could possibly result in system failures, miscalculations, or errors causing
disruptions in software-dependent operations.
Program Execution and Oversight. We have established a Year 2000 project
--------------------------------
office, and our executive management reviews our progress on Year 2000 efforts
on a monthly basis. The board of directors has designated the Year 2000
oversight role to its Audit Committee, which receives periodic updates and
progress reports on our Year 2000 preparations.
To execute our Year 2000 program, we are utilizing both internal and
external resources to identify, correct, reprogram and test our systems for Year
2000 compliance. Our use of internal resources to achieve the aims of our Year
2000 program has not had a material adverse effect on our ability to develop new
products and services or to maintain and upgrade, if necessary, our existing
products and services. Our use of external resources to achieve the aims of our
Year 2000 program has not had a material adverse effect on our operations or
earnings.
ITC/\DeltaCom's Program. We have undertaken a comprehensive program to
-----------------------
address the Year 2000 issue with respect to the following:
. our information technology and operating systems, including network
switching, customer service, call detail and billing systems;
. our non-information technology systems, such as buildings, plant,
equipment and other infrastructure systems that may contain embedded
microcontroller technology;
. the systems of our major vendors, third party network service providers,
and other material service providers insofar as they relate to our
business; and
. our major carrier's carrier and retail services customers.
As explained below, the program involves:
. a wide-ranging assessment of the potential Year 2000 issues that may
affect us;
. the development of remedies to address the concerns discovered in the
assessment phase;
testing of the remedies; and
. the preparation of contingency plans to deal with potential failure
scenarios.
24
<PAGE>
These steps will vary to meet the particular needs of a system or company
division and, in some cases, will overlap. Assessment, for example, is an on-
going element of our Year 2000 program.
Assessment Phase. As part of the assessment phase of this program, we have
-----------------
identified substantially all of the major components of the systems described
above. In order to determine the extent to which such systems are vulnerable to
the Year 2000 issue, we:
. evaluated our internally developed software applications;
. inventoried and assessed our facilities and equipment; and
. contacted substantially all of our significant hardware, software, and
other equipment vendors, third party network service providers, other
material service providers, and our material customers, requesting
detailed, written information related to their Year 2000 compliance and
the compliance status of the products or services they provide to us, if
any.
In addition, we perform a Year 2000 readiness assessment of all potential
purchases, leases, or contracts in an effort to prevent the acquisition of a
non-compliant system or facility.
To date, we have received and analyzed responses from substantially all of
our major vendors and service providers. We have also received responses from
approximately 80% of our customers to which inquiries were sent. The responses
received included our major carrier's carrier and retail services customers.
Based upon the responses received to date, and assuming contradictory
responses are not received in the future from the third parties who have been
solicited, we believe that our third party manufactured computer operating
systems dedicated to our customer service, call detail records and billing
systems, and our Nortel and Ascend system switches are now Year 2000 compliant.
We continue to closely monitor the Year 2000 readiness of the three public
utilities that own and operate approximately 3,700 miles of our approximately
8,250-mile fiber optic network. These three utilities have indicated that they
are Year 2000 compliant. We have been informed by the financial institutions
that provide services to us that they each have undertaken Year 2000 programs
and are Year 2000 compliant. Of our two largest carrier's carrier customers,
which together represented approximately 10.8% of our consolidated revenues for
the nine months ended September 30, 1999, one has responded that it is Year 2000
compliant and the other has responded that its mission-critical systems are
compliant. Of our five largest retail services customers, which represented an
aggregate of approximately 12.1% of our consolidated revenues for the nine
months ended September 30, 1999, four have either informed ITC/\DeltaCom or made
public disclosures that their mission-critical systems are now Year 2000
compliant.
Remediation and Testing. Based upon the results of our assessment efforts,
-----------------------
we conducted remediation and testing of the at-risk systems identified by the
assessment. The activities conducted during this phase were intended to
affirmatively address potential Year 2000 problems in our internally developed
computer software in our information technology and non-information technology
systems, and then demonstrate that the remediation was effective when the system
is used within normal operating parameters. In this phase, we first evaluated a
program application and, if a potential Year 2000 problem was identified, took
steps to remediate the problem. The application was then individually tested to
confirm that the remediating changes were effective and did not adversely affect
the functionality of that application. Similar remediation and testing was
undertaken with respect to the hardware and other equipment that operates or is
operated by the software. After the individual applications and system
components were remediated and tested, integrated testing was conducted to
demonstrate functional integrated systems operation.
We have completed the remediation and testing of our internally developed
code and the systems that operate and are operated by such software, and we have
placed the remediated systems and software into production.
After we completed the internally developed code remediation, we arranged
to conduct laboratory-simulated integrated systems testing in an effort to
demonstrate Year 2000 compliance of our integrated telecommunications systems
currently in use as they interface with external systems and the equipment of
25
<PAGE>
major vendors, third party network providers, other material service providers
and customers. This testing effort covered our essential network configurations
and integration configurations with the most common network components, which
are utilized by customers and other third parties that interconnect with our
network. We have completed the integrated systems testing process. No Year
2000 related failure or errors were experienced in testing.
Contingency Planing. We have established a Year 2000 contingency planning
--------------------
program office as a part of our Year 2000 program office. The Year 2000
contingency planning program office, utilizing both internal and external
resources, has developed detailed contingency plans to respond to potential Year
2000-related failure scenarios. The contingency plans will continue to be
refined and updated through the end of 1999 based upon, among other things,
responses from third party inquiries.
The bulk of our contingency planning primarily addresses potential year
2000 problems due to the potential failure of our interconnecting carriers' and
vendors' Year 2000 remediation efforts and our failure and/or the failure of our
third party suppliers to remediate major systems successfully. The contingency
plans have been developed to address the following primary goals in the event of
a failure:
. Keeping customers in service
. Maintaining trouble reporting and response
. Processing new orders for service
. Maintaining accurate records throughout the millennium date change
period, with particular emphasis on correct accounting for sales and
billing
While we expect to maintain normal operations throughout the millennium
date change, each of our switch centers, network operations centers, and data
centers will have senior personnel on-site and be fully staffed during the
December 31, 1999 through January 3, 2000 time period.
Costs Related to the Year 2000 Issue. We have incurred, and expect to
-------------------------------------
incur in the future, internal labor as well as consulting and other expenses
necessary to prepare our systems for the Year 2000. Through the end of 1998, we
incurred approximately $1.1 million in external costs for our Year 2000 program.
We incurred approximately $742,000 during the nine months ended September 30,
1999 and currently estimate that we will incur additional external expenses
during 1999 to complete our Year 2000 compliance work, which we do not expect to
exceed approximately $250,000. The actual costs, which may vary from our
estimates, have been, and will continue to be, expensed as incurred.
Risks Related to the Year 2000 Issue. We have been implementing a detailed
-------------------------------------
program to minimize the possibility of service interruptions or adverse effects
related to the Year 2000 issue. Although our Year 2000 efforts are intended to
minimize the potential adverse effects of the Year 2000 issue on our business
and operations, the actual effects of the issue cannot and will not be known
until the Year 2000. Failure by us and/or our major vendors, third party
network service providers, and other material service providers and customers to
adequately address their respective Year 2000 issues in a timely manner, insofar
as they relate to our business, could have a material adverse effect on our
business, results of operations, and financial condition.
Like all telecommunication service providers, our ability to provide
service is dependent on our interconnecting carriers and third party vendors,
including non-telecommunications related services providers. Our ability to
provide service and, therefore, our business, could be adversely affected if
these third parties fail to achieve Year 2000 compliance on a timely basis.
Failure by our carrier's carrier customers and retail services customers to
adequately address their Year 2000 issues could adversely affect their demand
for telecommunications service, which in turn could adversely affect our
revenues. We have taken steps to raise customer awareness of the Year 2000
issue and to encourage our customers to develop and implement plans to become
Year 2000 compliant.
Our failure to correct a material Year 2000 problem could result in
interruptions or a failure of our normal business activities and operations.
Such failures could materially and adversely affect our results of operations,
26
<PAGE>
liquidity, and financial condition. At this time, we are unable to determine
whether the consequences of third-party Year 2000 failures will have a material
impact on our results of operations, liquidity, or financial condition due to
the general uncertainty inherent in the Year 2000 problem, and uncertainties
relating to the Year 2000 readiness of our interconnecting carriers and vendors.
We believe that our Year 2000 program has reduced our level of uncertainty
about the Year 2000 problem and, in particular, about the Year 2000 compliance
and readiness of our information technology, telecommunications equipment, and
operating systems, our major vendors, third party network service providers, and
other material service providers and our customers. We believe that, with the
internal implementation of remediated information and network systems and our
interconnecting carriers' and primary vendors' Year 2000 readiness, we will
maintain normal operations for all dates on and after December 31, 1999.
Effects on Accounting Standards
Statement of Position 98-1, Accounting for the Costs of computer Software
Developed or Obtained for Internal Use, provides guidance on accounting for the
costs of computer software developed or obtained for internal use and was
adopted January 1, 1999, with no material impact on the consolidated financial
statements.
SFAS No. 133, Accounting for Derivative Instruments and for Hedging
Activities, establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 was originally effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 cannot be applied retroactively.
SFAS No. 133 must be applied to (1) derivative instruments and (2) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, which
amends SFAS No. 133 to be effective for all fiscal years beginning after June
15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). We
expect to implement SFAS No. 137 for the fiscal year beginning January 1, 2001,
and do not expect the adoption of SFAS No. 137 will have a material affect on
our consolidated financial statements.
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
We are exposed to interest rate risk related to our interest rate swap
agreement and our borrowings under our credit facility. There were no
borrowings outstanding under our credit facility as of September 30, 1999.
Additionally, we are exposed to fair value risk related to our fixed-rate, long-
term debt. Our market risk sensitive instruments do not subject us to material
market risk exposures.
27
<PAGE>
P A R T II
OTHER INFORMATION
Item 1. Legal Proceedings
On July 1, 1999, our resale and interconnection agreement with BellSouth
expired. We are currently in arbitration with BellSouth, in the public
utilities (or service) commissions in all BellSouth states except Kentucky,
regarding certain terms and conditions of the interconnection agreement,
although we will continue to exchange traffic under substantially the same terms
as those provided by the interconnection agreement on a month-to-month basis
until such time as renewal terms, conditions and prices are ordered by a state
commission or negotiated by the parties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Overview" for more
information on these proceedings.
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities
In consideration of our acquisition of the assets of SciTel, which we
completed effective August 16, 1999, we issued 83,117 shares of common stock
valued at approximately $2.0 million to the sole stockholder of SciTel. See
Note 5 to the financial statements appearing elsewhere in this report for
additional information regarding this transaction. In connection with this
issuance, the Company relied on the exemption from registration provided under
Section 4(2) of the Securities Act of 1933. The Company did not engage in any
advertising or general solicitation in connection with the offer and sale of the
securities. In addition, the Company provided or made available information
concerning the Company and the common stock, obtained investment representations
from SciTel's stockholder and placed restrictive legends on the certificates
evidencing the securities issued.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITC/\DELTACOM, INC.
------------------
(Registrant)
Date: November 12, 1999 By: /s/ Foster O. McDonald
----------------------
Foster O. McDonald
President
Date: November 12, 1999 By: /s/ Douglas A. Shumate
----------------------
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information
extracted from the unaudited balance sheet of ITC/\DeltaCom, Inc. as of
September 30, 1999 and the related unaudited, consolidated statements of
operations for the nine months ended September 30, 1999. This information is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 289,464
<SECURITIES> 0
<RECEIVABLES> 53,309
<ALLOWANCES> 2,028
<INVENTORY> 4,365
<CURRENT-ASSETS> 365,479
<PP&E> 437,765
<DEPRECIATION> 89,003
<TOTAL-ASSETS> 818,529
<CURRENT-LIABILITIES> 68,504
<BONDS> 516,329
0
15
<COMMON> 594
<OTHER-SE> 232,575
<TOTAL-LIABILITY-AND-EQUITY> 818,529
<SALES> 176,221
<TOTAL-REVENUES> 176,221
<CGS> 86,562
<TOTAL-COSTS> 193,014
<OTHER-EXPENSES> 545
<LOSS-PROVISION> 677
<INTEREST-EXPENSE> 33,401
<INCOME-PRETAX> (39,381)
<INCOME-TAX> 94
<INCOME-CONTINUING> (39,475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,475)
<EPS-BASIC> (.71)
<EPS-DILUTED> (.71)
</TABLE>
