<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, 2000
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 No.)
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 7, 2000
-------------------------------
Common Stock, $.01 par value 61,584,126 shares
<PAGE>
ITC/\DeltaCom, Inc.
Index
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1999 and September 30, 2000.................................. 3
Consolidated Statements of Operations
Three and nine months ended September 30, 1999 and 2000................... 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 2000............................. 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................ 22
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................................... 23
Signatures
</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,
2000 1999
--------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 157,473 $248,431
Cash, restricted for capital expenditures.................. 21,065 -
Restricted assets.......................................... - 6,741
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$3,291 and $1,524 in 2000 and 1999, respectively......... 121,612 47,377
Affiliate................................................. 6,865 4,047
Inventory.................................................. 8,524 5,074
Prepaid expenses........................................... 3,975 6,011
---------- --------
Total current assets.................................... 319,514 317,681
---------- --------
PROPERTY, PLANT AND EQUIPMENT, net......................... 606,613 382,867
---------- --------
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of
$14,124 and $9,679 in 2000 and 1999, respectively......... 115,102 91,762
Other long-term assets..................................... 14,930 15,288
---------- --------
Total other long-term assets............................ 130,032 107,050
---------- --------
Total assets............................................ $1,056,159 $807,598
========== ========
</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,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade.............................................. $ 35,105 $ 22,343
Construction....................................... 44,656 8,516
Accrued interest...................................... 16,433 8,281
Accrued compensation.................................. 4,653 4,444
Unearned revenue...................................... 47,618 14,625
Other accrued liabilities............................. 14,539 13,808
Current portion of long-term debt and capital lease
obligations.......................................... 2,237 751
---------- ---------
Total current liabilities................... 165,241 72,768
---------- ---------
LONG-TERM LIABILITIES:
Deferred income taxes................................. 512 512
Long-term debt and capital lease obligations.......... 683,745 516,156
---------- ---------
Total long-term liabilities 684,257 516,668
---------- ---------
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 2000 and 1999....... 15 15
Common Stock, $.01 par value; 200,000,000, and
90,000,000 shares authorized in 2000 and 1999,
respectively; 61,575,293 and 59,556,775 shares issued
and outstanding in 2000 and 1999, respectively....... 615 595
Additional paid-in-capital............................ 355,297 321,882
Accumulated deficit................................... (149,266) (104,330)
---------- ---------
Total stockholders' equity.................. 206,661 218,162
---------- ---------
Total liabilities and stockholders' equity.. $1,056,159 $ 807,598
========== =========
</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,
------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues............................... $ 102,875 $ 65,811 $ 264,993 $ 176,221
Cost of services................................. 39,335 31,542 111,890 86,562
----------- ----------- ----------- -----------
Gross margin..................................... 63,540 34,269 153,103 89,659
----------- ----------- ----------- -----------
Operating expenses:
Selling, operations and administration.......... 40,099 26,212 106,715 68,592
Depreciation and amortization................... 22,864 14,382 60,513 37,860
----------- ----------- ----------- -----------
Total operating expenses....................... 62,963 40,594 167,228 106,452
----------- ----------- ----------- -----------
Operating income (loss).......................... 577 (6,325) (14,125) (16,793)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense................................ (14,760) (11,806) (41,339) (33,401)
Interest income................................. 3,635 4,588 12,030 10,268
Other income (expense), net..................... (183) 15 (181) 545
----------- ----------- ----------- -----------
Total other expense, net...................... (11,308) (7,203) (29,490) (22,588)
----------- ----------- ----------- -----------
Loss before income taxes and
extraordinary item.............................. (10,731) (13,528) (43,615) (39,381)
Income tax expense............................... - - - 94
----------- ----------- ----------- -----------
Loss before extraordinary item................... (10,731) (13,528) (43,615) (39,475)
Extraordinary item -- loss on early termination
of credit facility.............................. - - (1,321) -
----------- ----------- ----------- -----------
Net loss......................................... $ (10,731) $ (13,528) $ (44,936) $ (39,475)
=========== =========== =========== ===========
Basic and diluted net loss per common share:
Before extraordinary loss....................... $ (0.17) $ (0.23) $ (0.72) $ (0.71)
Extraordinary loss.............................. - - (0.02) -
----------- ----------- ----------- -----------
Net loss........................................ $ (0.17) $ (0.23) $ (0.74) $ (0.71)
=========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding.............................. 61,438,721 59,180,843 60,698,032 55,321,483
=========== =========== =========== ===========
</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,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (44,936) $ (39,475)
--------- ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 60,513 37,860
Amortization of bond issue costs........................ 1,682 1,546
Deferred income taxes................................... - 94
Extraordinary item--loss on early termination of
credit facility........................................ 1,321 -
Changes in current operating assets and liabilities:
Accounts receivable, net................................ (76,538) (12,580)
Inventory............................................... (3,248) (1,459)
Prepaid expenses........................................ 2,035 (1,804)
Accounts payable........................................ 12,561 2,035
Accrued interest........................................ 8,152 4,478
Unearned revenue........................................ 32,567 (7)
Accrued compensation and other accrued liabilities...... 3,977 1,844
--------- ---------
Total adjustments..................................... 43,022 32,007
--------- ---------
Net cash used in operating activities................. (1,914) (7,468)
--------- ---------
Cash flows from investing activities:
Capital expenditures..................................... (267,958) (117,865)
Change in accrued construction costs..................... 36,139 2,622
Change in cash, restricted for capital expenditures...... 38,936 -
Change in restricted assets.............................. 6,741 6,326
Payment for acquisitions, net of cash received........... (2,218) 2,881
Other.................................................... 93 (554)
--------- ---------
Net cash used in investing activities................. (188,267) (106,590)
--------- ---------
Cash flows from financing activities:
Proceeds from $160 million senior secured credit
facility, net of issuance costs......................... 157,434 -
Cash from $160 million senior secured credit facility,
restricted for capital expenditures..................... (60,000) -
Proceeds from issuance of 4-1/2% Notes, net of issuance
costs................................................... - 96,954
Repayment of other long-term debt and capital lease
obligations............................................. (952) (860)
Proceeds from issuance of common stock, net of offering
expenses................................................ - 120,929
Proceeds from exercise of common stock options........... 2,826 2,231
Other.................................................... (85) 101
--------- ---------
Net cash provided by financing activities............. 99,223 219,355
--------- ---------
</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,
---------------------------------
2000 1999
-------- --------
<S> <C> <C>
(Decrease) increase in cash and cash equivalents.......... $(90,958) $105,297
Cash and cash equivalents at beginning of period.......... 248,431 184,167
-------- --------
Cash and cash equivalents at end of period................ $157,473 $289,464
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 33,718 $ 28,303
======== ========
(Refunds received) Cash paid for income taxes, net........ $ (138) $ 64
======== ========
NONCASH TRANSACTIONS:
Capital lease obligations exchanged for property rights... $ 10,027 $ -
======== ========
Acquisitions:
Note payable and capital lease obligation assumed....... $ - $ 63
======== ========
Issuance of common stock................................ $ 26,217 $ 31,190
======== ========
Issuance of common stock in connection with earn-out
provisions of AvData merger........................... $ 4,283 $ -
======== ========
</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. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business
ITC/\DeltaCom, Inc., "ITC/\DeltaCom" or the "Company," provides integrated
voice and data telecommunications services to mid-sized and major regional
businesses in the southern United States, which it refers to as its "retail
services," and is a leading regional provider of wholesale long-haul services to
other telecommunications companies, which it refers to as its "broadband
transport services" (and which it formerly referred to as its "carriers' carrier
services"). Retail services includes local exchange services, long distance
services, calling card and operator services, Asynchronous Transfer Mode, frame
relay, and high capacity broadband private line services, as well as Internet,
intranet and Web page hosting services and customer premise equipment sale,
installation and repair. In connection with these businesses, the Company owns,
operates and manages an extensive fiber optic network, which extends throughout
ten southern states.
In March 2000, the Company launched a new line of business which it refers
to as "e/\deltacom." e/\deltacom provides colocation and Web server hosting
services integral to operating business-critical applications over the Internet.
In addition, e/\deltacom provides a wide range of optional configurations and
services, including cabinet, caged and suite space, metered power, network
management, firewall management, disaster recovery and circuits from customer
premises to the Company's network.
Basis of Presentation
The accompanying interim consolidated financial statements are unaudited
and have been prepared by the Company's management in accordance with the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments considered necessary for the fair presentation of
the unaudited, consolidated financial statements have been included and the
unaudited, consolidated financial statements present fairly the financial
position and results of operations for the interim periods presented. These
unaudited, consolidated financial statements should be read in conjunction with
the audited, consolidated financial statements and related footnotes included in
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 30, 2000.
2. NONRECURRING CHARGE
In connection with the completion of the $160 million senior secured credit
facility, as discussed in Note 3, the Company terminated its $50 million credit
facility with Bank of America, N.A, as administrative lender, and certain other
lenders. In connection with the termination of the credit facility, the Company
wrote off $1.3 million of unamortized debt issuance costs, which is reflected in
the accompanying statement of operations as an extraordinary loss on early
termination of credit facility. No amounts had been borrowed under this credit
facility.
3. CREDIT FACILITY
On April 5, 2000, the Company entered into two senior secured credit
facilities, referred to as the "senior secured credit facility," totaling $160
million with Morgan Stanley Senior Funding, Inc., Bank of America, N.A. and
other lenders. The senior secured credit facility includes a $100 million
Tranche 1 Term Loan B facility, or "Tranche 1," to be used to finance working
capital, capital expenditures and other general corporate purposes, and a $60
million Tranche 2 Term Loan B facility, or "Tranche 2," to be used to finance
the purchase of equipment. All amounts available under Tranche 1 and Tranche 2
were drawn by the Company at the closing of the facility. Tranche 1 is secured
by all the Company's assets, except for the equipment purchased with proceeds
from Tranche 2. The senior secured credit facility is senior to the $415 million
principal amount of the Company's outstanding senior notes and $100 million
principal amount of the Company's convertible subordinated notes. Interest per
annum, as defined by the credit agreement, is payable on the senior secured
credit facility at the option of the Company at 1.875% plus the Base Rate or
2.875% plus the Eurodollar Rate. The combined terms of repayment for the Tranche
1 and Tranche 2 advances are $400,000
8
<PAGE>
quarterly from June 2000 through September 2006, $37,400,000 in December 2006,
$37,400,000 in March 2007, $37,400,000 in June 2007 and $37,400,000 on the
termination date as defined by the credit agreement. The termination date may be
accelerated and any remaining balance on the advances will become immediately
due in the event (i) the Company's convertible subordinated notes are not
converted or refinanced in full on terms and conditions reasonably satisfactory
to the lenders on or prior to April 15, 2006, in which event all outstanding
balances will be due on April 15, 2006, or (ii) the Company's 11% Senior Notes
due 2007 are not refinanced in full on terms and conditions reasonably
satisfactory to the lenders on or prior to April 15, 2007, in which event all
outstanding balances will be due on April 15, 2007.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt and capital lease obligations at September 30, 2000 and
December 31, 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
11% Senior Notes due 2007............................. $130,000 $130,000
8-7/8% Senior Notes due 2008, net of unamortized
discount of $119 and $131 in 2000 and 1999,
respectively..................................... 159,881 159,869
9-3/4% Senior Notes due 2008.......................... 125,000 125,000
4-1/2% Convertible Subordinated Notes due 2006........ 100,000 100,000
$160 million Senior Secured Credit Facility........... 159,600 --
Capital lease obligations at varying interest rates,
maturing through August 2020....................... 11,501 2,038
-------- --------
Total long-term debt and capital lease obligations.... 685,982 516,907
Less current maturities............................... (2,237) (751)
-------- --------
Total................................................. $683,745 $516,156
======== ========
</TABLE>
During the three months ended September 30, 2000, the Company amended an
agreement with a significant provider of rights-of-way to replace future
variable payments with specified future fixed payments annually through 2020 and
to modify certain rights under the contract. The present value of the future
payments has been recorded in the accompanying balance sheet as a capital lease
obligation in the amount of $10.0 million.
5. EQUITY INTERESTS
Amendment to Certificate of Incorporation
On May 25, 2000, the Company amended its certificate of incorporation to
increase the number of its authorized shares of capital stock from 95,000,000 to
205,000,000 and the number of its authorized shares of common stock from
90,000,000 to 200,000,000.
Amendment to Employee Stock Option Plan
On May 11, 2000, the Company's stockholders approved an increase in the
number of shares of common stock authorized for issuance under the Company's
1997 Stock Option Plan from 7,815,000 to 9,815,000.
9
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
At September 30, 2000, the Company had entered into agreements with vendors
to purchase approximately $42.0 million of equipment related to the improvement
and installation of switches, other network expansion efforts and certain
services.
Reciprocal Interconnection Charges
In September 2000, the Company reached a settlement with BellSouth of the
Company's long-standing dispute over BellSouth's payment of reciprocal
compensation for local calls placed by customers of BellSouth and terminated to
customers of the Company, including calls terminated to the Company's Internet
service provider customers. The agreement provides for the settlement of all
amounts claimed by the Company to be due for past reciprocal compensation at
rates consistent with or in excess of amounts previously recognized by the
Company as revenue, as well as establishes rates for all reciprocal compensation
traffic on the Company's network for the remainder of 2000, for 2001 and for
2002. The Company recognized a one-time net benefit of approximately $11.8
million and $14.3 million for the three and nine months ended September 30,
2000, respectively, of prior-period amounts as a result of this settlement and a
previous interconnection agreement settlement with BellSouth. Included in the
net benefit of $14.3 million for the nine months ended September 30, 2000 is a
$2.5 million net benefit recognized during the three months ended June 30, 2000
as a result of the previous settlement of past due monies for reciprocal
compensation for services provided in one state.
The September 2000 settlement agreement provided for a cash payment of
approximately $53 million, which BellSouth made in October 2000. This payment
represents payment for reciprocal compensation amounts previously billed to
BellSouth and for estimated reciprocal compensation billings for the remainder
of 2000 and for 2001. The portion of the payment related to 2001 is subject to
reconciliation procedures beginning in July 2001 to determine whether the
expected reciprocal compensation traffic amounts upon which the prepayment is
computed have been realized. The amount paid for prior period reciprocal
compensation is equal to or in excess of amounts previously recognized by the
Company as revenue. The accompanying balance sheet includes this $53 million in
accounts receivable-customer and $30 million in unearned revenue related to the
remainder of 2000 and 2001.
The settlement agreement also provides for the prepayment by BellSouth of
an additional amount to the Company in December 2001 related to expected
reciprocal compensation traffic levels in 2002. This additional amount also
will be subject to reconciliation procedures based upon the actual amount of
reciprocal compensation traffic during 2002.
The Company agreed to limit its reciprocal compensation received from
BellSouth to $27.5 million in 2001 and $29.5 million in 2002.
7. ACQUISITION
On May 1, 2000, the Company completed its acquisition, by merger, of Bay
Data Consultants, Inc., a privately owned information systems solutions company
headquartered in Atlanta, Georgia. The Company paid cash of $2 million and
issued 837,942 shares related to this acquisition. Of such shares, 111,725
shares are being held in escrow for two years to protect against specific
contingencies.
10
<PAGE>
8. SEGMENT REPORTING
As discussed in Note 1, the Company operates in three business segments:
broadband transport services, retail services and e/\deltacom. The Company also
has a corporate segment, which has no operations. Summarized financial data by
business segment for the nine months ended September 30, 2000 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
-----------------------------------------------------------------
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $61,664 $197,363 $ 5,966 $ - $ 264,993
Gross margin...................................... 54,590 96,105 2,408 - 153,103
Selling, operations and administration............ 24,188 73,484 9,043 - 106,715
Depreciation and amortization..................... 27,235 31,604 1,613 61 60,513
Other income (expense), net....................... 11,849
Interest expense.................................. (41,339)
---------
Loss before income taxes and extraordinary item... $ (43,615)
=========
Capital expenditures, net......................... $79,174 $107,483 $45,162 $ - $ 231,819
======= ======== ======= ===== =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-----------------------------------------------------------------
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $53,659 $122,562 $ - $ - $176,221
Gross margin...................................... 45,656 44,003 - - 89,659
Selling, operations and administration............ 17,214 51,378 - - 68,592
Depreciation and amortization..................... 20,630 17,169 - 61 37,860
Other income (expense), net....................... 10,813
Interest expense.................................. (33,401)
--------
Loss before income taxes and extraordinary item... $(39,381)
========
Capital expenditures, net......................... $50,230 $ 65,013 $ - $ - $115,243
======= ======== ====== ====== ========
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend" and "plan" as they
relate to ITC/\DeltaCom, Inc. or our management are intended to identify these
forward-looking statements. All statements by ITC/\DeltaCom, Inc. regarding our
expected future financial position and operating results, our business strategy,
our financing plans, forecasted trends relating to the markets in which we
operate and similar matters are forward-looking statements. We cannot assure you
that our expectations expressed or implied in these forward-looking statements
will turn out to be correct. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. The following analysis should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 1999 and
the financial statements and related notes thereto.
We have included data with respect to EBITDA, as adjusted, in the following
analysis because it is a measure commonly used in our industry. EBITDA, as
adjusted, represents earnings before other income and other expenses, net
interest, income taxes, extraordinary item, depreciation and amortization.
EBITDA, as adjusted, is not a measure of financial performance under accounting
principles generally accepted in the United States 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. See the notes to our unaudited,
consolidated financial statements appearing elsewhere in this report for
definitions of certain terms used in the following analysis.
Unless we indicate otherwise, references in this report to "we," "us,"
"our" and "ITC/\DeltaCom" mean ITC/\DeltaCom, Inc. and its subsidiaries. Unless
we indicate otherwise, we have rounded dollar amounts over $1 million to one
decimal place and dollar amounts of less than $1 million to the nearest
thousand.
Overview
We provide integrated voice and data telecommunications services to mid-
size and major regional businesses in the southern United States and are 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 $102.9 million for the three months ended September
30, 2000, which we refer to as the "2000 fiscal quarter," and $65.8 million for
the three months ended September 30, 1999, which we refer to as the "1999 fiscal
quarter." For the nine months ended September 30, 2000, which we refer to as the
"2000 fiscal nine-month period," we had revenues of $265.0 million and for the
nine months ended September 30, 1999, which we refer to as the "1999 fiscal
nine-month period," we had revenues of $176.2 million.
We provide wholesale long-haul services to other telecommunications
carriers. This means we sell capacity on our network to, and switch and
transport telecommunications traffic for, such carriers. We refer to these
services, which we formerly called our "carriers' carrier services," as our
"broadband transport services." Our broadband transport services customers
include, among others, AT&T Corp., WorldCom, Inc., Qwest Communications
International, Inc., Sprint Corporation, Cable & Wireless Communications, Inc.,
Allnet Communications Services, Inc. d/b/a Frontier Communications Services and
Broadwing, Inc. Our broadband transport services business generated revenues of
$20.8 million for the 2000 fiscal quarter compared to $19.0 million for the 1999
fiscal quarter, and revenues of $61.7 million for the 2000 fiscal nine-month
period compared to $53.7 million for the 1999 fiscal nine-month period.
We also 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, which we refer to as our "retail
services," include:
. local exchange services;
. long distance services;
. toll calling, 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;
. customer premise equipment sale, installation and repair;
. primary rate interface connectivity and colocation services to
Internet service providers, or "ISPs";
. enhanced services, including conference calling, fax broadcasting and
prepaid calling cards;
. consulting, integration, operation and proactive management of data
networks; and
12
<PAGE>
. in-depth network performance analysis and implementation and design
services for data network deployment.
As of September 30, 2000, we provided retail services to approximately
13,460 business customers in 35 metropolitan areas and had sold approximately
249,800 access lines, of which approximately 176,650 had been installed. We
intend to provide a full range of retail services in a total of approximately 44
metropolitan areas throughout the southern United States by the end of 2001.
Our retail services business generated revenues of $78.6 million and $46.8
million for the 2000 fiscal quarter and the 1999 fiscal quarter, respectively,
and $197.4 million and $122.6 million for the 2000 fiscal nine-month period and
the 1999 fiscal nine-month period, respectively.
Our retail services segment revenue for the 2000 fiscal quarter and the
2000 fiscal nine-month period included a one-time net benefit of approximately
$11.8 million and $14.3 million, respectively, of prior-period amounts as a
result of our interconnection agreement settlements with BellSouth. Excluding
one-time net benefits recognized from interconnection agreement settlements,
retail segment revenue increased $6.1 million, or 10%, over the three months
ended June 30, 2000 and $20.0 million, or 42.7%, over the 1999 fiscal quarter.
In March 2000, we launched a new line of business, which we refer to as
e/\deltacom. e/\deltacom provides colocation and Web server hosting services
integral to operating business-critical applications over the Internet. In
addition, e/\deltacom provides a wide range of optional configurations and
services, including:
. cabinet, caged and suite space;
. metered power;
. network management;
. firewall management;
. disaster recovery; and
. circuits from customer premises to our network.
To accelerate e/\deltacom's positioning in the market place, on May 1, 2000, we
acquired Bay Data Consultants, Inc. by merger. Bay Data is a technical
solutions service organization specializing in applications solutions, project
management, e-commerce, security, enterprise solutions, network integration
services, wide area network and carrier relations, storage management, managed
services, high availability and systems management. We believe the addition of
Bay Data will provide us with the expertise, staffing and customer relationships
to facilitate our penetration of e/\deltacom's target market. We acquired Bay
Data for cash of $2 million and 837,942 shares of our common stock. Of these
shares, 111,725 shares are being held in escrow for two years to protect against
specific contingencies.
e/\deltacom generated revenues of $3.5 million for the 2000 fiscal quarter,
a 43.8% increase over revenue from this segment of $2.4 million for the three
months ended June 30, 2000. Revenue generated for the 2000 fiscal nine-month
period totaled $6.0 million. Beginning in November 2000, we expect to occupy and
provide customers with colocation space in e/\deltacom's Suwanee, Georgia data
center and headquarters, which we purchased during the second quarter of 2000.
From this location, e/\DeltaCom's management team will manage the implementation
and integration of e/\deltacom's services.
During the 2000 fiscal quarter, we continued to show diversity in our
revenue base. Excluding the effect of the one-time benefit in the 2000 fiscal
quarter related to the prior-period amount of a BellSouth interconnection
agreement settlement, our revenue sources were as follows:
2000 fiscal quarter 1999 fiscal quarter
------------------- -------------------
Local/data/Internet............. 44% 28%
Long distance................... 23% 34%
Broadband transport............. 23% 29%
Other........................... 10% 9%
At September 30, 2000, our fiber optic network reached approximately 120
points of presence, or "POPs," in ten southern states: Alabama, Arkansas,
Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina,
Tennessee and Texas. In addition, our fiber optic network extended approximately
8,970 route miles, of which approximately 5,270 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. In October 2000, we
13
<PAGE>
added an additional 670 route miles of fiber optic network owned by us, thereby
raising our total network to 9,640 route miles. We expect to add additional
route miles to our fiber network by the end of 2000 through a combination of
construction and long-term dark fiber leases.
During the 2000 fiscal quarter, our operational achievements included the
following:
. we completed the installation of 17 additional colocations, raising
the total number of operational BellSouth colocations to 142;
. we installed Nortel DMS-500 switches in West Palm Beach, Florida and
Houston, Texas, bringing the total number of voice switches in
operation to 13; and
. we opened a branch office in Nashville, Tennessee, increasing our
market coverage to 36 branch offices operating in 35 markets.
During the 2000 fiscal quarter, we reached a settlement with BellSouth of
our long-standing dispute over BellSouth's payment of reciprocal compensation
for local calls placed by customers of BellSouth and terminated to our
customers, including calls terminated to our Internet service provider
customers. The agreement provides for the settlement of all amounts claimed by
us to be due for past reciprocal compensation at rates consistent with or in
excess of amounts previously recognized by us as revenue, as well as establishes
rates for all reciprocal compensation traffic on our network for the balance of
2000, for 2001 and for 2002. The terms of the settlement agreement are not
subject to modification by changes in law or subsequent FCC, court, or state
commission decisions.
The settlement agreement provides for a cash payment of approximately $53
million, which BellSouth made in October 2000. This payment represents payment
for reciprocal compensation amounts previously billed to BellSouth and for
estimated reciprocal compensation billings for the remainder of 2000 and for
2001. The portion of the payment related to 2001 is subject to reconciliation
procedures beginning in July 2001 to determine whether the expected reciprocal
compensation traffic amounts upon which the prepayment is computed have been
realized. The settlement agreement also provides for the prepayment by BellSouth
of an additional amount to us in December 2001 related to expected reciprocal
compensation traffic levels in 2002. This additional amount also will be subject
to reconciliation procedures based upon the actual amount of reciprocal
compensation traffic during 2002. In addition, we agreed to limit our reciprocal
compensation received from BellSouth to $27.5 million in 2001 and $29.5 million
in 2002.
A portion of our network runs through fiber optic cables owned by the
Mississippi Power Company, or MPC, with MPC's permission, on MPC's rights of way
located in Jasper County, Mississippi. A proceeding involving MPC and several
landowners who have granted MPC rights-of-way in Jasper County resulted in an
order of the Mississippi Supreme Court issued in January 1999 holding that MPC
could not use its rights of way at issue for any purpose other than in
connection with providing electricity to MPC customers. We were not a party to
the proceeding until after the January 1999 order. The Circuit Court of the
First Judicial District Court of Jasper County, Mississippi directed us on June
15, 2000 to cease using that portion of our fiber optic network located in
Jasper County. At our request, the Mississippi Supreme Court stayed application
of the District Court's order pending its decision on our appeal.
We have rerouted substantially all of the circuits on the affected portion
of the network so that, if the court's order is enforced, we expect to be able
to continue to provide services to our customers without material disruption.
The affected portion of our network, however, would not be protected by
geographically diverse routing, which enables traffic to be rerouted in the
event of electronic failures or total or partial cable cuts along the route. In
the event of an electronics failure or cable cut, these protections would
significantly reduce the duration of any outages in the affected area. We are
continuing our search to purchase rights of way in an attempt to minimize the
potential loss of route diversity for the portion of our network that would be
affected by the court's order, if it is enforced. As of the date of this
report, we cannot determine whether we will be able to secure these protections
or estimate how long it will take us to do so or the total costs we will incur.
14
<PAGE>
The following table presents information about our operations and business
as of the dates shown:
Quarterly Statistical Data*
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31,
2000 2000 2000 1999
------------- -------- --------- ------------
<S> <C> <C> <C> <C>
Cumulative markets........................ 35 34 33 33
Business customers served -
Retail Services**....................... 13,460 13,330 13,000 12,375
Route miles............................... 8,970 8,530 8,320 8,250
Colocations............................... 142 125 125 125
Voice switches............................ 13 11 10 10
ATM switches.............................. 10 10 10 10
Frame relay switches...................... 17 17 17 17
Next generation switches.................. 23 9 8 4
Passport switches......................... 36 0 0 0
Number of employees....................... 2,250 2,075 1,750 1,640
Lines sold cumulative..................... 249,800 223,000 148,000 128,200
Lines installed cumulative................ 176,650 148,350 119,300 101,500
Lines installed/Lines sold percentage..... 71% 67% 81% 79%
</TABLE>
*Data rounded except as to markets, colocations and switches.
**Reflects the combination of multiple accounts of some customers into a
single customer profile.
15
<PAGE>
Results of Operations
The following tables present for the 2000 and 1999 fiscal quarters and the
2000 and 1999 fiscal nine-month periods selected statement of operations data
and EBITDA, as adjusted, as a percentage of revenues generated by our retail
services business, our broadband transport services business and our e/\deltacom
business (in thousands):
<TABLE>
<CAPTION>
Retail Services
------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- ---------------------------------------
2000 % 1999 % 2000 % 1999 %
------- --- ------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $78,576 100% $46,781 100% $197,363 100% $122,562 100%
Cost of services......... 35,202 45% 28,949 62% 101,258 51% 78,559 64%
------- --- ------- --- -------- --- -------- ---
Gross margin............. 43,374 55% 17,832 38% 96,105 49% 44,003 36%
------- --- ------- --- -------- --- -------- ---
Operating expenses:
Selling, operations
and administration..... 26,150 33% 19,552 42% 73,484 37% 51,378 42%
Depreciation and
amortization........... 12,096 15% 6,781 14% 31,604 16% 17,169 14%
------- --- ------- --- -------- --- -------- ---
Total operating
expenses............... 38,246 48% 26,333 56% 105,088 53% 68,547 56%
------- --- ------- --- -------- --- -------- ---
Operating income (loss).. $ 5,128 7% $(8,501) (18)% $ (8,983) (5)% $(24,544) (20)%
======= === ======= === ======== === ======== ===
EBITDA, as adjusted:
Gross.................. $17,224 22% $(1,720) (4)% $ 22,621 11% $ (7,375) (6)%
======= === ======= === ======== === ======== ===
Net(1)................. $ 5,424 8% $(1,720) (4)% $ 8,321 5% $ (7,375) (6)%
======= === ======= === ======== === ======== ===
</TABLE>
(1) Net payments for interconnection agreement settlements for prior periods
totaled $11.8 million for the three months ended September 30, 2000 and
$14.3 million for the nine months ended September 30, 2000.
<TABLE>
<CAPTION>
Broadband Transport Services
----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------------
2000 % 1999 % 2000 % 1999 %
------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $20,780 100% $19,030 100% $61,664 100% $53,659 100%
Cost of services......... 1,971 9% 2,593 14% 7,074 11% 8,003 15%
------- --- ------- --- ------- --- ------- ---
Gross margin............. 18,809 91% 16,437 86% 54,590 89% 45,656 85%
------- --- ------- --- ------- --- ------- ---
Operating expenses:
Selling, operations
and administration..... 8,540 41% 6,660 35% 24,188 39% 17,214 32%
Depreciation and
amortization........... 9,752 47% 7,581 40% 27,235 44% 20,630 38%
------- --- ------- --- ------- --- ------- ---
Total operating
expenses............... 18,292 88% 14,241 75% 51,423 83% 37,844 70%
------- --- ------- --- ------- --- ------- ---
Operating income......... $ 517 2% $ 2,196 11% $ 3,167 5% $ 7,812 15%
======= === ======= === ======= === ======= ===
EBITDA, as adjusted...... $10,269 49% $ 9,777 51% $30,402 49% $28,442 53%
======= === ======= === ======= === ======= ===
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
e/\deltacom
-----------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------------
2000 % 1999 % 2000 % 1999 %
------- ---- ------- --- ------- ---- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ 3,519 100% $ 0 - $ 5,966 100% $ 0 -
Cost of services......... 2,162 61% 0 - 3,558 60% 0 -
------- ---- ------- --- ------- ---- ------- ---
Gross margin............. 1,357 39% 0 - 2,408 40% 0 -
------- ---- ------- --- ------- ---- ------- ---
Operating expenses:
Selling, operations
and administration..... 5,409 154% 0 - 9,043 152% 0 -
Depreciation and
amortization........... 996 28% 0 - 1,613 27% 0 -
------- ---- ------- --- ------- ---- ------- ---
Total operating
expenses............... 6,405 182% 0 - 10,656 179% 0 -
------- ---- ------- --- ------- ---- ------- ---
Operating loss........... $(5,048) (143)% $ 0 - $(8,248) (138)% $ 0 -
======= ==== ======= === ======= ==== ======= ===
EBITDA, as adjusted...... $(4,052) (115)% $ 0 - $(6,635) (111)% $ 0 -
======= ==== ======= === ======= ==== ======= ===
</TABLE>
Quarter and Nine Months Ended September 30, 2000 Compared to Quarter and
Nine Months Ended September 30, 1999
Revenues
Total revenues increased $37.1 million, or 56.3%, from $65.8 million for
the 1999 fiscal quarter to $102.9 million for the 2000 fiscal quarter. Total
revenues for the 2000 fiscal nine-month period increased $88.8 million, or
50.4%, to $265.0 million from total revenues of $176.2 million for the
1999 fiscal nine-month period.
Revenues from our retail services increased $31.8 million, or 68.0%, from
$46.8 million for the 1999 fiscal quarter to $78.6 million for the 2000 fiscal
quarter. Revenues from our retail services for the 2000 fiscal nine-month period
increased $74.8 million, or 61.0%, to $197.4 million from $122.6 million for the
1999 fiscal nine-month period. The increase in retail services revenues was
primarily attributable to the following factors:
. increased revenues generated by our local, data and Internet products,
which, excluding the effects of one-time net benefits from prior
period amounts of interconnection agreement settlements with
BellSouth, accounted for 44% of our total revenues for the 2000 fiscal
quarter and 40% of our total revenues for the 2000 fiscal nine-month
period, compared to 28% of our total revenues for the 1999 fiscal
quarter and 24% of our total revenues for the 1999 fiscal nine-month
period;
. continued growth in access lines installed, which increased by 28,300
from the end of the second quarter of 2000 and by 100,650 lines from
the end of the 1999 fiscal nine-month period;
. continued growth in the number of new customers purchasing multiple
products and our successful efforts selling additional products and
services to our existing customer base, which we believe supports our
bundled approach to offering our products;
. continued stability in the rate of revenue loss from former customers
from period to period; and
. continued increase in the number of customers served, from 11,900 at
the end of the 1999 fiscal nine-month period to 13,460 at the end of
the 2000 fiscal nine-month period.
The increase in our revenues from retail services during the 2000 fiscal
quarter and 2000 fiscal nine-month period was partially offset by a continued
decrease in the rate per minute of use we charge for the services we price per
minute-of-use, including reductions of the rate per minute of use we charge some
of our large customers for these services. The effect of this rate reduction
was partially offset by an increase in the average minutes of use per customer,
and we believe that the rate reductions will be further offset by similar
reductions in our cost of services. Our revenues during the current periods
also include a one-time net benefit of approximately $11.8 million for the 2000
fiscal quarter and $14.3 million for the 2000 fiscal nine-month period related
to the prior-period amounts of the interconnection agreement settlements with
BellSouth. We expect continued revenue growth and diversification in our retail
services during the remainder of 2000. In addition, we expect continued growth
in access lines installed during the remainder of the year.
17
<PAGE>
Revenues from our broadband transport segment revenue increased $1.8
million, or 9.2%, from $19.0 million for the 1999 fiscal quarter to $20.8
million for the 2000 fiscal quarter. Broadband transport segment revenue for
the 2000 fiscal nine-month period increased $8.0 million, or 14.9%, to $61.7
million from $53.7 million for the 1999 fiscal nine-month period. The increase
was primarily attributable to an increasing demand for bandwidth, which is
reflected in the growth of our customer base for this segment, and the expansion
of our network. The effects of this demand were partially offset by the
continued competitive pricing of our broadband transport services. We expect
continued growth in our broadband transport services revenues during the
remainder of 2000 as a result of the continued demand for bandwidth, the
expansion of our network and our continued efforts to provide customers with a
bundled package of our retail services and e/\deltacom product offerings.
Revenues from our e/\deltacom segment of $3.5 million for the 2000 fiscal
quarter represented a 43.8% increase over revenues from this segment of $2.4
million in the three months ended June 30, 2000. Revenues for the 2000 fiscal
nine-month period were $5.9 million. The revenues generated by e/\deltacom
during the 2000 fiscal quarter and the 2000 fiscal nine-month period were
primarily related to professional services. We expect this segment to continue
to experience revenue growth during the remainder of 2000 as we continue to sign
customers to colocation and hosting contracts and continue to integrate
additional offerings through the e/\deltacom data center, which we expect to
occupy beginning in November 2000.
Cost of Services
Total cost of services increased $7.8 million from $31.5 million for the
1999 fiscal quarter to $39.3 million for the 2000 fiscal quarter. Total cost of
services of $111.9 million for the 2000 fiscal nine-month period represented an
increase of $25.3 million over cost of services of $86.6 million for the 1999
fiscal nine-month period.
Cost of services for retail services increased $6.3 million from $28.9
million for the 1999 fiscal quarter to $35.2 million for the 2000 fiscal
quarter. Cost of services of $101.3 million for retail services for the 2000
fiscal nine-month period represented an increase of $22.7 million over cost of
services of $78.6 million for the 1999 fiscal nine-month period. Cost of
services as a percentage of revenues from our retail services decreased to 45%
for the 2000 fiscal quarter from 62% for the 1999 fiscal quarter and to 51% for
the 2000 fiscal nine-month period from 64% for the 1999 fiscal nine-month
period. These decreases for the current periods were primarily attributable to:
. continued increase in sales of facilities-based services as a
percentage of total sales, including facilities-based sales
representing more than 90% of net retail business line additions
during the 2000 fiscal quarter;
. continued migration of resale services onto our owned and operated
network; and
. continued reductions in access costs, primarily with respect to the
access costs we incur for the services we price based on minutes of
use.
Cost of services for broadband transport services decreased
$622,000 from $2.6 million for the 1999 fiscal quarter to $2.0 million for the
2000 fiscal quarter. Cost of services of $7.1 million for broadband transport
services during the 2000 fiscal nine-month period decreased $929,000 from cost
of services of $8.0 million for the 1999 fiscal nine-month period. Cost of
services as a percentage of revenues from broadband transport services decreased
to 9% for the 2000 fiscal quarter from 14% for the 1999 fiscal quarter and to
11% for the 2000 fiscal nine-month period from 15% for the 1999 fiscal nine-
month period. These decreases were primarily attributable to the continued
migration of traffic onto our owned and operated network, which reduced off-
network costs, and to a reduction in rates charged for off-network usage.
Cost of services attributable to our e/\deltacom segment was $2.2 million,
or 61% of revenues, for the 2000 fiscal quarter. Cost of services for this
segment during the 2000 fiscal nine-month period was $3.6 million, or 60% of
revenues.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $13.9
million from $26.2 million, or 40% of revenues, for the 1999 fiscal quarter to
$40.1 million, or 39% of revenues, for the 2000 fiscal quarter. Total selling,
operations and administration expense of $106.7 million for the 2000 fiscal
nine-month period represented an increase of $38.1 million from selling,
operations and administration expense of $68.6 million for the 1999 fiscal nine-
month period.
Selling, operations and administration expense attributable to retail
services increased $6.6 million from $19.6 million, or 42% of revenues, for the
1999 fiscal quarter to $26.2 million, or 33% of revenues, for the 2000 fiscal
quarter. Selling, operations and administration expense attributable to retail
services during the 2000 fiscal nine-month
18
<PAGE>
period increased $22.1 million to $73.5 million, or 37% of revenues, from $51.4
million, or 42% of revenues, for the 1999 fiscal nine-month period. These
increases were primarily attributable to costs associated with an increase in
the number of our employees, our continued geographic expansion and the further
expansion of our service offerings.
Selling, operations and administration expense attributable to our
broadband transport services increased $1.8 million from $6.7 million, or 35% of
revenues, for the 1999 fiscal quarter to $8.5 million, or 41% of revenues, for
the 2000 fiscal quarter. Selling, operations and administration expense
attributable to broadband transport services during the 2000 fiscal nine-month
period increased $7.0 million to $24.2 million, or 39% of revenues, from $17.2
million, or 32% of revenues, for the 1999 fiscal quarter. These increases were
primarily due to costs incurred in adding personnel to support the
geographic expansion of our network, in developing the infrastructure required
to support our Internet Protocol-based network backbone, and in supporting our
information systems and research and development activities.
Selling, operations and administration expense attributable to our
e/\deltacom segment was $5.4 million, or 154% of revenues, for the 2000 fiscal
quarter and $9.0 million, or 152% of revenues, during the 2000 fiscal
nine-month period.
Depreciation and Amortization
Total depreciation and amortization expense increased $8.5 million from
$14.4 million for the 1999 fiscal quarter to $22.9 million for the 2000 fiscal
quarter. Depreciation and amortization expense of $60.5 million for the 2000
nine-month period represented an increase of $22.6 million over depreciation and
amortization expense of $37.9 million for the 1999 fiscal nine-month period.
Retail services accounted for $5.3 million of the increase in the 2000 fiscal
quarter and $14.4 million of the increase for the 2000 nine-month period. These
increases were primarily related to installation of new central office and
related switching equipment. Network expansion, including installation of
electronics and fiber optic equipment, for our broadband transport services
operations accounted for $2.2 million of the increase in the 2000 fiscal quarter
and $6.6 million of the increase for the 2000 fiscal nine-month period. Our
e/\deltacom segment accounted for $1.0 million of the increase in the 2000
fiscal quarter and $1.6 million of the increase for the 2000 fiscal nine-month
period. We expect depreciation and amortization expense to continue to increase
during the remainder of 2000 as we add new switches and network facilities and
expand into new markets.
Interest Expense
Total interest expense increased $3.0 million from $11.8 million for the
1999 fiscal quarter to $14.8 million for the 2000 fiscal quarter. Total interest
expense of $41.3 million for the 2000 fiscal nine-month period represented an
increase of $7.9 million over total interest expense of $33.4 million for the
1999 fiscal nine-month period. The $3.0 million increase in interest expense for
the 2000 fiscal quarter was primarily attributable to higher average outstanding
debt balances as a result of the $160 million of borrowings we incurred in April
2000 under our senior secured credit facility. The $7.9 million increase in
interest expense for the 2000 fiscal nine-month period was primarily
attributable to higher average outstanding debt balances as a result of our
issuance in May 1999 of $100 million principal amount of convertible
subordinated notes and our $160 million of credit facility borrowings.
Interest Income
Total interest income from the temporary investment of available cash
balances decreased $1.0 million from $4.6 million for the 1999 fiscal quarter
to $3.6 million for the 2000 fiscal quarter. Total interest income of $12.0
million for the 2000 fiscal nine-month period represented an increase of $1.7
million over total interest income of $10.3 million for the 1999 fiscal nine-
month period.
Extraordinary Loss
We incurred an extraordinary loss of $1.3 million during the 2000 fiscal
nine-month period as a result of the write-off of debt-issuance costs related
to the early termination of our $50 million revolving credit facility. We had
not borrowed any amounts under this credit facility.
19
<PAGE>
EBITDA, as adjusted
EBITDA, as adjusted, increased $15.4 million from $8.1 million for the
1999 fiscal quarter to $23.4 million for the 2000 fiscal quarter. EBITDA, as
adjusted, of $46.4 million for the 2000 fiscal nine-month period represented an
increase of $25.3 million from EBITDA, as adjusted, of $21.1 million for the
1999 fiscal nine-month period. EBITDA, as adjusted, net of prior-period amounts
for our interconnection agreement settlements with BellSouth was $11.6 million
for the 2000 fiscal quarter and $32.1 million for the 2000 fiscal nine-month
period.
EBITDA, as adjusted, attributable to our retail services for the 2000
fiscal quarter was $17.2 million compared to EBITDA, as adjusted, of $(1.7)
million for the 1999 fiscal quarter. EBITDA, as adjusted, attributable to these
services for the 2000 fiscal nine-month period was $22.6 million compared
to EBITDA, as adjusted, of $(7.4) million for the 1999 fiscal nine-month period.
Net of prior-period amounts for our interconnection agreement settlements with
BellSouth, EBITDA, as adjusted, attributable to retail services was $5.4 million
for the 2000 fiscal quarter and $8.3 million for the 2000 fiscal nine-month
period. The increases in EBITDA, as adjusted, for our retail services in the
current periods were primarily attributable to:
. continued revenue growth resulting from product and geographic expansion;
. continued migration of customers from our resale products to our
facilities-based products;
. increased cost efficiencies; and
. reductions in our off-network access costs.
EBITDA, as adjusted, attributable to our broadband transport services
increased $492,000 from $9.8 million for the 1999 fiscal quarter to $10.3
million for the 2000 fiscal quarter. EBITDA, as adjusted, of $30.4 million
attributable to these services for the 2000 fiscal nine-month period represented
an increase of $2.0 million from EBITDA, as adjusted, of $28.4 million for the
1999 fiscal nine-month period. The effects of these increases, which were
primarily attributable to the increasing demand for bandwidth, were partially
offset by the competitive pricing of our broadband transport services.
EBITDA, as adjusted, attributable to our e/\deltacom segment was $(4.1)
million for the 2000 fiscal quarter and $(6.6) million for the 2000 fiscal nine-
month period.
Liquidity and Capital Resources
Cash used in operating activities was $1.9 million for the 2000 fiscal
nine-month period and $7.5 million for the 1999 fiscal nine-month period.
Working capital decreased $20.5 million for the 2000 fiscal nine-month period
and $7.5 million for the 1999 fiscal nine-month period. For the 2000 fiscal
nine-month period, the decrease was primarily attributable to increases in
accounts receivable and inventory, which were partially offset by a decrease in
prepaid expenses and increases in accounts payable, advanced billings, and
accrued interest, compensation and other liabilities. The decrease in working
capital for the 1999 fiscal nine-month period resulted primarily from increases
in accounts receivable, inventory, and prepaid expenses, which were partially
offset by increases in accounts payable and accrued interest, compensation and
other liabilities.
Cash used in investing activities was $188.3 million for the 2000 fiscal
nine-month period and $106.6 million for the 1999 fiscal nine-month period. Cash
used in investing activities in the nine-month periods was primarily applied to
fund capital expenditures. We made net capital expenditures of $231.8 million
for the 2000 fiscal nine-month period and $115.2 million for the 1999 fiscal
nine-month period. Of the $231.8 million of capital expenditures we made during
the 2000 fiscal nine-month period, $107.5 million related to our retail
services, $79.2 million related to our broadband transport services and $45.1
million related to our e/\deltacom segment. Of our $115.2 million of capital
expenditures for the 1999 fiscal nine-month period, $65.0 million related to
retail services and $50.2 million related to broadband transport services. The
increase in cash used in investing activities resulted from the continued
expansion of our existing network and facilities according to our business plan.
Cash provided by financing activities was $99.2 million for the 2000 fiscal
nine-month period and $219.4 million for the 1999 fiscal nine-month period. Cash
provided by financing activities for the 2000 fiscal nine-month period consisted
primarily of net proceeds of $157.4 million from our $160 million senior secured
credit facility, of which $60 million was restricted for capital expenditures,
and $2.8 million from the exercise of options to purchase common stock. Cash
provided by financing activities for the 1999 fiscal nine-month period consisted
primarily of net proceeds of $97.0 million from the sale of our convertible
subordinated notes and $120.9 million from our sale of common stock in a public
offering.
20
<PAGE>
At September 30, 2000, we had entered into agreements with vendors to
purchase approximately $42.0 million of equipment and services. For the 2000
fiscal nine-month period, we made capital expenditures of approximately $231.8
million. We currently estimate that our aggregate capital expenditure
requirements through 2001 will total approximately $285 million to $295 million,
including our $42.0 million in commitments as of September 30, 2000. We expect
to make substantial capital expenditures thereafter. Capital expenditures
through 2001 will be primarily for the following:
. continued development and construction of our telecommunications
network, including transmission equipment;
. continued addition of switching capacity, electrical equipment and
additional colocation space in connection with the expansion of our
ISP local telecommunications services;
. market expansion;
. infrastructure enhancements, principally for information systems; and
. the purchase of assets for our e/\deltacom line of business.
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, or in the event we decide to acquire other businesses or enter
into joint ventures and strategic alliances, in our industry .
In October 2000, we executed a $10 million operating lease with one of our
primary infrastructure providers. In addition, we are currently pursuing up to
$40 million under a capital lease facility.
As of September 30, 2000, we had $157.5 million of cash and cash
equivalents, excluding $21.1 million restricted for capital expenditures. We
believe that cash on hand, including the $53 million cash payment we received
from BellSouth in October 2000, together with the $40 million of additional
capital lease financing we anticipate for network expansion and cash flow from
operations, will provide sufficient funds to enable us to expand our business as
currently planned through the end of 2001. Absent additional financing, however,
we will be required to modify our current capital expenditures and expansion
plans. 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 of other businesses, we may be required to seek
additional capital sooner than currently anticipated. Additional sources may
include equity and debt financing and other financing agreements, such as vendor
financing. We have registered with the Securities and Exchange Commission for
the issuance from time to time of up to $300,000,000 in common stock, preferred
stock and other types of equity and equity-linked securities. 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. Any inability by us 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 our operations.
Our level of indebtedness and debt service obligations have significantly
increased as a result of our issuance of the publicly traded notes identified in
Note 4 to the financial statements included elsewhere in this report and our
borrowings of $160 million under our new senior secured credit facility in the
second quarter of 2000. 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.
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Effects of Accounting Standards
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin Number 101, "Revenue Recognition in Financial Statements,"
or "SAB 101." SAB 101 requires that revenues and costs of revenues derived from
services rendered at the beginning of a contract or business relationship be
deferred and recognized over the life of the related contract or relationship.
We adopted the guidelines in SAB 101 during the 2000 fiscal nine-month period.
Our adoption of these guidelines did not have a material effect on our
consolidated financial statements.
Statement of Financial Accounting Standard, or "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 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 may not be applied retroactively. SFAS No. 133 must be applied to
derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997. In June 1999, the Financial Accounting Standards Board, or "FASB,"
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," and in
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivatives and
Certain Hedging Activities - an Amendment to FASB No. 133." SFAS No. 137 amends
SFAS No. 133 to be effective for all fiscal years beginning after June 15, 2000
or January 1, 2001 for companies with calendar-year fiscal years. We expect to
implement SFAS Nos. 133, 137 and 138 for the fiscal year beginning January 1,
2001, and do not expect that the adoption of SFAS Nos. 133, 137 and 138 will
have a material effect on our consolidated financial statements.
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
Our major market risk exposure is to changing interest rates. We manage our
interest risk exposure through a combination of fixed and floating rate debt. We
are exposed to interest rate risk related to our interest rate swap agreement
and to $160 million of borrowings under our senior secured credit facility.
Interest is payable on our senior secured credit facility at our option at
either 1.875% plus the Base Rate or 2.875% plus the Eurodollar Rate, as defined
in the credit agreement. In addition, we are exposed to fair value risk related
to our fixed-rate, long-term debt. As of September 30, 2000, our fixed-rate,
long-term debt and capital lease obligations were $526.4 million.
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P A R T II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Amendment, effective as of August 1, 2000, between Southern
Telecom, Inc., on behalf of itself and as agent for the other
parties specified therein, and Interstate Fibernet, Inc. to the
Revised and Restated Fiber Optic Facilities and Services
Agreement made as of June 9, 1995.
10.2 Amended and Restated ITC/\DeltaCom, Inc. 1997 Stock Option
Plan. Filed as Exhibit 4.1 to ITC/\DeltaCom's Registration
Statement on Form S-8 (File No. 333-49034) and incorporated
herein by reference.
10.3 Amendment No. 1 to ITC Holding Company, Inc. Amended and
Restated Stock Option Plan. Filed as Exhibit 10.2 to
ITC/\DeltaCom's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2000 and incorporated herein by
reference.
10.4 Amendment No. 1 to ITC Holding Company, Inc. NonEmployee
Director Stock Option Plan. Filed as Exhibit 10.3 to
ITC/\Deltacom's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2000 and incorporated herein by
reference.
27.1 Financial Data Schedule.
_____________________
* Certain portions of this exhibit were omitted by means of
redacting a portion of the text. This exhibit has been filed
separately with the Secretary of the SEC without such text
pursuant to our application requesting confidential treatment
pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended.
(b) Reports on Form 8-K
We did not file any Current Reports on Form 8-K during the period
covered by this report.
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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 14, 2000 By: /s/ Douglas A. Shumate
----------------------
Douglas A. Shumate,
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
24