<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 June 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 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 August 7, 2000
-----------------------------
Common Stock, $.01 par value 61,380,968 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 June 30,
2000........................................................ 3
Consolidated Statements of Operations Three and Six Months
Ended June 30, 1999 and 2000................................ 5
Consolidated Statements of Cash Flows Six Months Ended
June 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......................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 23
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds................ 24
Item 4. Submission of Matters to a Vote of Security Holders...... 24
Item 6. Exhibits and Reports on Form 8-K......................... 25
</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>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 210,930 $ 248,431
Cash, restricted for capital expenditures.................. 60,000 -
Restricted assets.......................................... - 6,741
Accounts receivable:
Customer, net of allowance for uncollectible accounts of
$2,577 and $1,524 in 2000 and 1999, respectively......... 69,535 47,377
Affiliate................................................. 4,677 4,047
Inventory.................................................. 9,382 5,074
Prepaid expenses........................................... 3,746 6,011
----------- ------------
Total current assets.................................... 358,270 317,681
----------- ------------
PROPERTY, PLANT AND EQUIPMENT, net......................... 491,307 382,867
----------- ------------
OTHER LONG-TERM ASSETS:
Intangible assets, net of accumulated amortization of
$12,360 and $9,679 in 2000 and 1999, respectively......... 116,866 91,762
Other long-term assets..................................... 15,389 15,288
----------- ------------
Total other long-term assets........................... 132,255 107,050
----------- ------------
Total assets............................................ $ 981,832 $ 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>
June 30, December 31,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade........................................................ $ 30,502 $ 22,343
Construction................................................. 11,171 8,516
Accrued interest................................................ 11,845 8,281
Accrued compensation............................................ 5,442 4,444
Unearned revenue................................................ 16,944 14,625
Other accrued liabilities....................................... 12,428 13,808
Current portion of long-term debt and capital lease
obligations................................................... 2,111 751
--------- ------------
Total current liabilities............................. 90,443 72,768
--------- ------------
LONG-TERM LIABILITIES:
Deferred income taxes........................................... 512 512
Long-term debt and capital lease obligations.................... 674,022 516,156
--------- ------------
Total long-term liabilities................................... 674,534 516,668
--------- ------------
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; 61,351,495 and
59,556,775 shares issued and outstanding in 2000 and 1999,
respectively................................................. 613 595
Additional paid-in-capital...................................... 354,762 321,882
Accumulated deficit............................................. (138,535) (104,330)
--------- ------------
Total stockholders' equity............................ 216,855 218,162
--------- ------------
Total liabilities and stockholders' equity............ $ 981,832 $ 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 June 30, Six Months Ended June 30,
----------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues.............................. $ 86,411 $ 57,376 $ 162,118 $ 110,410
Cost of services................................ 37,919 28,259 72,555 55,020
----------- ----------- ----------- -----------
Gross margin.................................... 48,492 29,117 89,563 55,390
----------- ----------- ----------- -----------
Operating expenses:
Selling, operations and administration....... 35,480 22,112 66,616 42,380
Depreciation and amortization................ 19,991 12,310 37,649 23,478
----------- ----------- ----------- -----------
Total operating expenses..................... 55,471 34,422 104,265 65,858
----------- ----------- ----------- -----------
Operating loss.................................. (6,979) (5,305) (14,702) (10,468)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense............................. (14,932) (11,131) (26,579) (21,594)
Interest income.............................. 4,915 3,290 8,395 5,679
Other income (expense), net.................. (41) 304 2 529
----------- ----------- ----------- -----------
Total other expense, net..................... (10,058) (7,537) (18,182) (15,386)
----------- ----------- ----------- -----------
Loss before income taxes and
extraordinary item........................... (17,037) (12,842) (32,884) (25,854)
Income tax expense.............................. - 94 - 94
----------- ----------- ----------- -----------
Loss before extraordinary item.................. (17,037) (12,936) (32,884) (25,948)
Extraordinary item - loss on early termination
of credit facility........................... (1,321) - (1,321) -
----------- ----------- ----------- -----------
Net loss........................................ $ (18,358) $ (12,936) $ (34,205) $ (25,948)
=========== =========== =========== ===========
Basic and diluted net loss per common share:
Before extraordinary loss.................... $ (0.28) $ (0.23) $ (0.55) $ (0.49)
Extraordinary loss........................... (0.02) - (0.02) -
----------- ----------- ----------- -----------
Net loss..................................... $ (0.30) $ (0.23) $ (0.57) $ (0.49)
=========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding........................... 60,862,847 55,192,631 60,322,655 53,359,820
=========== =========== =========== ===========
</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>
Six Months Ended June 30,
-------------------------
2000 1999
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (34,205) $ (25,948)
------------ ----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 37,649 23,478
Amortization of bond issue costs......................... 1,143 985
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............................... (22,273) (4,398)
Inventory.............................................. (4,105) (522)
Prepaid expenses....................................... 2,265 (862)
Accounts payable....................................... 7,959 891
Accrued interest....................................... 3,564 309
Unearned revenue....................................... 1,892 (784)
Accrued compensation and other accrued liabilities..... 2,654 (677)
------------ ----------
Total adjustments................................. 32,069 18,514
------------ ----------
Net cash used in operating activities............... (2,136) (7,434)
------------ ----------
Cash flows from investing activities:
Capital expenditures........................................ (141,599) (66,616)
Change in accrued construction costs........................ 2,655 5,041
Purchase of Bay Data Consultants, Inc....................... (2,218) -
Release of restricted assets................................ 6,741 6,544
Other....................................................... 90 29
------------ ----------
Net cash used in investing activities............... (134,331) (55,002)
------------ ----------
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................................................... - 97,029
Repayment of other long-term debt and capital lease
obligations............................................. (774) (300)
Proceeds from issuance of common stock, net of offering
expenses................................................ - 120,929
Proceeds from exercise of common stock options.............. 2,325 1,763
Other....................................................... (19) 68
------------ ----------
Net cash provided by financing activities........... 98,966 219,489
------------ ----------
</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>
Six Months Ended June 30,
----------- -----------
2000 1999
----------- -----------
<S> <C> <C>
(Decrease) increase in cash and cash equivalents...... $ (37,501) $ 157,053
Cash and cash equivalents at beginning of period...... 248,431 184,167
----------- -----------
Cash and cash equivalents at end of period............ $ 210,930 $ 341,220
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest................................ $ 22,776 $ 21,005
=========== ===========
Cash paid (refunds received) for income taxes, net.... $ 55 $ 68
=========== ===========
NONCASH TRANSACTIONS:
Issuance of common stock in connection with Bay Data
merger.............................................. $ 26,217 $ -
=========== ===========
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 collocation 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, or "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
8
<PAGE>
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 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, as defined in the credit agreement.
The combined terms of repayment for the Tranche 1 and Tranche 2 advances are
$400,000 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 June 30, 2000 and December 31,
1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 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 $123 and $131 in 2000 and 1999,
respectively..................................... 159,877 159,869
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 0
Capital lease obligations at varying interest rates,
maturing through June 2006......................... 1,656 2,038
-------- ------------
Total long-term debt and capital lease obligations.... 676,133 516,907
Less current maturities............................... (2,111) (751)
-------- ------------
Total................................................. $674,022 $ 516,156
======== ============
</TABLE>
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
At June 30, 2000, the Company had entered into agreements with vendors to
purchase approximately $82.0 million of equipment related to the improvement and
installation of switches, other network expansion efforts and certain services.
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 certain
contingencies.
8. SEGMENT REPORTING
As discussed in Note 1, the Company operates in three business segments:
retail services, broadband transport services and e/\deltacom. The Company also
has a corporate segment, which has no operations. Summarized financial data by
business segment for the six months ended June 30, 2000 and 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $40,884 $118,787 $ 2,447 $ 0 $162,118
Gross margin...................................... 35,781 52,731 1,051 0 89,563
Selling, operations, and administration........... 15,648 47,334 3,634 0 66,616
Depreciation and amortization..................... 17,483 19,508 617 41 37,649
Other income (expense), net....................... 8,397
Interest expense.................................. (26,579)
--------
Loss before income taxes and extraordinary item... $(32,884)
========
Capital expenditures, net......................... $67,266 $ 71,288 $ 390 $ 0 $138,944
======= ======== ========= === ========
<CAPTION>
1999
Broadband
Transport Retail e/\deltacom Corporate
Segment Segment Segment Segment Consolidated
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $34,629 $75,781 $ 0 $ 0 $110,410
Gross margin...................................... 29,219 26,171 0 0 55,390
Selling, operations, and administration........... 10,553 31,827 0 0 42,380
Depreciation and amortization..................... 13,049 10,388 0 41 23,478
Other income (expense), net....................... 6,208
Interest expense.................................. (21,594)
--------
Loss before income taxes and extraordinary item... $(25,854)
========
Capital expenditures, net......................... $27,865 $33,710 $ 0 $ 0 $ 61,575
======= ======= ======== ==== ========
</TABLE>
10
<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. 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 $86.4 million for the three months ended June 30,
2000, which we refer to as the "2000 fiscal quarter," and $57.4 million for the
three months ended June 30, 1999, which we refer to as the "1999 fiscal
quarter." For the six months ended June 30, 2000, which we refer to as the "2000
fiscal six-month period," we had revenues of $162.1 million and for the six
months ended June 30, 1999, which we refer to as the "1999 fiscal six-month
period," we had revenues of $110.4 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, 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 $18.2 million for the 1999
fiscal quarter, and $40.9 million for the 2000 fiscal six-month period compared
to $34.6 million for the 1999 fiscal six-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;
11
<PAGE>
. 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 collocation 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
. in-depth network performance analysis and implementation and design services
for data network deployment.
As of June 30, 2000, we provided retail services to approximately 13,330
business customers in 34 metropolitan areas and had sold approximately 223,000
access lines, of which approximately 148,350 had been installed. We intend to
provide a full range of retail services in a total of approximately 41
metropolitan areas throughout the southern United States by the end of 2001. Our
retail services business generated revenues of $63.2 million and $39.2 million
for the 2000 fiscal quarter and the 1999 fiscal quarter, respectively, and
$118.8 million and $75.8 million for the 2000 fiscal six-month period and the
1999 fiscal six-month period, respectively.
In March 2000, we launched a new line of business, which we refer to as
e/\deltacom. e/\deltacom provides collocation 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 certain contingencies.
e/\deltacom generated revenues of $2.4 million for the 2000 fiscal quarter
and the 2000 fiscal six-month period. The acquisition of Bay Data enabled this
segment to report revenues in the second quarter of 2000, rather than the fourth
quarter of 2000 as initially planned. During the 2000 fiscal quarter, we
purchased a 303,000 square foot facility in Suwanee, Georgia, an Atlanta suburb,
which will be the location of e/\deltacom's data center, headquarters and the
management team which is managing the implementation and integration of our
e/\deltacom services.
During the 2000 fiscal quarter, we continued to show shifts in the
diversity of our revenue base. Comparing the 2000 fiscal quarter to the 1999
fiscal quarter, our revenue sources were as follows:
<TABLE>
<CAPTION>
2000 fiscal quarter 1999 fiscal quarter
------------------- -------------------
<S> <C> <C>
Local/data/Internet........................ 41% 23%
Long distance.............................. 25 39
Broadband transport........................ 24 32
Other...................................... 10 6
</TABLE>
At June 30, 2000, our fiber optic network reached approximately 115 points
of presence, or "POPs," in ten southern states, including Alabama, Arkansas,
Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina,
Tennessee and Texas. In addition, our fiber optic network extended approximately
8,530 route miles, of which approximately 4,830 miles are Company-owned and
approximately 3,700 miles are owned and operated principally by three public
utilities, which are Duke Power Company, Florida Power & Light Company and
Entergy Technology Company, and are managed and marketed by us. We expect to
add approximately 1,000 additional route miles by the end of 2000 through a
combination of construction and long-term dark fiber leases. At June 30, 2000,
our network
12
<PAGE>
included one Nortel DMS-250 and ten Nortel DMS-500 voice switches, seventeen
Ascend 9000 frame relay switches, ten ATM switches and nine next-generation
multi-service switches, which are used for both voice and Internet telephony
traffic. We intend to deploy additional next-generation multi-service switches
during the remainder of 2000. In addition, we had completed physical collocation
of switching equipment in 125 central offices of BellSouth Telecommunications,
Inc.
During the 2000 fiscal quarter, our operational highlights included the
following:
. we obtained rulings from the Georgia Public Service Commission and the
Tennessee Regulatory Authority securing reciprocal compensation for ISP
traffic at commission-ordered rates and establishing that BellSouth should be
required to adhere to service quality measures with financial consequences to
be established by each such regulatory authority for failure to perform;
. we obtained a ruling from the North Carolina Utilities Commission securing
reciprocal compensation for ISP traffic at commissioned-ordered rates;
. we expanded our geographic reach into Tennessee by opening our first branch
office in the state, located in Chattanooga;
. we completed the addition of approximately 210 miles of new fiber to our
network; and
. we completed the installation of a Nortel DMS-500 switch in Nashville,
Tennessee and added a next-generation multi-service switch in Huntsville,
Alabama.
In July 2000, we obtained a favorable ruling on our interconnection
contract complaint against BellSouth before the North Carolina Utilities
Commission. This decision requires the payment of approximately $1.5 million of
unpaid reciprocal compensation owed to us from a previous interconnection
agreement with BellSouth. We have not recognized any revenue benefit from this
ruling, consistent with the approach we continue to take relating to the
recognition of reciprocal compensation revenues.
Under our interconnection agreement with BellSouth, we continued billing
BellSouth during the first six months of 2000 for reciprocal interconnection
charges related to the provision by us of facilities-based local exchange
services. BellSouth has stated that it views termination to such ISPs as not
included under the reciprocal charge arrangements set forth in the
interconnection agreement, and has refused to pay compensation for such
terminations either to us or to other competitive local exchange carriers
operating under similar interconnection agreements. Beginning with the first
quarter 2000, we began recognizing reciprocal compensation revenue on ISP
traffic at a rate deemed realizable and at levels significantly less than
amounts being billed to BellSouth.
We have continued to bill BellSouth the reciprocal compensation rate set
forth in the interconnection agreement which expired on July 1, 1999. We believe
this rate will be substantially reduced retroactively to July 1, 1999. Such a
rate reduction would result in a substantial reduction in the accounts
receivable billed and reserved subsequent to July 1, 1999. We believe our
position with respect to the reserved portion of the cumulative interconnection
billings is supported by the terms of the BellSouth interconnection agreement,
although our billed and reserved accounts receivable for the period from July 1,
1999 to June 30, 2000 may be substantially reduced pending outcome of the terms
of the new interconnection agreement. As of June 30, 2000, we had reserved for
approximately $45 million of cumulative local interconnection billings,
inclusive of $35.6 million of billings from July 1, 1999 to June 30, 2000.
During the 2000 fiscal quarter, we recognized approximately $2.5 million in
revenue related to settlement of past due monies for reciprocal compensation for
services provided in one state prior to July 1, 1999.
During the 2000 fiscal quarter, we continued to pursue the completion of a
new interconnection agreement with BellSouth. We are in arbitration in all nine
BellSouth states except Kentucky and Mississippi. In Mississippi, we opted in
to an existing interconnection agreement between BellSouth and another
competitive local exchange carrier. To date, we have received orders in
Florida, Georgia, North Carolina and South Carolina and a ruling in Tennessee.
We plan to continue to pursue resolution of the arbitration proceedings in all
BellSouth states other than Mississippi and Kentucky in which we operate.
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
13
<PAGE>
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 service 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. These protections
would significantly reduce the duration of any outages, in the affected area, in
the event of an electronics failure or cable cut. We are seeking to purchase
rights of way and are taking other actions 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.
The following table presents information about our operations and business
as of the dates shown:
Statistical Data*
<TABLE>
<CAPTION>
June 30, March 31, December 31,
2000 2000 1999
---- ---- ----
<S> <C> <C> <C>
Cumulative markets 34 33 33
Business customers served -
retail services** 13,330 13,000 12,375
Route miles 8,530 8,320 8,250
Collocations 125 125 125
Voice switches 11 10 10
ATM switches 10 10 10
Frame relay switches 17 17 17
Next generation switches 9 8 4
Number of employees 2,075 1,750 1,640
Lines sold cumulative 223,000 148,000 128,200
Lines installed cumulative 148,350 119,300 101,500
Lines installed/Lines sold percentage 67% 81% 79%
</TABLE>
*Data rounded except as to markets, collocations and switches.
**Reflects the combination of the multiple accounts of certain customers into
a single customer profile.
14
<PAGE>
Results of Operations
The following tables present for the 2000 and 1999 fiscal quarters and the
2000 and 1999 fiscal six-month periods selected statement of operations data and
EBITDA, as adjusted, as a percentage of revenues generated by our broadband
transport services business, our retail services business and our e/\deltacom
business (in thousands):
<TABLE>
<CAPTION>
Broadband Transport Services
------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ---------------------------------
2000 % 1999 % 2000 % 1999 %
------- -------- ------- ----- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $20,774 100% $18,166 100% $ 40,884 100% $ 34,629 100%
Cost of services 2,657 13% 2,838 16% 5,103 13% 5,410 16%
------- --- ------- ---- -------- ---- -------- ----
Gross margin 18,117 87% 15,328 84% 35,781 87% 29,219 84%
------- --- ------- ---- -------- ---- -------- ----
Operating expenses:
Selling, operations
and administration 8,128 39% 5,414 30% 15,648 38% 10,553 30%
Depreciation and
amortization 9,042 44% 6,779 37% 17,483 43% 13,049 38%
------- --- ------- ---- -------- ---- -------- ----
Total operating
expenses 17,170 83% 12,193 67% 33,131 81% 23,602 68%
------- --- ------- ---- -------- ---- -------- ----
Operating income $ 947 4% $ 3,135 17% $ 2,650 6% $ 5,617 16%
======= === ======= ==== ======== ==== ======== ====
EBITDA, as adjusted $ 9,989 48% $ 9,914 54% $ 20,133 49% $ 18,666 54%
======= === ======= ==== ======== ==== ======== ====
<CAPTION>
Retail Services
------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ---------------------------------
2000 % 1999 % 2000 % 1999 %
------- -------- ------- ----- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $63,190 100% $39,210 100% $118,787 100% $ 75,781 100%
Cost of services 33,866 54% 25,421 65% 66,056 56% 49,610 65%
------- --- ------- ---- -------- ---- -------- ----
Gross margin 29,324 46% 13,789 35% 52,731 44% 26,171 35%
------- --- ------- ---- -------- ---- -------- ----
Operating expenses:
Selling, operations
and administration 24,288 38% 16,698 42% 47,334 40% 31,827 42%
Depreciation and
amortization 10,311 16% 5,510 14% 19,508 16% 10,388 14%
------- --- ------- ---- -------- ---- -------- ----
Total operating
expenses 34,599 54% 22,208 56% 66,842 56% 42,215 56%
------- --- ------- ---- -------- ---- -------- ----
Operating loss $(5,275) (8)% $(8,419) (21)% $(14,111) (12)% $(16,044) (21)%
======= === ======= ==== ======== ==== ======== ====
EBITDA, as adjusted $ 5,036 8% $(2,909) (7)% $ 5,397 4% $ (5,656) (7)%
======= === ======= ==== ======== ==== ======== ====
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
e/\deltacom
------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ---------------------------------
2000 % 1999 % 2000 % 1999 %
------- -------- ------- ----- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,447 100% $ 0 - $ 2,447 100% $ 0 -
Cost of services 1,396 57% 0 - 1,396 57% 0 -
------- -------- ------- ----- -------- ---- ------- -----
Gross margin 1,051 43% 0 - 1,051 43% 0 -
------- -------- ------- ----- -------- ---- ------- -----
Operating expenses:
Selling, operations
and administration 3,064 125% 0 - 3,634 149% 0 -
Depreciation and
amortization 617 25% 0 - 617 25% 0 -
------- -------- ------- ----- -------- ---- ------- -----
Total operating
expenses 3,681 150% 0 - 4,251 174% 0 -
------- -------- ------- ----- -------- ---- ------- -----
Operating loss $(2,630) (107)% $ 0 - $(3,200) (131)% $ 0 -
======= ======== ======= ===== ======== ==== ======= =====
EBITDA, as adjusted $(2,013) (82)% $ 0 - $(2,583) (106)% $ 0 -
======= ======== ======= ===== ======== ==== ======= =====
</TABLE>
Three Months Ended June 30, 2000 Compared With Three Months Ended June 30, 1999
Revenues
Total revenues increased $29.0 million, or 50.6%, from $57.4 million for
the 1999 fiscal quarter to $86.4 million for the 2000 fiscal quarter.
Revenues from retail services increased $24.0 million, or 61.2%, from $39.2
million for the 1999 fiscal quarter to $63.2 million for the 2000 fiscal
quarter. The increase in our retail services revenues was primarily attributable
to:
. continued expansion and diversification of our revenue base, especially
our local, data and Internet products, which accounted for 41% of our
total revenues for the 2000 fiscal quarter compared to 23% for the 1999
fiscal quarter;
. continued growth in access lines installed, which increased by 29,000
lines from the end of the first quarter of 2000 and by 92,000 lines from
the end of the 1999 fiscal quarter;
. continued growth in the number of customers purchasing multiple products,
which we believe supports our bundled approach to offering our products;
and
. continued stability in the rate of revenue loss from former customers
from period to period.
The increase in our revenues from retail services during the 2000 fiscal
quarter was partially offset by a rate decrease we offered to some of our large
customers. We believe that this rate decrease, which we implemented in June
2000, will be offset by reductions in our costs of services. Our revenues
during the 2000 fiscal quarter reflect the receipt of a one-time net cash
payment of approximately $2.5 million attributable to a regulatory dispute
in one state related to prior periods. We expect to continue to experience
revenue growth and diversification in our retail services during the remainder
of 2000. In addition, we expect to experience continued growth in access lines
installed during the remainder of the year.
Revenues from our broadband transport services increased $2.6 million, or
14.4%, from $18.2 million for the 1999 fiscal quarter to $20.8 million for the
2000 fiscal quarter. The increase was primarily attributable to increasing
demand for bandwidth, which is reflected in the growth of our customer base for
this segment. The effects of this demand were partially offset by the continued
competitive pricing of our broadband transport services. We expect to
experience continued growth in our broadband transport services revenues during
the remainder of 2000 as a result of the continued demand for bandwidth and the
continued use of our network to complement our retail services and e/\deltacom
product offerings.
16
<PAGE>
Revenues from our e/\deltacom segment were $2.4 million for the 2000 fiscal
quarter. This new segment had no operations in the 1999 fiscal quarter. We
expect this segment to continue to experience revenue growth during the
remainder of 2000 as we continue to sign customers to collocation and hosting
contracts.
Cost of Services
Total cost of services increased $9.6 million, from $28.3 million for the
1999 fiscal quarter to $37.9 million for the 2000 fiscal quarter.
Cost of services for our retail services increased $8.5 million, from $25.4
million for the 1999 fiscal quarter to $33.9 million for the 2000 fiscal
quarter. Cost of services as a percentage of revenues for retail services
decreased to 54% for the 2000 fiscal quarter from 65% for the 1999 fiscal
quarter. The decrease was primarily attributable to a continued increase in our
base of facilities-based services, a migration of existing resale services onto
our owned and operated network, and reductions in access costs.
Cost of services attributable to our broadband transport services decreased
$100,000 to $2.7 million for the 2000 fiscal quarter from $2.8 million for the
1999 fiscal quarter. Cost of services as a percentage of revenue for
broadband transport services decreased to 13% for the 2000 fiscal quarter from
16% for the 1999 fiscal quarter. The decrease was 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 our broadcast
transport services.
Cost of services attributable to our e/\deltacom segment was $1.4 million,
or 57% of revenues, for the 2000 fiscal quarter.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $13.4
million, from $22.1 million, or 39% of revenues, for the 1999 fiscal quarter to
$35.5 million, or 41% of revenues, for the 2000 fiscal quarter.
Selling, operations and administration expense attributable to our retail
services increased $7.6 million, from $16.7 million, or 42% of revenues, for the
1999 fiscal quarter to $24.3 million, or 38% of revenues, for the 2000 fiscal
quarter. The increase was primarily attributable to an increase in the number
of employees, continued geographic expansion and costs associated with the
expansion of our existing service offerings, primarily local services.
Selling, operations and administration expense attributable to our
broadband transport services increased $2.7 million, from $5.4 million, or 30%
of revenues, for the 1999 fiscal quarter to $8.1 million, or 39% of revenues,
for the 2000 fiscal quarter. The increase was primarily due to costs incurred
in adding personnel to support the geographic expansion of our network and in
developing the infrastructure required to support our Internet protocol
backbone, and to increased information systems and research and development
costs.
Selling, operations and administration expense attributable to our
e/\deltacom segment was $3.1 million, or 125% of revenues, for the 2000 fiscal
quarter.
Depreciation and Amortization
Total depreciation and amortization expense increased $7.7 million, from
$12.3 million for the 1999 fiscal quarter to $20.0 million for the 2000 fiscal
quarter. Our retail services accounted for $4.8 million of the increase, which
was primarily related to installation of new central office and other
telecommunications equipment. Network expansion, including installation of
electronics and fiber optic equipment, for our broadband transport services
operations accounted for $2.3 million of the increase. Assets acquired in the
Bay Data merger were primarily responsible for the increase of $617,000
attributable to our e/\deltacom segment. We expect depreciation expense to
continue to increase during the remainder of 2000 as we add new switches and
network facilities and expand into new markets.
17
<PAGE>
Interest Expense
Total interest expense increased $3.8 million, from $11.1 million for the
1999 fiscal quarter to $14.9 million for the 2000 fiscal quarter. The increase
in interest expense 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 to $160 million of borrowings in
April 2000 under our new senior secured credit facility. We expect interest
expense to increase during the remainder of 2000 compared to 1999 as a result of
interest payable on the $160 million of borrowings under the credit facility.
Interest Income
Total interest income from the temporary investment of available cash
balances increased from $3.3 million for the 1999 fiscal quarter to $4.9 million
for the 2000 fiscal quarter.
Extraordinary Loss
We incurred an extraordinary loss of $1.3 million during the 2000 fiscal
quarter attributable to 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 terminated credit facility.
EBITDA, as adjusted
EBITDA, as adjusted, increased $6.0 million, from $7.0 million for the 1999
fiscal quarter to $13.0 million for the 2000 fiscal quarter.
EBITDA, as adjusted, attributable to our retail services for the 2000
fiscal quarter was $5.0 million compared to $(2.9) million for the 1999 fiscal
quarter. EBITDA, as adjusted, attributable to our retail services increased
from (7)% of revenues for the 1999 fiscal quarter to 8% of revenues for the 2000
fiscal quarter. The increase in EBITDA, as adjusted, for our retail services was
primarily attributable to the continued migration of customers from our resale
products to our facilities-based products, continued diversification of our
revenue base and reductions in our off-network access costs.
EBITDA, as adjusted, attributable to our broadband transport services
increased $75,000 for the 2000 fiscal quarter compared to the 1999 fiscal
quarter. The increase was primarily attributable to the increasing demand for
bandwidth, the effects of which were partially offset by the competitive pricing
of our broadband transport services.
EBITDA, as adjusted, attributable to our e/\deltacom segment was $(2.0)
million for the 2000 fiscal quarter.
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
Revenues
Total revenues increased $51.7 million, or 46.8%, from $110.4 million for
the 1999 fiscal six-month period, to $162.1 million for the 2000 fiscal six-
month period.
Revenues from our retail services increased $43.0 million, or 56.8%, from
$75.8 million for the 1999 fiscal six-month period to $118.8 million for the
2000 fiscal six-month period. The increase in retail services revenues was
primarily attributable to:
. continued expansion and diversification of our revenue base, especially
our local, data and Internet products, which accounted for 39% of our
total revenues for the 2000 fiscal six-month period compared to 22% for
the 1999 fiscal six-month period;
18
<PAGE>
. continued growth in access lines installed, which increased by 92,000
lines from the end of the 1999 fiscal six-month period;
. continued growth in the number of business customers, which increased
from 11,250 at the end of the 1999 fiscal six-month period to 13,330 at
the end of the 2000 fiscal six-month period;
. continued growth in the number of customers purchasing multiple
products, which we believe supports our bundled approach to offering our
products; and
. continued stability in the rate of revenue loss from former customers
from period to period.
The increase in our revenues from retail services during the 2000 fiscal six-
month period was partially offset by a rate decrease we offered some of our
large customers. Our revenues during this period reflect the receipt of a one-
time net cash payment of approximately $2.5 million attributable to a regulatory
dispute in one state related to prior periods.
Revenues from our broadband transport services increased $6.3 million, or
18.1%, from $34.6 million for the 1999 fiscal six-month period to $40.9 million
for the 2000 fiscal six-month period. The increase in revenue from the
broadband transport services was primarily attributable to the increasing demand
for bandwidth. The effects of this demand were partially offset by the
continued competitive pricing of our broadband transport services.
Revenues from our e/\deltacom segment were $2.4 million for the 2000 fiscal
six-month period.
Cost of Services
Total cost of services increased $17.6 million, from $55.0 million for the
1999 fiscal six-month period to $72.6 million for the 2000 fiscal six-month
period.
Cost of services for our retail services increased $16.5 million, from
$49.6 million for the 1999 fiscal six-month period to $66.1 million for the 2000
fiscal six-month period. Cost of services as a percentage of revenues for
retail services decreased to 56% for the 2000 fiscal six-month period from 65%
for the 1999 fiscal six-month period. The decrease was primarily attributable
to a continued increase in our base of facilities-based services, a migration of
existing resale services onto our owned and operated network and a reduction in
access costs.
Cost of services attributable to our broadband transport services decreased
$307,000 to $5.1 million for the 2000 fiscal six-month period from $5.4 million
for the 1999 fiscal six-month period. Cost of services as a percentage of
revenues for broadband transport services decreased to 13% for the 2000 fiscal
six-month period from 16% for the 1999 fiscal six-month period. The decrease
was primarily attributable to the continued migration of traffic onto our owned
and operated network, which has reduced off-network costs. The decrease was
partially offset by rate decreases to current market rates.
Cost of services attributable to our e/\deltacom segment was $1.4 million,
or 57% of revenues, for the 2000 fiscal six-month period.
Selling, Operations and Administration Expense
Total selling, operations and administration expense increased $24.2
million, from $42.4 million, or 38% of revenues, for the 1999 fiscal six-month
period to $66.6 million, or 41% of revenues, for the 2000 fiscal six-month
period.
Selling, operations and administration expense attributable to our retail
services increased $15.5 million, from $31.8 million, or 42% of revenues, for
the 1999 fiscal six-month period to $47.3 million, or 40% of revenues, for the
2000 fiscal six-month period. The increase in selling, operations and
administration expense for our retail services segment was primarily
attributable to an increase in the number of employees, continued geographic
expansion, and costs associated with the expansion of our existing service
offerings, primarily local services.
19
<PAGE>
Selling, operations and administration expense attributable to our
broadband transport services increased $5.0 million, from $10.6 million, or 30%
of revenues, for the 1999 fiscal six-month period to $15.6 million, or 38% of
revenues, for the 2000 fiscal six-month period. The increase in selling,
operations, and administration expense for our broadband transport services was
primarily due to costs incurred in adding personnel to support the geographic
expansion of our network and in developing the infrastructure required to
support our Internet protocol backbone, and to increased information systems and
research and development costs.
Selling, operations and administration expense attributable to our
e/\deltacom segment was $3.6 million, or 149% of revenues, for the 2000 fiscal
six-month period.
Depreciation and Amortization
Total depreciation and amortization expense increased $14.1 million, from
$23.5 million for the 1999 fiscal six-month period to $37.6 million for the 2000
fiscal six-month period. Our retail services accounted for $9.1 million of the
increase, which was primarily related to installation of new central office and
other telecommunications equipment. Network expansion for our broadband
transport services operations accounted for $4.4 million of the increase.
Assets acquired in the Bay Data merger were primarily responsible for the
increase of $617,000 attributable to our e/\deltacom segment.
Interest Expense
Total interest expense increased $5.0 million, from $21.6 million for the
1999 fiscal six-month period to $26.6 million for the 2000 fiscal six-month
period. The increase in interest expense 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 to $160
million of borrowings in April 2000 under our new senior secured credit
facility.
Interest Income
Total interest income from the temporary investment of available cash
balances increased from $5.7 million for the 1999 fiscal six-month period to
$8.4 million for the 2000 fiscal six-month period.
Extraordinary Loss
We incurred an extraordinary loss of $1.3 million during the 2000 fiscal
six-month period attributable to 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 terminated credit facility.
EBITDA, as adjusted
EBITDA, as adjusted, increased $9.9 million, from $13.0 million for the
1999 fiscal six-month period to $22.9 million for the 2000 fiscal six-month
period.
EBITDA, as adjusted, attributable to our retail services for the 2000
fiscal six-month period was $5.4 million compared to $(5.7) million for the 1999
fiscal six-month period. EBITDA, as adjusted, attributable to our retail
services increased from (7)% of revenues for the 1999 fiscal six-month period to
4% of revenues for the 2000 fiscal six-month period. The increase in EBITDA, as
adjusted, for our retail services was primarily attributable to the continued
migration of customers from our resale products to our facilities-based
products, continued diversification of our revenue base and reductions in our
off-network access costs.
EBITDA, as adjusted, attributable to our broadband transport services
increased $1.5 million for the 2000 fiscal six-month period compared to the 1999
fiscal six-month period. The increase was primarily attributable to increasing
demand for bandwidth and reduction in off-network costs. The positive impact of
these factors was offset in part by the competitive pricing of our broadband
transport services.
20
<PAGE>
EBITDA, as adjusted, attributable to our e/\deltacom segment was $(2.6)
million for the 2000 fiscal six-month period.
Liquidity and Capital Resources
Cash used in operating activities was $2.1 million for the 2000 fiscal six-
month period and $7.4 million for the 1999 fiscal six-month period. Decreases in
working capital from the prior corresponding periods were $8.0 million for the
2000 fiscal six-month period and $6.0 million for the 1999 fiscal six-month
period. For the 2000 fiscal six-month period, the decrease was primarily
attributable to an increase in net accounts receivable and inventory. The
effect of these items was partially offset by a decrease in prepaid expenses and
an increase in accounts payable, accrued interest, unearned revenue and accrued
compensation and other accrued liabilities. The decrease in working capital
for the 1999 fiscal six-month period resulted primarily from a decrease in
unearned revenue and other accrued liabilities and an increase in accounts
receivable, inventory and other prepaid expenses. The effect of these items was
partially offset by an increase in accounts payable and accrued interest.
Cash used in investing activities was $134.3 million for the 2000 fiscal
six-month period and $55.0 million for the 1999 fiscal six-month period. The
cash used in investing activities in the two six-month periods was primarily
applied to fund capital expenditures. We made net capital expenditures of
$138.9 million in the 2000 fiscal six-month period and $61.6 million in the 1999
fiscal six-month period. Of our $138.9 million of capital expenditures during
the 2000 fiscal six-month period, $71.3 million related to our retail services,
$67.3 million related to our broadband transport services and $390,000 related
to our e/\deltacom segment. Of our $61.6 million of capital expenditures during
the 1999 fiscal six-month period, $33.7 million related to retail services and
$27.9 million related to broadband transport services. The increase in cash used
in investing activities resulted from continued expansion of our existing
network and facilities as we continue to implement our business plan.
Cash provided by financing activities was $99.0 million for the 2000 fiscal
six-month period and $219.5 million for the 1999 fiscal six-month period. Cash
provided by financing activities for the 2000 fiscal six-month period consisted
primarily of net proceeds of $157.4 million from our new $160 million senior
secured credit facility, of which $60 million is restricted for capital
expenditures, and $2.3 million from the exercise of common stock options. Cash
provided by financing activities for the 1999 fiscal six-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.
On April 5, 2000, we entered into two senior secured credit facilities, or
"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,
to be used to finance working capital, capital expenditures and other general
corporate purposes, and a $60 million Tranche 2 Term Loan B facility, to be used
to finance the purchase of equipment. All amounts available under Tranche 1 and
Tranche 2 were drawn by us at the closing of the facility. Tranche 1 is secured
by all of our 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 our outstanding senior notes and $100 million principal
amount of our convertible subordinated notes. Interest per annum is payable on
the senior secured credit facility at our option at 1.875% plus the Base Rate,
or 2.875% plus the Eurodollar Rate, as defined in the credit agreement. The
combined terms of repayment for the Tranche 1 and Tranche 2 advances are
$400,000 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 earliest of (1) October 5, 2007, (2) April 15, 2006 in the
event our convertible subordinated notes have not previously been converted or
refinanced in full on terms and conditions reasonably satisfactory to the
lenders, or (3) April 15, 2007 in the event our 11% Senior Notes due 2007 have
not previously been refinanced in full on terms and conditions reasonably
satisfactory to the lenders.
At June 30, 2000, we had entered into agreements with vendors to purchase
approximately $82.0 million of equipment and services, and for the 2000 fiscal
six-month period had made capital expenditures of $138.9 million. We currently
estimate that our aggregate capital requirements through 2000 will total
21
<PAGE>
approximately $300.0 million, including the $82.0 million in commitments as of
June 30, 2000. We expect to make substantial capital expenditures thereafter.
Capital expenditures during 2000 will be used primarily for the following:
. expansion of our fiber optic network in Texas, including Austin and San
Antonio, and in Tennessee, including Memphis, Nashville, Chattanooga and
Knoxville;
. continued development and construction of our telecommunications
network, including transmission 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;
. 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 make acquisitions or enter into joint ventures and
strategic alliances, in our industry.
As of June 30, 2000, we had approximately $210.9 million of cash and cash
equivalents, excluding $60 million restricted for capital expenditures. We
believe that cash on hand and cash flow from operations will provide sufficient
funds to enable us to expand our business as currently planned through the end
of the first quarter of 2001. Absent additional financing, however, we will be
required to modify our current capital expenditure and expansion plans. In the
event 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. Additional sources may include equity and debt financing
and other financing agreements, such as vendor financing. The Company has
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
2000 fiscal quarter. 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.
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 quarter. Our
adoption of these guidelines did not have a material effect on our consolidated
financial statements.
22
<PAGE>
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 June 30, 2000, our fixed-
rate, long-term debt and capital lease obligations were $516.5 million.
23
<PAGE>
P A R T II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Effective May 1, 2000, ITC/\DeltaCom issued 837,942 shares of its
common stock valued at approximately $26 million to the former stockholder of
Bay Data Consultants, Inc., in consideration for ITC/\DeltaCom's acquisition of
that company. Of such shares, 111,725 shares are held in a two-year escrow to
protect against specified contingencies. See Note 7 to the financial statements
appearing elsewhere in this report. In connection with this issuance,
ITC/\DeltaCom relied on the exemption from registration under the Securities Act
of 1933 provided in Section 4(2) of the Securities Act and/or Regulation D
thereunder. ITC/\DeltaCom did not engage in general advertising or general
solicitation in connection with the offer and sale of the securities. In
addition, ITC/\DeltaCom provided or made available information concerning
ITC/\DeltaCom and the common stock and obtained investment representations from
the selling stockholder.
Effective April 25, 2000, ITC/\DeltaCom issued 44,000 shares of its common
stock upon the exercise of options held by ANSTAAFL Partnership, a transferee of
such options, which were issued under the ITC/\DeltaCom, Inc. 1997 Stock Option
Plan. The purchaser of the shares paid approximately $98,700 as the option
exercise price and received shares with a value of approximately $1.4 million
based on the trading price of the common stock on the purchase date. In
connection with this issuance, ITC/\DeltaCom relied on the exemption from
registration under the Securities Act of 1933 provided in Section 4(2) of the
Securities Act and/or Regulation D thereunder. ITC/\DeltaCom did not engage in
general advertising or general solicitation in connection with the offer and
sale of the securities. In addition, ITC/\DeltaCom provided or made available
information concerning ITC/\DeltaCom and the common stock and obtained
investment representations from the purchaser.
Item 4. Submission of Matters to a Vote of Security Holders
(a) ITC/\DeltaCom held its 2000 annual meeting of stockholders on May 11,
2000.
(c) The following sets forth information regarding each matter voted upon
at the 2000 annual meeting. There were 60,016,650 shares of common
stock outstanding as of the record date for, and entitled to vote at,
the 2000 annual meeting.
Proposal 1. The stockholders approved a proposal to elect each of the
nominees to the board of directors for a three-year term, which will expire at
the annual meeting of stockholders in 2003. The tabulation of votes on this
proposal is as follows:
<TABLE>
<CAPTION>
Nominees Votes For Votes Withheld
-------- ---------- --------------
<S> <C> <C>
Campbell B. Lanier, III 38,981,425 14,898
Andrew M. Walker 38,981,425 14,898
William B. Timmerman 38,981,425 14,898
James H. Black, Jr. 38,972,449 23,874
</TABLE>
Proposal 2. The stockholders approved a proposal to amend ITC/\DeltaCom's
restated certificate of incorporation to increase the number of authorized
shares of capital stock from 95,000,000 shares to 205,000,000 shares and to
increase the number of authorized shares of common stock from 90,000,000 shares
to 200,000,000 shares, with the number of authorized shares of preferred stock
remaining at 5,000,000 shares. The tabulation of votes on this proposal is as
follows:
24
<PAGE>
<TABLE>
<S> <C>
Votes For 37,812,540
Votes Against 1,175,025
Abstentions 8,758
</TABLE>
Proposal 3. The stockholders approved a proposal to amend the
ITC/\DeltaCom, Inc. 1997 Stock Option Plan to increase the number of shares of
common stock that may be issued under the plan from 7,815,000 shares to
9,815,000 shares. The tabulation of votes on this proposal is as follows:
<TABLE>
<S> <C>
Votes For 35,724,981
Votes Against 3,250,727
Abstentions 20,615
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Restated Certificate of Incorporation of ITC/\DeltaCom. Filed
herewith.
10.1 Amended and Restated ITC/\DeltaCom, Inc. 1997 Stock Option Plan.
Filed herewith.
10.2 Amendment No. 1 to ITC Holding Company, Inc. Amended and
Restated Stock Option Plan. Filed herewith.
10.3 Amendment No. 1 to ITC Holding Company, Inc. NonEmployee
Director Stock Option Plan. Filed herewith.
10.4 Credit Agreement (the "Credit Agreement"), dated as of April 5,
2000, among ITC/\DeltaCom, Inc., Interstate FiberNet, Inc., the
subsidiary guarantors listed on the signature page thereto, the
banks, financial institutions and other institutional lenders
listed on the signature pages thereto as the Initial Lenders,
Morgan Stanley Senior Funding, Inc. ("Morgan Stanley"), as
administrative agent for the Lender Parties (as defined
therein), Morgan Stanley & Co. Incorporated, as collateral
agent, Bank of America Securities LLC and Morgan Stanley, as
joint lead arrangers and joint book runners, and Bank of
America, N.A., as syndication agent. Filed as Exhibit 10.1 to
ITC/\DeltaCom's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2000 and incorporated herein by
reference.
10.5 Security Agreement, dated April 5, 2000, made by Interstate
FiberNet, Inc., ITC/\DeltaCom, Inc., the other Persons listed on
the signature pages thereof and the Additional Grantors (as
defined in Section 23(b) thereof) to Morgan Stanley & Co.
Incorporated, as collateral agent for the Secured Parties (as
defined in the Credit Agreement). Filed as Exhibit 10.2 to
ITC/\DeltaCom's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2000 and incorporated herein by
reference.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K.
We did not file any Current Reports on Form 8-K during the period
covered by this report.
25
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITC/\DeltaCom, Inc.
------------------
(Registrant)
Date: August 14, 2000 By: /s/ Douglas A. Shumate
_______________________________
Douglas A. Shumate
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
26
