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U.S. 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: MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-25314
e.spire COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1947746
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12975 WORLDGATE DRIVE 20170
HERNDON, VIRGINIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
703.639.6000
(ISSUER'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
TITLE OF SECURITIES
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:
The number of shares at e.spire Common Stock, Par Value $0.01 outstanding on
May 5, 2000 was 52,204,724.
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e.spire COMMUNICATIONS, INC.
FORM 10 -- Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 2000 (unaudited)
and December 31, 1999 1
Unaudited Condensed Consolidated Statements of Operations -- Three
Months Ended March 31, 2000 and 1999 2
Unaudited Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 2000 and 1999 3
Notes to Unaudited Condensed Consolidated Interim Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and reports on Form 8-K 17
Signatures....................................................................... 18
Index of Exhibits................................................................ 19
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
2000 1999
-------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 118,964 $ 62,525
Restricted cash and investments 2,900 18,754
Trade accounts receivable, net of allowance for doubtful accounts
of $31,216 and $28,707 at March 31, 2000 and December 31,
1999, respectively 102,312 97,238
Unbilled revenue 4,065 14,032
Other current assets 6,635 9,435
-------------- ----------------
Total current assets 234,876 201,984
-------------- ----------------
Inventory, Networks, equipment and furniture, gross 874,986 848,698
Less: accumulated depreciation and amortization (189,666) (166,224)
-------------- ----------------
685,320 682,474
Deferred financing fees, net of accumulated amortization of $14,788
and $13,246 at March 31, 2000 and December 31, 1999,
respectively 43,235 44,660
Intangible assets, net of accumulated amortization of
$12,687 and $11,203 at March 31, 2000 and December 31, 1999,
respectively 5,968 7,452
Other assets 6,832 4,672
-------------- ----------------
Total assets $ 976,231 $ 941,242
============== ================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES, REDEEMABLE STOCK, AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current Liabilities:
Accounts payable $ 46,365 $ 46,106
Accrued employee costs 6,716 5,262
Other accrued liabilities 14,631 15,995
Notes payable - current portion 164,000 164,000
Obligations under capital leases - current portion 11,197 9,932
Accrued interest 9,148 14,344
-------------- ----------------
Total current liabilities 252,057 255,639
-------------- ----------------
Long Term Liabilities:
Notes payable, less current portion 765,175 749,406
Obligations under capital leases, less current portion 43,393 46,786
Other long-term liabilities 13,022 9,010
-------------- ----------------
Total liabilities 1,073,647 1,060,841
-------------- ----------------
Redeemable stock
14 3/4% Redeemable Preferred Stock due 2008 91,612 87,051
12 3/4% Junior Redeemable Preferred Stock due 2009 200,925 194,545
-------------- ----------------
Total redeemable stock 292,537 281,596
Stockholders' deficit:
Preferred Stock 81 0
Common Stock, $0.01 par value, 125,000,000 shares authorized,
51,990,718 and 51,149,825 shares, respectively, issued and
outstanding 520 511
Additional paid-in capital 329,806 236,577
Accumulated deficit (720,360) (638,283)
-------------- ----------------
Total stockholders' deficit (389,953) (401,195)
-------------- ----------------
Total liabilities, redeemable stock and stockholders' deficit $ 976,231 $ 941,242
============== ================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT SHARE DATA)
For the three months ended March 31,
---------------------------------------
2000 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Revenues:
Telecommunications services $ 61,531 $ 40,033
Network technologies services 4,246 18,040
----------------- -----------------
Total revenues 65,777 58,073
Cost of sales:
Telecommunications services, excluding noncash stock
compensation of $ 0 and $520, respectively 39,685 28,134
Network technologies services, excluding
noncash stock compensation of $136 and $185,
respectively 3,517 9,103
----------------- -----------------
Total cost of sales 43,202 37,237
Gross profit:
Telecommunications services 21,846 11,899
Network technologies services 729 8,937
----------------- -----------------
Total gross profit 22,575 20,836
Operating Expenses
Selling, general and administrative, excluding
noncash stock compensation of $1,447 and $2,344,
respectively 46,545 36,222
Noncash stock compensation expense 1,583 3,049
Depreciation and amortization 28,173 20,175
----------------- -----------------
Total Operating Expenses 76,301 59,446
Loss from Operations (53,726) (38,610)
Nonoperating income/expenses
Interest and other income (1,395) (4,267)
Interest and other expense 29,746 22,845
----------------- -----------------
Net loss (82,077) (57,188)
Preferred stock dividends, accretion and beneficial
conversion 36,010 9,697
----------------- -----------------
Net loss applicable to common stockholders $(118,087) $ (66,885)
================= =================
Basic and diluted net loss per common share $ (2.29) $ (1.37)
================= =================
Weighted average number of common
shares outstanding 51,471,837 48,687,218
================= =================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
For the three months ended March 31,
2000 1999
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities
Net Loss $ (82,077) $ (57,188)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 28,173 20,175
Interest deferral and accretion 15,769 14,046
Amortization of deferred financing fees 1,542 1,251
Noncash stock compensation 1,583 3,049
Non-monetary revenue - (5,621)
Changes in operating assets and liabilities:
Trade accounts receivable 4,893 (15,330)
Other current assets (438) 1,903
Other assets (2,160) (94)
Accounts payable 259 (27,037)
Other liabilities (1,436) (6,437)
------------------- --------------------
Net cash used in operating activities (33,892) (71,283)
Cash flows from investing activities
Release of restricted cash and investments related to network activities 729 -
Payments for networks, equipment and furniture (26,288) (54,983)
------------------- --------------------
Net cash used in investing activities (25,559) (54,983)
Cash flows from financing activities
Issuance of Preferred Stock 100,665 -
Cost associated with Preferred Stock issuance (1,377) -
Shares issued under the Employee Stock Purchase Plan 427 -
Payment of dividends for preferred stock (29) (17)
Payment of notes payable - (437)
Payment of lease obligation (2,128) (1,200)
Payment of deferred financing fees (117) (370)
Release of restricted cash and investments related to financing activities 15,125 14,703
Exercise of warrants, options and other 3,324 1,105
------------------- --------------------
Net cash provided by financing activities 115,890 13,784
Net (decrease) increase in cash & cash equivalents 56,439 (112,482)
Cash and cash equivalents - beginning of period 62,525 328,758
=================== ====================
Cash and cash equivalents - end of period $ 118,964 $ 216,276
=================== ====================
Supplemental disclosure of cash flow information:
Interest paid $ 18,248 $ 16,378
Assets acquired under capital lease $ - $ 8,854
Dividends declared with preferred stock $ 10,735 $ 9,680
Increase in intangibles $ - $ 14
Accrual of stock bonuses $ 275 $ 2,100
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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e.spire COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
e.spire Communications, Inc. ("e.spire" or the "Company") and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
The condensed consolidated balance sheet as of March 31, 2000, the
condensed consolidated statements of operations for the three months ended
March 31, 2000 and 1999, and the condensed consolidated statements of cash
flows for the three months ended March 31, 2000 and 1999, have been prepared by
the Company, without audit. In the opinion of management, all adjustments,
which include normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows as of March 31, 2000,
and for all periods presented, have been made. Certain amounts in the 1999
condensed consolidated statements have been reclassified to conform to the 2000
presentation. Operating results for the three months ended March 31, 2000, are
not necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the disclosures
provided are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the consolidated
financial statements and the related notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
RESTRICTED CASH AND INVESTMENTS
The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction to cash
amounting to approximately $2,900,000 at March 31, 2000, and $3,629,000 at
December 31, 1999. The face amount of all bonds and letters of credit is
approximately $21,148,000 as of March 31, 2000, and $21,559,000 as of December
31, 1999.
USE OF ESTIMATES
The preparation of the condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities; and disclosure of contingent assets and liabilities at the dates
of the consolidated financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may differ from those
estimates.
RISKS AND UNCERTAINTIES
a) Liquidity and Negative Cash Flow
To date, the Company has funded the construction of its networks and its
operations with external financing though various preferred stock, common
stock, and debt issuances, as well as through capital lease financing. As a
result of certain of these transactions, the Company will be required to
satisfy substantially higher periodic cash debt service obligations in the
future. There can be no assurance that the Company will be able to generate
sufficient cash flow or otherwise obtain funds to cover interest, principal and
redeemable preferred stock dividend payments associated with currently
outstanding and future debt and other obligations.
The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. In accordance with the
terms of its debt facilities, the Company has also deferred payment of most of
its interest charges. During fiscal year 2000, the Company will be required to
make cash interest payments on its 2007 Senior Notes and Senior Secured Credit
Facility. The Company's continued development, construction, expansion, and
operation of local networks, as well as the further development of additional
services, including local switched voice and high-speed data services, will
require continued substantial capital expenditures. The Company's ability to
fund these expenditures is dependent upon the Company raising substantial
financing. To meet its remaining capital requirements and to fund operations
and cash flow deficiencies, the Company will be required to sell additional
equity securities, increase its existing credit facility, acquire additional
credit facilities, sell additional debt securities, or sell certain Company
assets, some of which may require the consent of the Company's bondholders.
There can be no assurance that the Company will be able to obtain the
additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy. Failure to raise sufficient capital
could compel the Company to delay or abandon some or all of its plans or
expenditures, which could have a material adverse effect on its business,
results of operations, and financial condition. During the quarter, the Company
received commitment letters for $175 million in equity funding. The Company
received approximately $100.7 million of this amount in March 2000. The
remaining $75 million may be subject to shareholder approval and satisfaction
of various closing conditions, including the absence of any material change or
debt covenant violation. As described below, the Company received a waiver of
the debt covenant violation on April 13, 2000. The Company has also entered
into a stand-by commitment for an additional $50 million in equity funding,
subject to certain conditions. Management believes that the Company's current
cash resources, together with amounts expected to be available pursuant to the
funding commitments described above, will be sufficient to fund the Company's
continuing negative cash flow and required capital expenditures through 2000.
If required, the Company also believes that it could raise additional funds
from the sale of certain assets which are not essential to the Company's
operations.
The Senior Secured Credit Facilities contain financial covenants with which
the Company must comply, including adjusted EBITDA (Earnings before interest,
taxes, depreciation, amortization, and noncash compensation), debt to capital
ratio, and capital expenditures. The Company was not in compliance with the
financial covenants as of December 31, 1999 and March 31, 2000, resulting in a
default under the Credit Facilities which allows the lenders to accelerate the
maturity of the borrowings under the Credit Facilities. Any such acceleration
would also result in the acceleration of other obligations of the Company,
including the 2005 Notes, 2006 Notes, 2007 Notes and 2008 Notes (the Notes). In
the event of an acceleration of its outstanding debt obligations, the Company
would not have sufficient liquidity to meet its obligations. On April 13, 2000,
the Company obtained a waiver of the event of non-compliance as of December 31,
1999 and the lenders agreed to a standstill on an actions related to such
non-compliance until June 15, 2000. The Company is currently in discussion
with its lenders and believes that it will be successful in amending its
financial covenants on a going forward basis to amounts that the Company
believes will allow for compliance. However, there can be no assurance that the
Company will be successful in amending its covenants, that the Company will be
in compliance with its debt covenants throughout the remainder of 2000 or that
the Credit Facilities will not be accelerated, causing an acceleration of other
obligations. The Company has classified its obligation under the Credit
Facilities as a current liability as a result of the debt covenant violation.
The Senior Notes cannot be accelerated unless payment of amounts due under the
Credit Facilities is accelerated and therefore, remain classified as long-term
obligations as of March 31, 2000. In the event that the Company is unsuccessful
in negotiating amendments to the financial covenants, the Company believes that
it will have access to sufficient financial resources to ensure that the Notes
will not be accelerated.
b) Reciprocal Compensation
The Company has recorded net revenue of approximately $15.6 million and $8.2
million for the three months ended March 31, 2000 and 1999, respectively, for
reciprocal compensation relating to the transport and termination of local
traffic, primarily to Internet Service Providers ("ISPs"), from customers of
Incumbent Local Exchange Carriers ("ILECs") pursuant to various interconnection
agreements. The ILECs have not paid a substantial portion of the amounts billed
by the Company and have disputed these charges based on the belief that such
calls are not local traffic as defined by the various agreements and are not
subject to payment of transport and termination charges under state and federal
laws and public policies. However, the Company has resolved certain of these
disputes, as discussed in the following paragraphs. The resolutions of these
disputes have been, and will continue to be, based on rulings by state public
utility commissions and/or by the Federal Communications Commission (FCC),
commercial arbitrators, or through negotiations between the parties. To date,
there have been favorable final rulings from over 30 state public utility
commissions that ISP traffic is subject to the payment of reciprocal
compensation under current interconnection agreements. Many of these state
commission decisions have been appealed by the ILECs. To date, five federal
court decisions, including two federal circuit court of appeals decisions have
been issued upholding state commission decisions ordering the payment of
reciprocal compensation for ISP traffic.
On February 25, 1999, the FCC issued a decision that ISP-bound traffic is
jurisdictionally interstate in nature. The decision relies on the long-standing
federal policy that ISP traffic, although jurisdictionally interstate, is
treated as though it is local traffic for pricing purposes. The decision also
emphasized that, because the FCC concluded that there currently are no federal
rules governing inter-carrier compensation for ISP traffic, the determination
as to whether such traffic was subject to reciprocal compensation under the
terms of interconnection agreements was properly made by the state commissions
and that carriers were bound by their interconnection agreements and state
commission decisions regarding the payment of reciprocal compensation for ISP
traffic.
The FCC has initiated a rulemaking proceeding regarding the adoption of
prospective federal rules for intercarrier compensation for ISP traffic. In its
notice of rulemaking, the FCC expressed its preference that compensation rates
for this traffic continue to be set by negotiations between carriers, with
disputes resolved by arbitrations conducted by state commissions, pursuant to
the Telecommunications Act.
Since the issuance of the FCC's decision on February 25, 1999, at least 19
state public utility commissions, have either ruled or reaffirmed that ISP
traffic is subject to reciprocal compensation under current interconnection
agreements, and two state commissions have declined to apply reciprocal
compensation for ISP traffic under current interconnection agreements.
On March 24, 2000, the United States Court of Appeals for the District of
Columbia Circuit vacated and remanded the FCC's February 25, 1999 decision. The
court found that the FCC did not provide an adequate basis for its February
1999 decision that the reciprocal compensation provisions of the
Telecommunications Act and the FCC rules did not apply to ISP traffic. The
Company does not believe that the Circuit Court's decision will adversely
affect the state decisions noted above with respect to reciprocal compensation.
The decision does, however, create some uncertainty, and there can be no
assurance that future FCC or state rulings will be favorable to the Company.
The Company has participated in a number of regulatory proceedings that address
the obligation of the ILECs to pay the Company reciprocal compensation for
ISP-bound traffic under the Company's interconnection agreements. These
proceedings include complaint proceedings brought by the Company against
individual ILECs for failure to pay reciprocal compensation under the terms of
a current interconnection agreement; generic state commission proceedings
concerning the obligations of ILECs to pay reciprocal compensation to CLECs;
and arbitration proceedings before state commissions addressing the payment of
reciprocal compensation on a prospective basis under new interconnection
agreements.
In January 2000, a commercial arbitrator awarded e.spire damages in the
amount of approximately $1.9 million, including interest, from an ILEC for the
state of Florida. This award settles reciprocal compensation from such ILEC for
the state of Florida through July 31, 1999. The Company has initiated the
process to obtain a further award through at least March 31, 2000. In February
2000, a commercial arbitrator granted e.spire the right to recover $14.2
million from BellSouth, representing reciprocal compensation, including accrued
interest, through December 31, 1999 for the states of Alabama, Louisiana, and
South Carolina. e.spire has subsequently collected these amounts. e.spire also
received favorable decisions from the PUCs in Georgia and Florida. BellSouth
appealed both decisions, but e.spire settled the appeals on favorable terms.
e.spire also recently settled a similar collection complaint in Kentucky.
e.spire has also collected these Georgia, Florida and Kentucky settlement
amounts.
Accordingly, the Company through its commercial arbitration award and these
recent settlements has collected all reciprocal compensation billed to
BellSouth through December 31, 1999, totaling approximately $25 million.
e.spire and BellSouth have also agreed to prospective reciprocal compensation
rates, eliminating litigation over the ISP issue and setting rates through
December 31, 2002. Such rates are less than historical rates and decrease
annually through 2002.
The Company has outstanding trade accounts receivable related to reciprocal
compensation of approximately $40.5 million at March 31, 2000, net of
allowances of approximately $11.7 million. The allowances are determined based
on a state-by-state analysis of the collectibility of billed amounts. The
Company believes that this receivable, net of allowances, is collectible, and
that future reciprocal compensation will be realized, although the timing of
receipts cannot be predicted at this time.
Certain of the Company's interconnection agreements with the ILECs have
expired or will soon expire. The Company believes that there is substantial
risk that the future rates for reciprocal compensation under new
interconnection agreements, some of which are currently in negotiation, will be
significantly lower than current rates.
c) Lawsuits
Three identical lawsuits have been filed against e.spire and Anthony J.
Pompliano, David L .Piazza and Douglas R. Hudson (former officers of e.spire)
by Mitchell Kranes et al, Randy Pludo et al and Chaim Klein et al on April 20,
2000, April 21, 2000 and April 28, 2000 respectively in the United States
District Court for the District of Maryland alleging violation of certain
federal securities laws in connection with financial reporting and disclosure
during the period of August 12, 1999 through March 30, 2000. The plaintiffs in
each complaint assert that the intent of these allegedly false statements was
to artificially inflate the stock price so that: insiders could profit; e.spire
could continue its acquisition spree; and e.spire would continue in compliance
with its debt covenants. The lawsuits purport to be class actions on behalf of
those who purchased stock between August 12, 1999 and March 30, 2000. The U.S.
District Court for the District of Maryland will consolidate the lawsuits and
select lead plaintiff's counsel approximately sixty (60) days after the first
complaint was filed. e.spire believes these claims to be without merit and
intends to vigorously defend itself. The plaintiffs are seeking an unasserted
amount of damages.
d) Other
On May 9, 2000, one of the Network Technology's customers announced that
it was experiencing liquidity problems and may need to seek protection under
the applicable bankruptcy laws. As of March 31, 2000, the Company has
receivables from this customer totaling approximately $2.1 million. The Company
believes that it has several methods of recovery for this amount, including
reclaiming the asset sold to the customer. Based on an analysis of currently
available information, the Company believes that it has adequately reserved for
its exposure to loss related to this receivable. However, as more information
becomes available regarding the customers' financial condition, the Company
will continue to evaluate this receivable for collectibility.
7
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NOTE 3: FINANCING ACTIVITIES
To date, the Company has funded the construction of its networks and its
operations with external financings, as described in the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations.
e.spire signed commitment letters with Greenwich Street Capital Partners II,
L.P., and The Huff Alternative Income Fund , L.P. for a total of $125 million in
equity funding. In addition, e.spire signed a commitment letter with Honeywell
International Inc. Master Retirement Trust, in cooperation with Allied Capital
Management, L.L.C., a subsidiary of Honeywell International, Inc. for $50
million in equity funding. Pursuant to the commitment letters, e.spire will
issue 175,000 shares of Series A Convertible Preferred Stock (liquidation
preference $1,000 per share) and 175,000 warrants to purchase Common Stock that
will entitle the holders to purchase, in the aggregate, a total of up to 7.72
million shares of Common Stock. On March 3, 2000, e.spire completed a private
offering of the first tranche of these securities and received $100.7 million.
In connection with the private offering, e.spire issued 81,777 shares of Series
A Convertible Preferred Stock and 175,000 warrants to purchase Common Stock. The
issuance of the remaining shares of Series A Convertible Preferred Stock may be
subject to shareholder approval and satisfaction of various closing conditions,
including the absence of any material adverse change. Each share of Series A
Convertible Preferred Stock is initially convertible into 126.4 shares of Common
Stock (an effective conversion price of $7.91 per share), and each warrant is
initially exercisable for 44.1 shares of Common Stock (at an initial exercise
price of $9.89 per share). The warrants will automatically expire on the tenth
anniversary after the date that they are issued. Dividends on the Series A
Preferred Stock accrue from the date of issuance, are cumulative and are payable
quarterly in arrears, at a per annum rate of 7% of $1,000 (the "stated value"),
plus 7.0% of the accrued but unpaid dividends thereon, subject to an adjustment
in the dividend rate to 15% upon the occurrence of certain events and to 20
percent upon a change of control. Dividends on the convertible preferred stock
are cumulative and shall accrue whether or not the company has earnings or
profits, whether or not there are funds legally available for the payment of
such dividends and whether or not dividends are declared by the Company.
Dividends on the convertible preferred stock are payable only when and if
declared by the Company; provided that all accrued but unpaid dividends on any
share of convertible preferred stock must be paid by the Company upon the
conversion of such share of convertible preferred stock. The convertible
preferred stock is junior to the 14.75% Redeemable Preferred Stock and ranks
pari passu to the 12.75% Redeemable Preferred Stock. All dividends will be paid
by the Company in shares of its Common Stock equal to accrued dividends divided
by a rate equal to the effective conversion price described above or, if no
shareholder approval has been obtained, the closing price of the common stock on
March 6, 2000. In connection with the issuance of the convertible preferred
stock, the Company has agreed to certain restrictive covenants, which are
substantially similar to the covenants that were entered into in connection with
the issuance of the Company's 12 3/4% Redeemable Preferred Stock. The
Certificate of Designation provides that these covenants shall be deemed waived
automatically if waived or amended by the holders of the 12 3/4% Redeemable
Preferred stock. The Company has also entered into a stand-by commitment for an
additional $50 million in equity financing, subject to certain conditions.
The convertible Preferred Stock was issued at a conversion price that was
less than market price at the time of the funding commitment. Thus, under
Emerging Issues Task Force Issue 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" the Company recognized a beneficial conversion charge of $24.6 million
in the first quarter. The full amount of the charge was recognized in the first
quarter because the Preferred Stock is immediately convertible into Common
Stock.
NOTE 4: NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements. This
SAB expresses the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Companies can apply
the accounting and disclosure requirements of this SAB retrospectively, or may
report a change in accounting principle no later than the first fiscal quarter
of the fiscal year beginning after December 15, 1999. The application of this
SAB did not have a material impact on the Company's financial statements.
NOTE 5: SEGMENT REPORTING
During 1998, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Company has identified three
reportable segments: Telecommunications, CyberGate, and Network Technologies.
The Telecommunications segment provides special access, local switched voice,
and data transmission over the Company's own facilities and on a resale basis.
CyberGate provides Internet, high-speed data communications and web-hosting
services. The Network Technologies segment offers fiber optic network design,
project management and construction services. The Company's reportable segments
are strategic business units that offer different products and services. They
are managed separately because each business unit requires different technology
and marketing strategies.
The Company evaluates the performance of each segment based on revenues
from third parties and gross margin, which are separately disclosed on the
condensed consolidated statement of operations for Telecommunications services
and Network Technologies. CyberGate revenue, which is included in
Telecommunications services in the Statement of Operations, for the three months
ended March 31, 2000 and 1999 was $7.3 million and $5.8 million, respectively.
CyberGate gross margin for the three months ended March 31, 2000 and 1999 was
$3.7 million and $3.0 million, respectively. The reportable total assets for
Telecommunications services, CyberGate and Network Technologies services are
approximately $875.6 million, $18.5 million and $82.1 million, respectively, at
March 31, 2000. Network Technologies services assets primarily consist of
accounts receivable and property, plant and equipment that are specifically
identifiable with Network Technologies.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other sections herein,
including statements regarding the development of the Company's businesses, the
markets for the Company's services and products, the Company's anticipated
capital expenditures, and other similar statements are forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) which can be identified as any statement that does not relate
strictly to historical or current facts. Forward-looking statements use such
words as plans, expects, will, will likely result, are expected to, will
continue, is anticipated, estimate, project, believes, anticipates, intends,
may, should, continue, seek, could and other similar expressions. Although the
Company believes that its expectations are based on reasonable assumptions, it
can give no assurance that its expectations will be achieved. The important
factors that could cause actual results to differ materially from those in the
forward-looking statements herein (the "Cautionary Statements") include, without
limitation, the Company's degree of financial leverage, risks associated with
debt service requirements and interest rate fluctuations, risks associated with
acquisitions and the integration thereof, the impact of restriction under the
Company's financial instruments, dependence on availability of transmission
facilities, regulation risks including the impact of the Telecommunications Act
of 1996, contingent liabilities, the impact of competitive services and pricing,
the ability of the Company to successfully implement its strategies, as well as
the other risks referenced from time to time in the Company's filings with the
SEC, including the Company's Form 10-K for the year ended December 31, 1999. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based integrated communications provider to businesses. The Company
currently operates in 38 markets throughout the United States where it has
state-of-the-art local fiber optic networks. The Company's wholly-owned
subsidiary, CyberGate, an ISP, delivers high-speed data communications
services, including computer network connections and related infrastructure
services, that provide both commercial and residential customers access to the
Internet through their personal computer and the use of a modem. By the end of
1997, the Company had become one of the first Competitive Local Exchange
Carriers ("CLECs") to combine the provision of dedicated, local and long
distance voice services with frame relay, ATM and Internet services. Having
established this suite of telecommunications services which emphasizes data
capabilities in addition to traditional CLEC offerings, e.spire seeks to provide
customers with superior service and competitive prices while offering a single
source for integrated communications services designed to meet its business
customers' needs. The Company's facilities-based network infrastructure is
designed to provide services to customers on an end-to-end basis, and, as of
March 31, 2000, was comprised of 3,852 route miles of fiber in its 38 local
networks in 21 states, state of the art equipment including 46 ATM switches, 51
routers, 28 voice switches and approximately 26,000 backbone long haul miles in
its leased coast-to-coast broadband data network.
With the passage of the federal Telecommunications Act of 1996 ("Telecom
Act, FTA or the Act"), the Company enhanced the scope of its product offerings
from dedicated services to a full range of switched voice, data and Internet
services in order to meet the needs of business end-users, and is expanding its
sales, marketing, customer care and operations support systems ("OSS")
capabilities. The Company introduced local switched voice services, including
local exchange services, in late 1996 and long distance services in late 1997.
In late 1998, e.spire announced that it would begin to eliminate its resale
business. As of March 31, 2000, e.spire had installed 181,436 customer access
lines of which approximately 95% were on-switch. This represents a significant
increase over the 135,134 access lines installed as of March 31, 1999 of which
approximately 59% were on-switch.
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The development of the Company's business and the construction, acquisition
and expansion of its networks require significant capital expenditures, a
substantial portion of which are incurred before realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. However, as
the Company's customer base grows, the Company expects that incremental revenues
can be generated with decreasing incremental operating expenses. The Company has
made specific strategic decisions to build high capacity networks with broad
market coverage, which initially increases its level of capital expenditures and
operating losses. However, the Company believes that over the long term this
strategy will enhance the Company's financial performance by increasing the
traffic flow over its network.
The company formed ACSI Network Technologies, Inc.("ACSI NT") to pursue
opportunities in fiber optic network design and construction with carriers,
large end user customers and municipalities. ACSI NT is a wholly owned
subsidiary of e.spire which provides full service network development solutions
including business planning, market analysis, engineering, project management,
construction and network monitoring center design.
RESULTS OF OPERATIONS
REVENUES
The Company reported an increase in total revenues of $7.7 million, or 13%,
to $65.8 million for the three months ended March 31, 2000, compared with
revenues of $58.1 million for the three months ended March 31, 1999, as
discussed below.
TELECOMMUNICATIONS SERVICES
The Company reported an increase in Telecommunications services revenues of
$21.5 million, or 54%, to $61.5 million for the quarter ended March 31, 2000,
compared with revenues of $40.0 million for the quarter ended March 31, 1999.
Included in Telecommunications services are revenues from the dedicated access,
switched local, long distance, reciprocal compensation and data/Internet
products. The increase in revenues was attributable to the Company's greater
presence and expansion in its markets. The increase was principally due to
increased reciprocal compensation revenue as discussed below and increases in
the Company's other service offerings such as special access, on-net switched
and data services. Also, these increases in revenues were partially offset by a
decrease in resale revenue due to the Company's elimination of its switched
resale portfolio.
The Company also increased the number of route miles, fiber miles,
co-locations, buildings connected, voice switches and data POPs. Between March
31, 2000 and March 31, 1999, the Company increased route miles by 2,071 miles,
or 116% and increased fiber miles by 28,356 or 18%. Of the 2,071 route miles
added over the 12 month period, 1,670 route miles are long haul connections
between selected local metropolitan fiber networks of the Company, with an
associated 7,000 fiber miles. Co-locations increased by 17, or 18%, and
buildings connected increased by 924, or 29%. Voice switches deployed increased
to 28 as of March 31, 2000, from 25 as of March 31, 1999. In addition, the
growth is attributable to the Company's leased coast-to-coast broadband network
infrastructure by which it delivers both ATM and frame relay products via its
388 data POPs, which are a combination of both e.spire's infrastructure and
various network-to-network interconnection arrangements. The number of data POPs
has increased to 388 as of March 31, 2000, from 66 as of March 31, 1999. Net
access lines installed increased by 46,302, or 34%, to 181,436 at March 31,
2000, from 135,134 at March 31, 1999. At March 31, 2000, approximately 95% of
total installed lines were "on-switch" versus approximately 59% as of March 31,
1999.
Included in Telecommunications services revenues is reciprocal compensation
of approximately $15.6 million for the three months ended March 31, 2000 and
approximately $8.2 million for the three months ended March 31, 1999. Reciprocal
compensation relates to the transport and termination of local traffic,
primarily to ISPs from ILEC customers, pursuant to various interconnection
agreements. These ILECs have not paid a substantial portion of the amount billed
by the Company and have disputed these charges based on the belief that such
calls are not local traffic as defined by the various agreements and under state
and federal law and public policies. As of March 31, 2000, the Company has
received approximately $30.4 million for reciprocal compensation. The continued
resolution of the remaining disputes will be based on rulings by state PUCs, the
FCC, the courts and/or commercial arbitrators. In February 1999, the FCC ruled
that ISP-bound traffic is jurisdictionally "interstate in nature." The FCC also
found that the reciprocal compensation provisions of the Telecommunications Act
did not apply to ISP traffic but delegated to state PUCs the decision of whether
reciprocal compensation must be paid under the terms of local interconnection
agreements. On March 24, 2000, the United States Court of Appeals for the
District of Columbia Circuit vacated and remanded the FCC's decision on the
grounds that the FCC did not provide an adequate basis for its decision that the
reciprocal compensation provisions of the Telecommunications Act did not apply
to ISP traffic, and remanded further consideration. e.spire has obtained
favorable rulings from the Georgia and Florida PSCs requiring payment
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of past due reciprocal compensation from BellSouth in those states, BellSouth
appealed this decision, but e.spire settled the appeal on favorable terms.
e.spire has several pending proceedings before state PSCs and commercial
arbitrators to collect outstanding amounts from multiple ILECs. Accordingly the
Company, through its commercial arbitration awards and these recent settlements
has collected all reciprocal compensation billed to BellSouth through December
31, 1999, totaling approximately $25 million. e.spire and BellSouth have also
agreed to prospective reciprocal compensation rates, eliminating litigation over
the ISP issue and setting new rates through December 31, 2002. Such rates are
less than historical rates and decrease annually through 2002. Although there
can be no assurance that future regulatory or arbitration rulings will be
favorable to the Company and the timing of receipts cannot be predicted at this
time, the Company believes that its receivables for reciprocal compensation of
$40.5 million at March 31, 2000, net of allowance, are ultimately collectible.
NETWORK TECHNOLOGIES SERVICES
Network Technologies services revenues decreased $13.8 million, or 77%, to
$4.2 million for the three months ended March 31, 2000, compared with revenues
of $18.0 million for the three months ended March 31, 1999. The decrease in
revenues is attributable the decrease in the size and number of contracts, as
well as the impact of adopting FIN 43 in the third quarter of 1999. The Network
Technologies segment offers construction services, including the sale of
Indefeasible Rights of Use ("IRUs") on portions of e.spire's networks to IXCs
and other customers, fiber optic network design and project management services.
Also, included in Network Technologies revenues are revenues for construction
contracts and grants of IRUs on portions of e.spire's networks to IXCs and other
customers. The Company recognized approximately $5.6 million for the three
months ended March 31, 1999, in revenues from agreements to exchange IRU
multiple fibers along certain sections of e.spire's networks for dissimilar
assets or for IRUs on other companies networks with substantial cash payments.
Included in the three months ended March 31, 2000 and 1999 revenues was
approximately $2.9 million and $9.1 million, respectively, derived from
contracts with three and two major customers, respectively. As previously
disclosed, under FIN 43, the Company is required to recognize revenue for
certain contracts for the provision of dark fiber entered in subsequent to June
30, 1999 as operating leases over the term of the contract. To the extent that
contracts entered into by the Company in the future do not transfer title to
dark fiber and related conduit, the Company's timing of recognition of revenues
will continue to be deferred.
COST OF SALES
For the quarter ended March 31, 2000, compared with the quarter ended March
31, 1999, total cost of sales increased $6.0 million, or 16%, to $43.2 million
from $37.2 million for the three months ended March 31, 1999, as discussed
below.
TELECOMMUNICATIONS SERVICES
Cost of sales for Telecommunications services increased $11.6 million, or
41%, to $39.7 million for the quarter ended March 31, 2000, from $28.1 million
for the same period of 1999. These increases relate to growth in the delivery of
switched, data and special access services and the addition of engineering and
operations personnel dedicated to supporting the network infrastructure.
Included in cost of sales are costs of Telecommunications services paid to
IXCs, ILECs and others for leased telecommunications facilities, access and
services. Such costs increased approximately $6.6 million to approximately $32.8
million for the three months ended March 31, 2000, from approximately $26.2
million for the three months ended March 31, 1999. In addition, network related
personnel costs such as employee salaries and benefits are also included in cost
of sales. For the three months ended March 31, 2000 and 1999, these costs
increased approximately $4.9 million, or 245%, to approximately $6.9 million
from $2.0 million, respectively.
NETWORK TECHNOLOGIES SERVICES
Cost of sales for Network Technologies services decreased $5.6 million, to
approximately $3.5 million for the quarter ended March 31, 2000, compared with
$9.1 million for the same period of 1999. The decrease was due to the decrease
in the size and number of contracts and the mix of revenue during the quarter.
Included in Network Technologies cost of sales are direct materials and labor
associated with the construction of networks and costs associated with
contracted services.
GROSS MARGIN
For the quarter ended March 31, 2000, total gross margin decreased 160
basis points to 34.3% from 35.9% for the quarter ended March 31, 1999, as
discussed below.
TELECOMMUNICATIONS SERVICES
Telecommunications services gross margin increased 580 basis points to
35.5% for the quarter ended March 31, 2000 from 29.7% for the same period
of 1999. These increases were primarily due to increases in sales volume, which
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resulted in increases in reciprocal compensation as described above.
Furthermore, the Company continues to achieve network cost savings through
negotiations with vendors.
NETWORK TECHNOLOGIES SERVICES
Network Technologies services gross margin decreased 3,230 basis points to
17.2% for the three months ended March 31, 2000 from 49.5% for the three months
ended March 31, 1999. The decrease is principally due to change in mix of
revenue. During the three months ended March 31, 1999, the Company's revenue was
principally from dark fiber sales which generally carry a higher margin than the
construction management contracts which comprised the majority of the revenue in
2000.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE
For the quarter ended March 31, 2000, selling, general and administrative
("SG&A") expenses increased $10.3 million, or 28%, to $46.5 million from $36.2
million for the same period of 1999, as discussed below.
Included in SG&A expenses are personnel costs such as employee salaries,
benefits and commissions. Such costs increased $3.8 million, to $18.2 million
for the quarter ended March 31, 2000 from $14.4 million for the quarter ended
March 31, 1999. Also, included in SG&A expenses are operating costs such as
rent, advertising, general administrative and office expenses. These expenses
increased $6.5 million, to $28.3 million for the quarter ended March 31, 2000
from $21.8 million for the quarter ended March 31, 1999.
Increases in SG&A are the result of increases in the Company's personnel
that are necessary to support and grow the Company's operations. Costs directly
related to the increase in personnel include salaries, benefits, bonuses and
commissions. Another significant portion of the SG&A increase is due to
backoffice expenses such as professional services costs which have been
necessary to maintain and improve existing processes. In addition, increases in
costs for facilities and related expenses have been incurred due to an increased
number of office locations and facilities. Also, in connection with the
Company's growth in revenue, bad debt allowances have increased. The Company
continues to monitor on an ongoing basis its SG&A costs to evaluate any costs
that can be eliminated.
NON-CASH STOCK COMPENSATION
Non-cash stock compensation expense decreased $1.4 million, or 47%, to $1.6
million for the quarter ended March 31, 2000, from $3.0 million for the quarter
ended March 31, 1999.
Included in non-cash compensation are accruals for the issuance of common
stock in connection with performance bonuses and costs of grants of employee
stock options. Costs associated with the accrual for performance bonuses were
approximately $1.6 million and $2.1 million for the quarters ended March 31,
2000 and 1999, respectively. The Company did not incur any costs for the
quarter ended March 31, 2000 in association with stock option plans, due to the
Company's granting of stock options at fair market value. The related costs
incurred were $0.9 million for the same period of 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased $8.0 million, or 40%, to
$28.2 million for the quarter ended March 31, 2000, from $20.2 million for the
quarter ended March 31, 1999. These increases were due to an increase in gross
property, plant and equipment to $875.0 million at March 31, 2000, compared
with capital assets of $625.8 million at March 31, 1999.
INTEREST AND OTHER INCOME
Interest and other income decreased $2.9 million, or 67%, to $1.4 million
for the quarter ended March 31, 2000, from $4.3 million for the quarter ended
March 31, 1999. The decrease in interest and other income reflects a decrease in
the cash and cash equivalents and restricted cash and investments balances of
$125.6 million from $247.5 million at March 31, 1999 to $121.9 million at March
31, 2000. These funds have been invested in commercial paper, U.S. Government
Securities and money market instruments.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $6.9 million, or 30%, to $29.7 million
for the quarter ended March 31, 2000, from $22.8 million for the quarter ended
March 31, 1999. The increase was primarily due to the accrual of interest
related to the
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interest incurred in connection with the Credit Facilities, the accrual of
interest related to the 13% Senior Discount Notes due 2005 (the "2005 Notes"),
the 12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") and the interest
expense associated with the Company's capital leases. Also, beginning in the
fourth quarter of 2000, cash interest payments under the 2005 Notes will begin.
NET LOSS & NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the aforementioned increases in revenues, cost of sales,
operating expenses, depreciation and amortization, and interest income and
expense, net loss increased $24.9 million, or 44%, to $82.1 million for the
quarter ended March 31, 2000 from $57.2 million for the quarter ended March 31,
1999. Further, net loss applicable to common stockholders increased $51.2
million, or 77%, to $118.1 million for the quarter ended March 31, 2000 from
$66.9 million for the same period of 1999. These increases to net loss
applicable to common stockholders were attributable to the preferred stock
dividends and accretion related to the 14 3/4% Preferred Stock and the 12 3/4%
Preferred Stock and to the beneficial conversion charge related to the
convertible Preferred Stock issued in the first quarter of 2000. This beneficial
conversion charge was approximately $24.6 million.
The Series A Convertible Preferred Stock was issued at a conversion price
that was less than market price at the time of the funding commitment. Thus,
under Emerging Issues Task Force Issue 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" the Company recognized a beneficial conversion charge of
$24.6 million in the first quarter. The full amount of the charge was
recognized in the first quarter because the Preferred Stock is immediately
convertible into Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's further development and enhancement of new services, the
continued development, construction, expansion, operation and potential
acquisition of networks will require substantial capital expenditures. The
funding of these expenditures is dependent upon the Company's ability to raise
substantial financing. From the Company's inception through March 31, 2000, the
Company has raised net proceeds of approximately $1.4 billion from debt and
equity financings. The Company's cash, cash equivalents and restricted cash
decreased $40.6 million for the three months ended March 31, 2000, due to
capital expended for the expansion of the Company's infrastructure and services
and to fund negative cash flow, including principal and interest payments. The
Company expects to incur additional capital expenditures for the expansion of
its infrastructure and services and to fund negative cash flow in the future. At
March 31, 2000, the Company had approximately $121.9 million of cash, cash
equivalents and restricted cash available for such purposes. In the first
quarter of 2000, the Company announced that it had secured $175 million in
funding commitments from Greenwich Street Capital Partners II, L.P., The Huff
Alternative Income Fund, L.P. and Honeywell International Inc. Master Retirement
Trust. The Company has an additional $36 million available under the Credit
Facilities, contingent upon the Company obtaining an amendment to the financial
covenants under the Credit Facilities as discussed below. The Company has also
entered into stand-by commitment for an additional $50 million in equity
financing, subject to certain conditions. The Company continues to consider
potential arrangements that may fit the Company's strategic plan. Any
arrangements that the Company might consider are likely to require additional
equity or debt financing, which the Company will seek to obtain as required and
which may also require that the Company obtain the consent of its debt holders.
e.spire signed commitment letters with Greenwich Street Capital Partners II,
L.P., and The Huff Alternative Income Fund , L.P. for a total of $125 million in
equity funding. In addition, e.spire signed a commitment letter with Honeywell
International Inc. Master Retirement Trust, in cooperation with Allied Capital
Management, L.L.C., a subsidiary of Honeywell International, Inc. for $50
million in equity funding. Pursuant to the commitment letters, e.spire will
issue 175,000 shares of Series A Convertible Preferred Stock (liquidation
preference $1,000 per share) and 175,000 warrants that will entitle the holders
to purchase, in the aggregate, a total of up to 7.72 million shares of Common
Stock. On March 3, 2000, e.spire completed a private offering of the first
tranche of these securities and received $100.7 million. In connection with the
private offering, e.spire issued 81,777 shares of Series A Convertible Preferred
Stock and 175,000 warrants. The issuance of the remaining shares of Series A
Convertible Preferred Stock may be subject to shareholder approval and
satisfaction of various closing conditions, including the absence of any
material adverse change. Each share of Series A Convertible Preferred Stock is
initially convertible into 126.4 shares of Common Stock (an effective conversion
price of $7.91 per share), and each warrant is initially exercisable for 44.1
shares of Common Stock (at an initial exercise price of $9.89 per share). The
warrants will automatically expire on the tenth anniversary after the date that
they are issued. Dividends on the Series A Preferred Stock accrue from the date
of issuance, are cumulative and are payable quarterly in arrears, at a per annum
rate of 7% of $1,000 (the "stated value"), plus 7.0% of the accrued but unpaid
dividends thereon, subject to an adjustment in the dividend rate to 15% upon the
occurrence of certain events and to 20% upon a change of control.
Dividends on the convertible preferred stock are cumulative and shall accrue
whether or not the company has earnings or profits, whether or not there are
funds legally available for the payment of such dividends and whether or not
dividends are declared by the Company. Dividends on the convertible preferred
stock are payable only when and if declared by the Company; provided that all
accrued but unpaid dividends on any share of convertible preferred stock must be
paid by the Company upon the conversion of such share of convertible preferred
stock. The convertible preferred stock is junior to the 14.75% Redeemable
Preferred Stock and ranks pari passu to the 12.75% Redeemable Preferred Stock.
All dividends will be paid by the Company in shares of its Common Stock
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equal to accrued dividends divided by a rate equal to the effective conversion
price described above or, if no shareholder approval has been obtained, the
closing price of the common stock on March 6, 2000. In connection with the
issuance of the convertible preferred stock, the Company has agreed to certain
restrictive covenants, which are substantially similar to the covenants that
were entered into in connection with the issuance of the Company's 12 3/4%
Redeemable Preferred Stock. The Certificate of Designation provides that these
covenants shall be deemed waived automatically if waived or amended by the
holders of the 12 3/4% preferred stock.
In December 1999, e.spire obtained an additional commitment of $50 million
in capital lease financing from GATX Capital Corporation, a diversified
financial services company, and its telecommunications investing affiliate, GATX
Telecom Investors II-A, L.L.C. (collectively "GATX"). The proceeds will be used
primarily to finance voice switches, including remote modules and associated
software, as well as other related telecommunications networking equipment. As
of December 31, 1999, e.spire had drawn approximately $16 million under these
capital leases. The Company's ability to draw the balance of approximately $34
million is subject to GATX's discretion in light of the Company's EBITDA loss.
On August 12, 1999, the Company entered into the Credit Facilities which
consists of a $35 million revolver, a $55 million multiple draw term loan, each
with a 6.5 year maturity, and a $110 million term loan with a 7 year maturity.
Of the Credit Facilities, a total of $164 million was immediately available to
the Company and was outstanding as of March 31, 2000. The remaining $36 million
is available to the Company contingent upon the Company obtaining an amendment
to the financial covenants under the Credit Facilities. Also, the Credit
Facilities contain an Incremental Facility of up to an additional $100 million,
although no lender is obligated to participate in the Incremental Facility. In
conjunction with the Credit Facilities, the Company retired a $35 million credit
facility with Newcourt Commercial Finance Corporation on August 12, 1999.
The Credit Facilities are collateralized by the capital stock of all of the
restricted subsidiaries of the Company and the assets of the Company and its
restricted subsidiaries, including promissory notes representing intercompany
indebtedness. In addition, the Credit Facilities contain certain covenants,
which impose restrictions on the Company and its restricted subsidiaries. These
include, without limitation, restrictions on the declaration or payment of
dividends with respect to the capital stock of the Company, the conduct of
certain activities, certain investments, the creation of additional liens or
indebtedness, the disposition of assets, transactions with affiliates and
fundamental changes.
The Credit Facilities contain financial covenants with which the Company
must comply, including adjusted EBITDA (Earnings before interest, taxes,
depreciation, amortization, and noncash compensation), debt to capital ratio,
and capital expenditures. The Company was not in compliance with the financial
covenants as of December 31, 1999 and March 31, 2000, resulting in a default
under the Credit Facilities which allows the lenders to accelerate the maturity
of the borrowings under the Credit Facilities. Any such acceleration would also
result in the acceleration of other obligations of the Company, including the
2005 Notes, 2006 Notes, 2007 Notes and 2008 Notes (collectively the "Notes"). In
the event of an acceleration of its outstanding debt obligations, the Company
would not have sufficient liquidity to meet its obligations. On April 13, 2000,
the Company obtained a waiver of the event of non-compliance as of December 31,
1999 and the lenders agreed to a stand still on any actions related to such
non-compliance until June 15, 2000. The Company is currently in discussion with
its lenders and believes that it will be successful in amending its financial
covenants on a going forward basis to amounts that the Company believes will
allow for compliance. However, there can be no assurance that the Company will
be successful in amending its covenants, that the Company will be in compliance
with its debt covenants throughout 2000 or that the Credit Facilities will not
be accelerated, causing an acceleration of other obligations. The Company has
classified its obligation under the Credit Facilities as a current liability as
a result of the debt covenant violation. The Notes cannot be accelerated unless
payment of amounts due under the Credit Facilities is accelerated and therefore,
remain classified as long-term obligations at March 31, 2000. In the event that
the Company is unsuccessful in negotiating amendments to the financial
covenants, the Company believes that it will have access to sufficient financial
resources to ensure that the Notes will not be accelerated.
The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. In accordance with the
terms of its debt facilities, the Company has also deferred payment of most of
its interest charges. During fiscal year 2000, the Company will be required to
make cash interest payments on its 2007 Senior Notes and Senior Secured Credit
Facility. The Company's continued development, construction, expansion, and
operation of local networks, as well as the further development of additional
services, including local switched voice and high-speed data services, will
require continued substantial capital expenditures. The Company's ability to
fund these expenditures is dependent upon the Company raising substantial
financing. To meet its remaining capital requirements and to fund operations
and cash flow deficiencies, the Company will be required to sell additional
equity securities, increase its existing credit facility, acquire additional
credit facilities, sell additional debt securities, or sell certain Company
assets, some of which may require the consent of the Company's bondholders.
There can be no assurance that the Company will be able to obtain the
additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy. Failure to raise sufficient capital
could compel the Company to delay or abandon some or all of its plans or
expenditures, which could have a material adverse effect on its business,
results of operations, and financial condition.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's long-term debt includes both fixed and variable rate
instruments. The fair market value of the Company's fixed rate long-term debt is
sensitive to changes in interest rates. The Company runs the risk that market
rates will decline and the required payments will exceed those based on current
market rate. Under its current policies, the Company does not use interest rate
derivative instruments to manage its exposure to interest rate changes.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Three identical lawsuits have been filed against e.spire and Anthony J.
Pompliano, David L .Piazza and Douglas R. Hudson (former officers of e.spire) by
Mitchell Kranes et al, Randy Pludo et al and Chaim Klein et al on April 20,
2000, April 21, 2000 and April 28, 2000, respectively, in the United States
District Court for the District of Maryland alleging violation of certain
federal securities laws in connection with financial reporting and disclosure
during the period of August 12, 1999 through March 30, 2000. The plaintiffs in
each complaint assert that the intent of these allegedly false statements was to
artificially inflate the stock price so that: insiders could profit; e.spire
could continue its acquisition spree; and e.spire would continue in compliance
with its debt covenants. The lawsuits purport to be class actions on behalf of
those who purchased stock between August 12, 1999 and March 30, 2000. The United
States District Court for the District of Maryland will consolidate the lawsuits
and select lead plaintiff's counsel approximately sixty (60) days after the
first complaint was filed. e.spire believes these claims to be without merit and
intends to vigorously defend itself. The plaintiffs are seeking an unasserted
amount of damages.
In addition, the Company and its subsidiaries are currently parties to other
routine litigation incidental to their business, none of which, individually or
in the aggregate, are expected to have a material adverse effect on the Company.
The Company and its subsidiaries are parties to various court appeals and
regulatory arbitration proceedings relating to certain of the Company's
interconnection agreements and continue to participate in regulatory proceedings
before the FCC and state regulatory agencies
ITEM 2 - CHANGES IN SECURITIES
On March 14, 2000, e.spire issued to Harold VanArnem, 46,444 shares of common
stock pursuant to a Confidential Settlement and Release Agreement dated as of
March 10, 2000. This transaction was consummated as a private transaction
pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
-------- ----------------------------------------------
27 Financial Data Schedule
99 Supplemental Financial Information
(b) Reports on Form 8-K
On February 1, 2000, e.spire filed a Form 8-K disclosing:
On January 25, 2000, e.spire Communications, Inc. issued a press release
announcing that William R. Huff was named as the Chairman of its Board of
Directors. e.spire also announced that Anthony J. Pompliano retired as Chairman
and Chief Executive Officer, effective January 21, 2000.
On January 28, 2000, e.spire issued a press release announcing that Randall
Muench was appointed as Executive Vice President of Sales and Marketing. e.spire
announced that Michael Miller was appointed as President of ACSI Network
Technologies, Inc. a subsidiary of e.spire. Mssrs. Muench and Miller replaced
Richard Putt and Douglas R. Hudson respectively.
On February 14, 2000, e.spire filed a Form 8-K disclosing:
On February 3, 2000, e.spire Communications, Inc. issued a press release
announcing that it has signed commitment letters with Greenwich Street Capital
Partners II, L.P. (GSC Partners) and The Huff Alternative Income Fund, L.P. for
a total of $125 million in new equity funding. e.spire will issue 125,000 shares
of convertible preferred stock and 5.5 million warrants.
On April 5, 2000, e.spire filed a Form 8-K disclosing:
17
<PAGE> 16
On March 30, 2000, e.spire issued a press release announcing that its Board of
Directors has elected George F. Schmitt as Chairman. Mr. Schmitt succeeds
William R. Huff, who has been named Vice Chairman. In addition, the Board
approved Mr. Schmitt's appointment of Christopher J. Resavy as Chief Operating
Officer. e.spire Communications, Inc. issued a second press release announcing
its preliminary 4th quarter and full year financial results.
On March 28, 2000, e.spire Communications, Inc. issued a press release
announcing that Dennis J. Kern resigned as its Chief Operating Officer,
effective March 24, 2000.
On March 14, 2000, Riley M. Murphy, Executive Vice President of Legal and
Regulatory Affairs, General Counsel and Secretary, resigned from e.spire.
Juliette Pryor, e.spire's former Vice President and Associate General Counsel,
assumed Ms. Murphy's primary legal responsibilities as e.spire's General
Counsel, Senior Vice President and Secretary. Jim Falvey, e.spire's former Vice
President of Regulatory Affairs, now oversees all regulatory proceedings and
initiatives as e.spire's Senior Vice President of Regulatory Affairs.
On April 11, 2000, e.spire filed a Form 8-K disclosing:
On April 10, 2000, e.spire Communications, Inc. announced that its Chief
Financial Officer, John R. Polchin, resigned from the Company.
18
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
e.spire Communications, Inc.
----------------------------
(Registrant)
By: /s/ GEORGE F. SCHMITT
------------------------------------
George F. Schmitt,
Chairman of the Board of Directors
and Interim Chief Executive Officer
Date: May 15, 2000
By: /s/ BRADLEY E. SPARKS
------------------------------------
Bradley E. Sparks,
Interim Chief Financial Officer
Date: May 15, 2000
19
<PAGE> 18
<TABLE>
<CAPTION>
INDEX OF EXHIBITS
-----------------
EXHIBIT
NO. DESCRIPTION PAGE NO.
- --- ----------- --------
<C> <S> <C>
27 Financial Data Schedules E-1
99 Supplemental Financial Information E-2
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM e.spire
COMMUNICATIONS, INC. FORM 10-Q FOR THE THREE MONTHS ENDED 3/31/00 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 121,864
<SECURITIES> 0
<RECEIVABLES> 137,593
<ALLOWANCES> (31,216)
<INVENTORY> 6,635
<CURRENT-ASSETS> 234,876
<PP&E> 874,986
<DEPRECIATION> (189,666)
<TOTAL-ASSETS> 976,231
<CURRENT-LIABILITIES> 252,057
<BONDS> 765,175
0
292,618
<COMMON> 520
<OTHER-SE> (390,554)
<TOTAL-LIABILITY-AND-EQUITY> 976,231
<SALES> 0
<TOTAL-REVENUES> 65,777
<CGS> 43,202
<TOTAL-COSTS> 76,301
<OTHER-EXPENSES> (1,395)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,746
<INCOME-PRETAX> (82,077)
<INCOME-TAX> 0
<INCOME-CONTINUING> (82,077)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,077)
<EPS-BASIC> (2.29)
<EPS-DILUTED> (2.29)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
e.spire COMMUNICATIONS, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
YEAR TO DATE - MARCH 31, 2000
($'S IN THOUSANDS)
<TABLE>
<CAPTION>
Networks Placed Networks Placed Networks Placed Networks Placed
in Service in Service in Service in Service
Prior to 12/31/95 During 1996 During 1997 During 1998
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Property, Plant & Equipment $ 176,441 $ 149,102 $ 182,162 $ 61,606
Revenues $ 19,678 $ 12,177 $ 17,314 $ 3,772
EBITDA $ 6,313 $ (1,209) $ 1,007 $ (2,975)
EBIT $ 4,077 $ (3,145) $ (1,408) $ (3,975)
Network Statistics (cumulative)
- -------------------------------
Access Lines Installed 76,262 44,741 53,842 5,415
Fiber Miles 47,609 42,733 46,338 25,209
Route Miles 789 497 400 159
Buildings Connected 1,705 932 1,306 210
Voice Grade Equivalents 909,938 485,627 614,391 82,808
<CAPTION>
Networks Placed
in Service
During 1999 Total
----------------- -------------
<S> <C> <C>
Property, Plant & Equipment $ 139,725 $ 709,035
Revenues $ 1,053 $ 53,994
EBITDA $ (4,040) $ (904)
EBIT $ (5,062) $ (9,512)
Network Statistics (cumulative)
- -------------------------------
Access Lines Installed 1,176 181,436
Fiber Miles 17,368 179,257
Route Miles 337 2,181
Buildings Connected 1 4,155
Voice Grade Equivalents 13,648 2,106,411
</TABLE>
