<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
[ ] 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, HERNDON, VIRGINIA 20170
(Address of principal executive offices)
(703) 639-6000
(Registrant's telephone number, including area code)
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 November 8, 1999 was
51,122,783.
This amended Form 10-Q is being filed to reflect the restatement of certain
previously reported information as more fully described in Note 1 of Notes to
Unaudited Condensed Consolidated Interim Financial Statements contained herein.
Portions of Part I Item 1 - "Financial Statements" and "Notes to Unaudited
Condensed Consolidated Interim Financial Statements", Part I - Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Exhibit 27 - "Financial Data Schedule" have been amended to
reflect the restatement. The remaining information in this amended Form 10-Q has
not been updated to reflect any changes in information that may have occurred
subsequent to the date of the reporting period to which the Form 10-Q relates.
================================================================================
1
<PAGE> 2
e.spire COMMUNICATIONS, INC.
FORM 10 -- Q A
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1999 (unaudited) and
December 31, 1998 1
Condensed Consolidated Statements of Operations -- Three and Nine Months Ended
September 30, 1999 and 1998 (unaudited) 2
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1999 and 1998 (unaudited) 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>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 74,399 $ 328,758
Restricted cash and investments 18,487 30,769
Trade accounts receivable, net of allowance for doubtful accounts of
$21,297 and $5,581 at September 30, 1999 and December 31, 99,542 42,254
1998, respectively
Unbilled revenue 16,615 12,093
Other current assets 5,699 8,742
--------- ---------
Total current assets 214,742 422,616
--------- ---------
Inventory, Networks, equipment and furniture, gross 811,597 561,954
Less: accumulated depreciation and amortization (139,329) (76,020)
--------- ---------
672,268 485,934
Deferred financing fees, net of accumulated amortization of
$11,749 and $7,855 at September 30, 1999 and December 31, 1998,
respectively 45,687 42,184
Intangible assets, net of accumulated amortization of
$9,715 and $3,897 at September 30, 1999 and December 31, 1998,
respectively 8,940 14,743
Restricted cash and investments 0 15,125
Other assets 3,102 2,355
--------- ---------
Total assets $ 944,739 $ 982,957
========= =========
LIABILITIES, REDEEMABLE STOCK, AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 68,927 $ 66,647
Accrued employee costs 11,649 1,682
Other accrued liabilities 11,155 8,894
Notes payable - current portion 110,000 2,188
Obligations under capital leases - current portion 6,332 3,607
Accrued interest 7,456 13,864
--------- ---------
Total current liabilities 215,519 96,882
--------- ---------
Long Term Liabilities:
Notes payable, less current portion 734,103 723,105
Obligations under capital leases, less current portion 32,850 20,915
Other long-term liabilities 4,045 2,745
--------- ---------
Total liabilities 986,517 843,647
--------- ---------
Redeemable stock
14 3/4% Redeemable Preferred Stock due 2008 82,610 70,136
12 3/4% Junior Redeemable Preferred Stock due 2009 188,359 170,908
--------- ---------
Total redeemable stock 270,969 241,044
Stockholders equity (deficit):
Common Stock, $0.01 par value, 125,000,000 shares authorized,
50,536,407 and 48,446,064 shares, respectively, issued and
outstanding 505 484
Additional paid-in capital 235,831 258,317
Accumulated deficit (549,083) (360,535)
--------- ---------
Total stockholders' deficit (312,747) (101,734)
--------- ---------
Total liabilities, redeemable stock and stockholders' deficit $ 944,739 $ 982,957
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
3
<PAGE> 4
e.spire COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 45,461 $ 34,002 $ 130,249 $ 89,120
Network Technologies services 19,655 11,458 56,260 19,561
------------ ------------ ------------ ------------
Total revenues 65,116 45,460 186,509 108,681
Cost of sales:
Telecommunications services 31,170 25,517 87,787 67,644
Network Technologies services 10,170 3,680 30,051 5,150
------------ ------------ ------------ ------------
Total cost of sales 41,340 29,197 117,838 72,794
Gross profit:
Telecommunications services 14,291 8,485 42,462 21,476
Network Technologies services 9,485 7,778 26,209 14,411
------------ ------------ ------------ ------------
Total gross profit 23,776 16,263 68,671 35,887
Operating Expenses
Selling, general and administrative 45,494 28,685 119,547 70,139
Noncash compensation expense 2,384 1,562 7,577 4,989
Depreciation and amortization 25,362 11,551 69,039 28,934
------------ ------------ ------------ ------------
Total Operating Expenses 73,240 41,798 196,163 104,062
Loss from Operations (49,464) (25,535) (127,492) (68,175)
Nonoperating income/expenses
Interest and other income (a) (1,791) (6,930) (9,309) (16,921)
Interest and other expense 24,310 20,171 70,365 52,062
------------ ------------ ------------ ------------
Net loss (71,983) (38,776) (188,548) (103,316)
Preferred stock dividends and accretion 10,305 9,022 30,002 26,122
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (82,288) $ (47,798) $ (218,550) $ (129,438)
============ ============ ============ ============
Basic and diluted net loss per common share $ (1.64) $ (1.00) $ (4.41) $ (2.97)
============ ============ ============ ============
Weighted average number of common
shares outstanding 50,267,001 47,732,934 49,550,227 43,574,670
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
(a) For the three months ended September 30, 1999, Interest and other income
includes a $71 loss associated with the sale of switched resale lines. For the
nine months ended September 30, 1999, Interest and other income includes a $359
gain associated with the sale of switched resale lines.
4
<PAGE> 5
e.spire COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net Loss $(188,548) $(103,316)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 69,039 28,934
Interest deferral and accretion 43,373 24,573
Amortization of deferred financing fees 3,894 2,805
Noncash compensation 7,577 4,088
Non-monetary revenue (17,958) (9,002)
Changes in operating assets and liabilities:
Trade accounts receivable (43,852) (27,389)
Other current assets 3,043 (1,481)
Other assets (747) (571)
Accounts payable 2,280 29,952
Other accrued liabilities 1,043 (815)
--------- ---------
Net cash used in operating activities (120,856) (52,222)
Cash flows from investing activities
Restricted cash related to network activities 2,139
Network development costs and purchases of equipment and furniture (229,741) (149,365)
--------- ---------
Net cash used in investing activities (227,602) (149,365)
Cash flows from financing activities
Issuance of notes payable 110,000 224,959
Issuance of common stock - 134,261
Payment of dividends for preferred stock (85) -
Payment of notes payable (34,563) -
Payment of lease obligation (5,242) (1,978)
Payment of deferred financing fees (7,397) (21,312)
Restricted cash related to financing activities 25,268 27,364
Exercise of warrants, options and other 6,118 14,707
--------- ---------
Net cash provided by financing activities 94,099 378,001
Net (decrease) increase in cash & cash equivalents (254,359) 176,414
Cash and cash equivalents - beginning of period 328,758 260,837
--------- ---------
Cash and cash equivalents - end of period $ 74,399 $ 437,251
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 35,207 $ 30,048
Assets acquired under capital lease $ 19,902 $ 37,025
Dividends declared with preferred stock $ 27,348 $ 23,989
Increase in intangibles $ 14 $ 1
Accrual of stock bonuses $ 6,077 $ 1,859
Stock issued under purchase agreements $ - $ 2,515
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
e.spire COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
NOTE 1: RESTATEMENT
The Company has restated its financial results for the three and nine months
ended September 30, 1999 to reflect the impact on certain transactions of
adopting the provisions of Financial Accounting Standards Board Interpretation
No. 43, "Real Estate Sales: An interpretation of FASB Statement No. 66," which
was effective for all transactions entered into after June 30, 1999. All
disclosures related to the periods presented have been amended, as appropriate,
to reflect the restatement and are summarized as follows ($ in 000's):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues
As reported $67,492 $188,885
As restated $65,116 $186,509
Cost of Sales
As reported $41,752 $118,250
As restated $41,340 $117,838
Net loss
As reported ($70,019) ($186,584)
As restated ($71,983) ($188,548)
Basic and diluted
net loss per common share
As reported ($1.60) ($4.37)
As restated ($1.64) ($4.41)
</TABLE>
NOTE 2: 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 September 30, 1999, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1999 and 1998, and the condensed consolidated statements of
cash flows for the nine months ended September 30, 1999 and 1998, 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 at September
30, 1999, and for all periods presented, have been made. Certain amounts in the
1998 condensed consolidated statements have been reclassified to conform to the
1999 presentation. Operating results for the three and nine months ended
September 30, 1999, 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 audited financial
statements and the related notes included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
6
<PAGE> 7
NOTE 3: 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 $3,362,000 at September 30, 1999, and $1,223,000 at
December 31, 1998. The face amount of all bonds and letters of credit is
approximately $21,681,000 as of September 30, 1999, and $12,292,000 as of
December 31, 1998. In addition, as of September 30, 1999, the Company currently
has approximately $15,125,000 in an escrow account to fund the next interest
payment of its 13 3/4 % senior notes due 2007. The escrow account is invested in
cash equivalents consisting of government and commercial securities.
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 significant portion of the Company's cash resources are committed for
existing obligations. However, management anticipates that the Company's current
cash resources and amounts available under the $200 million Senior Secured
Credit Facilities (the "Credit Facilities") assuming the Company receives a
waiver to the Credit Facilities in order to remedy its default (see Note 3), are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures into 2000. To meet its remaining operating and capital
requirements and to successfully implement its strategy, the Company will be
required to sell additional equity securities, increase its existing Credit
Facilities, acquire additional credit facilities or sell additional debt
securities, certain of which may require the consent of the Company's debt
holders. Also, the Company is currently exploring additional sources of
financing including increases in capital leases. There can be no assurance that
the Company will be able to obtain the additional financing necessary to satisfy
its cash requirements or to implement its strategy successfully, in which event
the Company will be unable to fund its ongoing operations, which would have a
material adverse effect on its business, results of operations and financial
condition.
The Company has recorded revenue of approximately $13.6 million and $32.4
million, respectively, for the three and nine months ended September 30, 1999
and approximately $4.8 million and $11.4 million for the same period of 1998 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. These ILECs have not paid and have disputed the majority of these
charges, based on the belief that such calls are not local traffic, as defined
by the various agreements and under state and federal laws and public policies.
As of September 30, 1999, the Company has received approximately $9.8 million
for reciprocal compensation. The resolution of these disputes will be based on
rulings by state public utility commissions ("PUCs"), the Federal Communications
Commission ("FCC"), the courts and/or commercial arbitrators. The FCC ruled that
ISP-bound traffic is jurisdictionally "interstate in nature", but delegated to
state PUCs the decision of whether reciprocal compensation must be paid under
the terms of local interconnection agreements. e.spire has obtained favorable
rulings from the Georgia and Florida PSCs requiring payment of past due
reciprocal compensation in those states although those rulings have been
appealed by the ILEC. e.spire has several pending proceedings before state PSCs
and commercial arbitrators to collect these amounts. The Company has outstanding
trade accounts receivable related to reciprocal compensation of approximately
$44.8 million at September 30, 1999. 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 these amounts are ultimately collectible.
Certain of the Company's interconnection agreements with the ILECs have
expired or soon will expire. The Company believes that there is a high
probability that the future rates for reciprocal compensation under new
interconnection agreements, some of which are currently in negotiation, may be
significantly less than current rates.
7
<PAGE> 8
NOTE 4: 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.
On August 12, 1999, the Company closed the Credit Facilities consisting 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, of
which the Company drew $110 million. The remaining $36 million becomes available
if the Company is able to complete an additional junior capital raise of at
least $100 million. 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 addition, the Credit Facilities contain financial covenants with which
the Company must comply. The Company is not in compliance with the financial
covenants as of September 30, 1999. Absent a waiver, a default exists under the
Credit Facilities and allows the lenders to accelerate the maturity of the
borrowings under the Credit Facilities. Any such acceleration could also result
in the acceleration of other obligations of the Company, including the 2005
Notes, 2006 Notes, 2007 Notes and 2008 Notes. In the event of an acceleration of
its outstanding debt obligations, the Company would not have sufficient
liquidity to meet its obligations.
The Company is presently seeking, and believes that it is likely to obtain
the waiver to the Credit Facilities in order to remedy its default thereunder.
There can be no assurance that the Company will be successful in obtaining the
waiver that it is seeking or that it will be successful in avoiding acceleration
of its debt obligations. The Company has classified the amounts outstanding
under the Credit Facilities as a current liability in the accompanying unaudited
Condensed Consolidated Balance Sheets.
With the proceeds of the Credit Facilities, the Company retired a secured
credit facility in the amount of $35 million with Newcourt Commercial Finance
Corporation on August 12, 1999.
NOTE 5: NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, " Accounting for Derivative
Instruments and Hedging Activities," which is effective for all quarters of all
fiscal years beginning June 15, 2000. The Company is currently assessing the
impact of this standard.
In June 1999, the FASB issued FASB Interpretation No. 43 ("FIN 43"), "Real
Estate Sales: An interpretation of FASB Statement No. 66," which is effective
for all transactions entered into after June 30, 1999. Under FIN 43, sales,
capital leases and indefeasible rights of use ("IRUs") of dark fiber, conduit
and capacity related to fiber optic cable systems may be required to be
accounted for under FASB No. 66 based upon the terms of the transaction and
components of asset involved. The Company believes that its sales, capital
leases and IRUs of dark fiber, conduit and fiber optic cable systems, to the
extent title is transferred, will continue to meet the criteria for sales type
lease accounting. FIN 43 does not have any effect on the Company's cash flows,
however; in the event that title does not transfer, the effect on the Company's
results of operations can be material.
NOTE 6: SEGMENT REPORTING
During 1998, the Company adopted Statement of Financial Accounting Standard
No. 131 , "Disclosures about Segments of an Enterprise and Related Information."
The Company has identified two reportable segments: Telecommunications services
and Network Technologies services. The Telecommunications services segment
provides special access, local switched voice, data transmission, and Internet
services, over the Company's own facilities, over facilities the Company has
long-term lease agreements for and on a limited resale basis. The Network
Technologies services segment offers construction services, including the sale
of IRUs on portions of e.spire's networks to Interexchange Carriers ("IXCs") and
other customers, fiber optic network design and project management 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 each segment. The reportable total
assets for
8
<PAGE> 9
Telecommunications services and Network Technologies services are approximately
$903.3 million and $41.4 million, respectively at September 30, 1999. Network
Technologies services assets primarily consist of accounts receivable and
property, plant and equipment that are specifically identifiable with Network
Technologies.
9
<PAGE> 10
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, 1998. 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 seeks to be a leading facilities-based integrated communications
provider ("ICP") to small- and medium-sized businesses. The Company is one of
the first Competitive Local Exchange Carriers ("CLECs") to combine the provision
of voice services, such as dedicated access, local, and long distance, with
advanced data services, such as frame relay, asynchronous transfer mode ("ATM"),
dedicated Internet service, and dial-up Internet and web hosting services. The
Company currently offers voice services in 38 U.S. markets where it has
state-of-the-art local fiber optic networks and offers data services in 48 U.S.
markets where it provides access to 388 data points-of-presence ("POPs").
Through its subsidiary, ACSI Network Technologies, Inc. ("ACSI NT"), e.spire
also offers network design and construction services, including the sale of IRUs
on portions of e.spire's networks to IXCs and other customers. Customers include
CLECs, IXCs, corporations, and municipalities in selected markets throughout the
U.S.
While the ILECs, such as BellSouth, SBC Communications, Bell Atlantic, U S
West, and GTE, still dominate most local markets given their long history of
monopoly control, regulatory changes have clearly mandated their markets to be
subject to competition. Enabled by the Federal Telecommunications Act of 1996,
e.spire can bundle a broader suite of service offerings over a wider geography
and price more competitively, than its Regional Bell Operating Company
competitors. Moreover, e.spire has state-of-the-art network technology, compared
to most of the legacy systems and infrastructure of the ILECs. These competitive
advantages have enabled the Company to compete thus far and create the
opportunity for future increases in market penetration. The Company targets
small- and medium-sized businesses for fully bundled voice and high-speed data
services, a niche that the Company believes is largely underserved by the ILECs
and other CLECs.
As of September 30, 1999, e.spire had 131,965 local access lines in service,
of which approximately 92% were on-switch. These lines represent approximately
8,000 customers. The Company's facilities-based network infrastructure is
designed to provide services to customers seeking end-to-end connectivity. As of
September 30, 1999, e.spire's infrastructure was comprised of 3,797 route miles
of fiber in its 38 local voice markets throughout the Southeast and Eastern
seaboard of the United States, 28 Lucent 5ESS voice switches, 110 central office
co-locations, and approximately 26,000 backbone long-haul route miles in its
leased coast-to-coast broadband data network. Further complementing the data
infrastructure, e.spire has 388 data POPs which are a combination of both
e.spire's infrastructure and various network-to-network interconnection
arrangements. e.spire is a Tier 1 Internet provider and has more than 50 public
and private peering arrangements to date, which should ensure robust
connectivity to all Internet destinations. e.spire provides dedicated and
dial-up Internet service and web hosting through its wholly owned subsidiary,
CyberGate, Inc.
10
<PAGE> 11
In the third quarter of 1999, e.spire announced the lighting of its 182-mile
network in New York. In addition, e.spire recently initiated services in five
new Tier 1 cities, Atlanta, South Florida (Ft. Lauderdale/Miami), Philadelphia,
Washington, DC/Northern Virginia and San Antonio, with local fiber-optic
networks and Lucent 5ESS-2000 digital voice switches. Also, the Company has
completed its 194-mile long-haul data, Internet and voice connection of its
fiber-optic networks in New York City, Philadelphia, Baltimore and Washington,
DC/Northern Virginia.
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, have
resulted and will continue to result in a negative cash flow until an adequate
customer base is established. However, as the Company's customer base grows, the
Company expects that as a facilities-based provider, incremental revenues can be
generated with decreasing incremental operating expenses, which will provide
positive contributions to cash flow. 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.
TELECOMMUNICATIONS SERVICES
e.spire's Telecommunications services include local, long distance, special
access services, high-speed data and Internet services, including dial-up and
dedicated Internet access, web hosting, frame relay, and ATM. To become a single
source provider of voice and data services, e.spire has introduced an integrated
product line offering bundled local and long distance together with data and
Internet services. The Company also provides value-added services such as web
hosting, messaging and e-commerce solutions, custom network services (which
includes design, installation, maintenance, hardware, and configuration of a
customer's network), and firewall services (security and monitoring of a
customer's network). In the first quarter of 1999, the Company announced that it
signed an agreement with Covad Communications, Inc. ("Covad") that enables it to
offer digital subscriber line ("DSL") service, a high-speed enabling technology
providing a "last mile" connection to the customer. e.spire is completing its
DSL beta-testing phase with Covad, and expects to introduce its first DSL
service by the end of the fourth quarter of 1999, starting in selected e.spire
markets.
The Company is already expanding its data and Internet offerings to some of
the larger Tier 1 markets across the U.S. During the third quarter of 1999,
e.spire launched dedicated and dial-up Internet service to small- and
medium-sized business customers in 25 cities where it already provides local
switched services.
NETWORK TECHNOLOGIES SERVICES
Through its ACSI NT subsidiary, e.spire designs and constructs high-speed,
advanced fiber-optic networks for third parties, such as other CLECs, IXCs,
corporations, and municipalities. ACSI NT sells IRUs on portions of e.spire's
networks to IXCs and other customers. ACSI NT provides expertise for
engineering, and construction processes and outsources the actual physical
construction work to subcontractors. ACSI NT performs preliminary market
analysis and site assessments, develops business plans, manages liability risk,
and construction, installs fiber, and monitors completed networks.
The continued growth of the Internet and bandwidth-intensive advanced data
services, together with deregulation and technology improvements, has generated
increasing demand for telecommunications network design and construction. ACSI
NT has demonstrated its expertise in building virtually all of e.spire's
high-quality networks for e.spire's own use. It has leveraged its network
expertise to third parties, by developing a business that is low risk,
opportunistic, and a diversified source of revenues with healthy margins, all
with a limited use of the Company's capital.
11
<PAGE> 12
RESULTS OF OPERATIONS
REVENUES
The Company reported an increase in total revenues of $19.7 million, or 43%,
to $65.1 million for the three months ended September 30, 1999, compared with
revenues of $45.5 million for the three months ended September 30, 1998, as
discussed below. For the nine months ended September 30, 1999, total revenues
increased $77.8 million, or 72%, to $186.5 million from $108.7 million for the
same period of 1998, as discussed below.
TELECOMMUNICATIONS SERVICES
The Company reported an increase in Telecommunications services revenues of
$11.5 million, or 34%, to $45.5 million for the quarter ended September 30,
1999, compared with revenues of $34.0 million for the quarter ended September
30, 1998. For the nine months ended September 30, 1999, Telecommunications
services revenues increased $41.2 million, or 46% to $130.3 million from $89.1
million for the nine months ended September 30, 1998. Included in
Telecommunications services are revenues from the dedicated access, switched
local, long distance, and reciprocal compensation and data/Internet products.
The increase in revenues was attributable to the Company's continued 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 bundled service offerings such as e.spire Platinum and Gold. The
Company's revenue during the third quarter of 1999 was adversely affected by
increased revenue reserves for customer churn, related in part to the Company's
previously announced elimination of its local switched resale business.
The Company also increased the number of route miles, fiber miles,
co-locations, buildings connected, voice switches and data POPs. Between
September 30, 1999 and September 30, 1998, the Company increased route miles by
2,146 miles, or 130% and increased fiber miles by 25,878 or 17%. Of the 2,146
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 34 or 45% and
buildings connected increased by 1,371, or 49%. Lucent 5ESS switches deployed
increased to 28 as of September 30, 1999, from 18 as of September 30, 1998. 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 September 30, 1999, from 223 as
of September 30, 1998. Net access lines installed increased by 16,091, or 14% to
131,965 at September 30, 1999, from 115,874 at September 30, 1998. In line with
the Company's previously announced initiative to eliminate local switched
resale, over 60,000 resale lines have been eliminated from the access line base
through forced attrition and a multi-phase sale. At September 30, 1999,
approximately 92% of total installed lines were "on-switch" versus approximately
43% as of September 30, 1998.
Included in Telecommunications services revenues is reciprocal compensation
of approximately $13.6 million and $4.8 million, for the three months ended
September 30, 1999 and 1998, respectively, and approximately $32.4 million and
$11.4 million for the nine months ended September 30, 1999 and 1998,
respectively. 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 and have disputed the
majority of 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 September 30, 1999, the Company has received
approximately $9.8 million for reciprocal compensation. The resolution of these
disputes will be based on rulings by state PUCs, the FCC, the courts and/or
commercial arbitrators. The FCC ruled that ISP-bound traffic is jurisdictionally
"interstate in nature" but delegated to state PUCs the decision of whether
reciprocal compensation must be paid under the terms of local interconnection
agreements. e.spire has obtained favorable rulings from the Georgia and Florida
PSCs requiring payment of past due reciprocal compensation in those states,
although those ruling have been appealed by the ILEC. e.spire has several
pending proceedings before state PSCs and commercial arbitrators to collect
these amounts. 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 these
amounts are ultimately collectible.
12
<PAGE> 13
NETWORK TECHNOLOGIES SERVICES
Network Technologies services revenues increased $8.2 million, or 72%, to
$19.7 million for the three months ended September 30, 1999, compared with
revenues of $11.5 million for the three months ended September 30, 1998. For the
nine month periods ended September 30, 1999 and 1998, Network Technologies
services revenues increased $36.7 million, or 188%, to $56.3 million from $19.6
million, respectively. The increase in revenues is attributable to the continued
growth in the size and number of construction contracts in this expanded
operation. The Network Technologies services segment offers construction
services, including the sale of 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 $2.5 million and $14.4 million
for the three and nine months ended September 30, 1999, respectively, 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 and nine months
ended September 30, 1999, are revenues of approximately $10.7 million and $30.0
million, respectively, derived from contracts with three major customers. The
Company expects to see continued increases in revenues from Network Technologies
due to future growth and expansion in this line of business. The Company's
revenue recognition policies for Network Technologies services could be
adversely effected by FIN 43 in the event that title does not transfer. See Note
5 of the Notes to Unaudited Condensed Consolidated Interim Financial Statements.
COST OF SALES
For the quarter ended September 30, 1999, compared with the quarter ended
September 30, 1998, total cost of sales increased $12.1 million, or 42%, to
$41.3 million from $29.2 million for the three months ended September 30, 1998,
as discussed below. Cost of sales increased $45.0 million, or 62%, to $117.8
million for the nine months ended September 30, 1999 from $72.8 million for the
same period of 1998, as discussed below.
TELECOMMUNICATIONS SERVICES
Cost of sales for Telecommunications services increased $5.7 million, or
22%, to $31.2 million for the quarter ended September 30, 1999, from $25.5
million for the same period of 1998. For the nine months ended September 30,
1999, Telecommunications services cost of sales increased $20.2 million, or 30%,
to $87.8 million from $67.6 million for the nine months ended September 30,
1998. 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 $4.9 million to approximately $27.4
million for the three months ended September 30, 1999, from approximately $22.5
million for the three months ended September 30, 1998. For the nine months ended
September 30, 1999, these costs increased approximately $20.4 million to $79.4
million compared with $59.0 million for the same period of 1998. In addition,
network related personnel costs such as employee salaries and benefits are also
included in cost of sales. For the three months ended September 30, 1999 and
1998, these costs increased approximately $0.7 million, or 23%, to approximately
$3.7 million from $3.0 million, respectively. For the nine months ended
September 30, 1999 and 1998, these costs decreased approximately $0.3 million to
approximately $8.3 million from $8.6 million, respectively.
NETWORK TECHNOLOGIES SERVICES
Cost of sales for Network Technologies services increased $6.5 million, to
approximately $10.2 million for the quarter ended September 30, 1999, compared
with $3.7 million for the same period of 1998. For the nine months ended
September 30, 1999, cost of sales increased $24.9 million to $30.1 million from
$5.2 million for the same period of 1998. Included in Network Technologies cost
of sales are direct materials and labor associated with the construction of
networks and costs associated with contracted services. Increases in the costs
are attributable to the increased growth in this expanded line of business. The
Company expects this growth to continue into the future as the Network
Technologies segment continues to expand.
13
<PAGE> 14
GROSS MARGIN
For the quarter ended September 30, 1999, total gross margin increased 70
basis points to 36.5 percent from 35.8 percent for the quarter ended September
30, 1998, as discussed below. Gross margin increased 380 basis points to 36.8
percent for the nine months ended September 30, 1999, from 33.0 percent for the
same period of 1998, as discussed below.
TELECOMMUNICATIONS SERVICES
Telecommunications services gross margin increased 640 basis points to 31.4
percent for the quarter ended September 30, 1999 from 25.0 percent for the same
period of 1998. For the nine months ended September 30, 1999, telecommunications
services gross margin increased 850 basis points to 32.6 percent from 24.1
percent for the nine months ended September 30, 1998. These increases were
primarily due to increases in sales volume, which 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 1,960 basis points to
48.3 percent for the three months ended September 30, 1999 from 67.9 percent for
the three months ended September 30, 1998. For the nine months ended September
30, 1999, Network Technologies services gross margin decreased 2,710 basis
points to 46.6 percent from 73.7 percent for the nine months ended September 30,
1998. The decrease was due to the broader mix of projects that Network
Technologies services has performed as the operations continue to grow. The
Company expects 1999 margins to be more consistent with future performance.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE
For the quarter ended September 30, 1999, selling, general and
administrative ("SG&A") expenses increased $16.8 million, or 59%, to $45.5
million from $28.7 million for the same period of 1998, as discussed below. SG&A
expenses increased $49.4 million, or 70%, to $119.5 million for the nine months
ended September 30, 1999 from $70.1 million for the same period of 1998, as
discussed below.
Included in SG&A expenses are personnel costs such as employee salaries,
benefits and commissions. Such costs increased $9.2 million, to $16.7 million
for the quarter ended September 30, 1999 from $7.5 million for the quarter ended
September 30, 1998. For the nine months ended September 30, 1999, these costs
increased approximately $23.7 million to $46.2 million compared with $22.5
million for the same period of 1998. Also, included in SG&A expenses are
operating costs such as rent, advertising, general administrative and office
expenses. These expenses increased $7.6 million, to $28.8 million for the
quarter ended September 30, 1999 from $21.2 million for the quarter ended
September 30, 1998. For the nine months ended September 30, 1999, these costs
increased approximately $25.8 million to $73.4 million compared with $47.6
million for the same period of 1998.
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. Costs
associated with Year 2000 remediation efforts have also contributed to the
increases. The Company continues to monitor on an ongoing basis its SG&A costs
to evaluate any costs that can be eliminated.
14
<PAGE> 15
NON-CASH STOCK COMPENSATION
Non-cash stock compensation expense increased $0.8 million, or 53%, to $2.4
million for the quarter ended September 30, 1999, from $1.6 million for the
quarter ended September 30, 1998. Non-cash stock compensation expenses increased
$2.6 million, or 52%, to $7.6 million for the nine months ended September 30,
1999 from $5.0 million for the same period of 1998.
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 $2.0 million and $1.0 million for the quarters ended September 30,
1999 and 1998, respectively, and $6.1 million and $3.3 million for the nine
months ended September 30, 1999 and 1998, respectively. The costs for the
compensation associated with stock option plans was approximately $0.4 million
for the quarter ended September 30, 1999, and $0.6 million for the same period
of 1998. For the nine months ended September 30, 1999, stock option plan costs
were approximately $1.5 million compared with $1.7 million for the nine months
of 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased $13.8 million, or 120%, to
$25.4 million for the quarter ended September 30, 1999, from $11.6 million for
the quarter ended September 30, 1998. Depreciation and amortization expenses
increased $40.1 million, or 139%, to $69.0 million for the nine months ended
September 30, 1999 from $28.9 million for the same period of 1998. These
increases were due to an increase in gross property, plant and equipment to
$811.6 million at September 30, 1999, compared with capital assets of $467.5
million at September 30, 1998.
INTEREST AND OTHER INCOME
Interest and other income decreased $5.1 million, or 74%, to $1.8 million
for the quarter ended September 30, 1999, from $6.9 million for the quarter
ended September 30, 1998. Interest and other income decreased $7.6 million, or
45%, to $9.3 million for the nine months ended September 30, 1999 from $16.9
million for the same period of 1998. Included in interest and other income for
the three months ended September 30, 1999 is a loss of approximately $0.1
million and for the nine months ended September 30, 1999, a gain of
approximately $0.4 million associated with the sale of certain resale customer
lines and the related accounts receivable. The sale of the customer base was
part of the Company's strategy to eliminate its switched resale business. The
decrease in interest and other income reflects a decrease in the unrestricted
cash and cash equivalents balance of $388.9 million from $481.8 million at
September 30, 1998 to $92.9 million at September 30, 1999. 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 $4.1 million, or 21%, to $24.3 million
for the quarter ended September 30, 1999, from $20.2 million for the quarter
ended September 30, 1998. Interest and other expense increased $18.3 million, or
35%, to $70.4 million for the nine months ended September 30, 1999 from $52.1
million for the same period of 1998. The increase was primarily due to the
accrual of interest related to the 10 5/8% Senior Discount Notes due 2008 (the
"2008 Notes") which were issued in July 1998 and the interest incurred in
connection with the Credit Facilities. Furthermore, 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 contributed to the increase in
interest expense.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreased by $9.4 million, or 75%, to a loss of $21.8 million for the quarter
ended September 30, 1999, from a loss of $12.4 million for the same period of
1998. EBITDA decreased $16.2 million, or 47% to $50.5 million for the nine
months ended September 30, 1999 from $34.3 million for the same period of 1998.
The decrease was due to the increases in cost of sales and SG&A expenses which
offset the increases in revenues as discussed above. Also, the Company's EBITDA
during the third quarter of 1999 was adversely affected by increased revenue
reserves for customer churn, related in part to the Company's previously
announced elimination of its local switched resale business.
15
<PAGE> 16
EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, non-cash stock compensation and, for the quarter
and year-to-date periods ended September 30, 1999, includes a gain of
approximately $0.4 million associated with the sale of certain resale customer
lines and the related accounts receivable. EBITDA is a measure commonly used in
the telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash flow
or results of operations in accordance with generally accepted accounting
principles.
NET LOSS & NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the previously discussed increases in revenues, cost of
sales, operating expenses, depreciation and amortization, and interest income
and expense, net loss increased $33.2 million, or 86%, to $72.0 million for the
quarter ended September 30, 1999, from a loss of $38.8 million for the quarter
ended September 30, 1998. Net loss increased $85.2 million, or 83% to $188.6
million for the nine months ended September 30, 1999 from $103.3 million for the
same period of 1998. Furthermore, net loss applicable to common stockholders
increased $34.5 million, or 72%, to $82.3 million for the quarter ended
September 30, 1999, from a loss of $47.8 million for the same period of 1998.
For the nine months ended September 30, 1999, net loss applicable to common
stockholders increased $89.2 million, or 69%, to $218.6 million from $129.4
million for the same period of 1998. These increases to net loss applicable to
common stockholders are attributable to the changes mentioned above, as well as
an increase in preferred stock dividends and accretion related to the 14 3/4%
Preferred Stock and the 12 3/4% Preferred 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 September 30, 1999,
the Company has raised net proceeds of approximately $1.2 billion from debt and
equity financings. The Company's cash, cash equivalents and restricted cash
decreased $281.8 million for the nine months ended September 30, 1999, 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
September 30, 1999, the Company had approximately $92.9 million of cash, cash
equivalents and restricted cash available for such purposes. Also, the Company
has an additional $54 million available, contingent upon the Company obtaining a
waiver related to the Company's default under the Credit Facilities as discussed
below. In addition, the Company would have an additional $36 million available
under the Credit Facilities if it is able to complete an additional junior
capital raise of at least $100 million. The Company continues to consider
potential acquisitions or other arrangements that may fit the Company's
strategic plan. Any such acquisitions or 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.
On August 12, 1999, the Company closed 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. The remaining $36 million will become available if the Company is able
to complete an additional junior capital raise of at least $100 million. 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. As of September 30, 1999, the Company had $110 million outstanding
under the Credit Facilities. 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 secured 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.
16
<PAGE> 17
In addition, the Credit Facilities contain financial covenants with which
the Company must comply. The Company is not in compliance with the financial
covenants as of September 30, 1999 and, as a result a default exists under the
Credit Facilities. Absent a waiver from the lender group, this default negates
any additional borrowings and allows the lenders to accelerate the maturity of
the borrowings under the Credit Facilities. Any such acceleration could also
result in the acceleration of other obligations of the Company, including the
2005 Notes, 2006 Notes, 2007 Notes and 2008 Notes. In the event of an
acceleration of its outstanding debt obligations, the Company would not have
sufficient liquidity to meet its obligations.
The Company is presently seeking, and believes that it is likely to obtain a
waiver under the Credit Facilities of its non-compliance with the financial
covenants in order to remedy its default thereunder. However, there can be no
assurance that the Company will be successful in obtaining the waiver that it is
seeking or that it will be successful in avoiding acceleration of its debt
obligations. The Company has classified the amounts outstanding under the Credit
Facilities as a current liability in the accompanying unaudited Condensed
Consolidated Balance Sheet.
A significant portion of the Company's cash resources are committed to
existing obligations. However, management anticipates that the Company's current
cash resources, assuming the Company receives a waiver to the Credit Facilities,
are sufficient to fund the Company's continuing negative cash flow and required
capital expenditures into 2000. To meet its additional remaining capital
requirements and to successfully implement its strategy, the Company will be
required to sell additional equity securities, increase its existing Credit
Facilities, acquire additional credit facilities or sell additional debt
securities. The Company is currently exploring additional sources of financing
including increases to its existing capital lease programs. Accordingly, there
can be no assurance that the Company will be able to obtain the additional
financing necessary to satisfy its cash requirements or to implement its
strategy successfully, in which event the Company will be unable to fund its
ongoing operations, which would have a material adverse effect on its business,
results of operations and financial condition.
On November 14, 1995, the Company completed a private offering of the 2005
Notes and warrants from which the Company received approximately $96.1 million
in net proceeds. The 2005 Notes will accrue to an aggregate principal amount of
$190.0 million by November 1, 2000, after which cash interest will accrue and be
payable on a semi-annual basis.
On March 21, 1996, the Company completed a private offering of the 2006
Notes from which the Company received net proceeds of approximately $61.8
million. The 2006 Notes will accrue to an aggregate principal amount of $120.0
million by April 1, 2001, after which cash interest will accrue and be payable
on a semi-annual basis.
On July 10, 1997, the Company completed the issuance and sale of 75,000
units (the "Unit Offering"), consisting of 14 3/4% Redeemable Preferred Stock
due 2008 and warrants (the "Unit Warrants") from which the Company received net
proceeds of approximately $67.7 million. Dividends on the 14 3/4% Preferred
Stock accrue from the date of issuance, are cumulative and are payable quarterly
in arrears, at a rate per annum of 14 3/4% of the liquidation preference per
share. Dividends on the 14 3/4% Preferred Stock will be paid, at the Company's
option, either in cash or by the issuance of additional shares of 14 3/4%
Preferred Stock; provided, however, that after June 30, 2002, to the extent and
for so long as the Company is not precluded from paying cash dividends on the 14
3/4% Preferred Stock by the terms of any then outstanding indebtedness or any
other agreement or instrument to which the Company is then subject, the Company
shall pay dividends on the 14 3/4% Preferred Stock in cash.
On July 23, 1997, the Company completed the sale of the 2007 Notes. Of the
total net proceeds of $204.3 million, the Company placed $70.0 million
representing funds sufficient to pay the first 5 interest payments on the 2007
Notes into an escrow account for the benefit of the holders thereof. Payments of
interest on the 2007 Notes are payable semi-annually, and began in January 1998.
In October 1997, the Company issued the 12 3/4% Preferred Stock from which
the Company received net proceeds of approximately $146.0 million. Dividends on
the 12 3/4% Preferred Stock accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, at a rate per annum of 12 3/4% of the
liquidation preference per share. Dividends on the 12 3/4% Preferred Stock will
be paid, at the Company's option, either in cash or by the issuance of
additional shares of 12 3/4% Preferred Stock; provided, however, that after
October 15, 2002, to the extent and for so long as the Company is not precluded
from paying cash dividends on the 12 3/4% Preferred Stock by the terms of any
agreement or instrument governing any of its then outstanding indebtedness, the
Company shall pay dividends on the 12 3/4% Preferred Stock in cash.
On March 31, 1998, the Company restructured certain leases resulting in a
change from operating to capital lease treatment. This transaction resulted in
capital lease obligations totaling $39.2 million, being included in liabilities
as of September 30, 1999.
17
<PAGE> 18
On July 24, 1998, the Company completed a private placement of 10 5/8%
Senior Discount Notes due 2008 yielding net proceeds to the Company of
approximately $225 million. The 2008 Notes will accrue to an aggregate principal
amount of $375 million by July 2008. The 2008 Notes will require payment of cash
interest semi-annually in arrears beginning January 1, 2004.
YEAR 2000 PROGRAM
The Year 2000 problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Overview of Company Year 2000 Preparations
The Company began preparing for Year 2000 in 1997 by establishing a Year
2000 Readiness Program. The Company subsequently established a company-wide Year
2000 Program Management Office ("PMO"). The PMO leads the Company's Year 2000
Readiness efforts, with support from a consulting firm, which is Year 2000
certified by the Information Technology Association of America. The Company has
completed a comprehensive systems assessment of its Year 2000 readiness. The
assessment reviewed both the hardware and software for the Company's
telecommunications network, information systems, network construction and
Internet services. The Company is near completion of its remediation and
contingency planning efforts.
Year 2000 Readiness and Testing
The Company has evaluated its network structure, telecommunications software
and hardware, and systems against the testing results of the Telco Year 2000
Forum and the Alliance for Telecommunications Industry Solutions. According to
this evaluation, the Company believes that its telecommunications network is
Year 2000 compliant. The Company has evaluated and, if necessary, tested,
mission critical systems used in network construction and determined that these
systems are Year 2000 compliant. The Company has evaluated and, if necessary,
tested, mission critical systems used for delivery of Internet services and
believes that these systems are also Year 2000 compliant. For the purposes of
this disclosure, the Company defines the term "mission critical" to mean: any
component or system involved in the delivery of telecommunication, internet or
network construction services.
To the best of its current knowledge, substantially all of the Company's
non-mission critical systems and functional areas are believed to be Year 2000
compliant. In the case of its critical back office business applications, the
determination of Year 2000 readiness was made on the basis of real time date
testing. In the case of non-critical back office business information systems,
the Company relied on vendor representations. Items were deemed to be critical
if they directly impacted the Company's ability to deliver its services.
The Company has also established a process to assess the Year 2000 readiness
of certain of its vendors and business partners to determine whether, as a
corporate entity, these businesses will survive the turn of the century, and, as
a result, support the Company. The Company identified 127 of these entities and
has completed its assessment of their Year 2000 readiness. The Company has
placed these entities into one of four categories based on its evaluation. For
entities in the lowest category of Year 2000 readiness, alternate vendors and
business partners may be chosen.
Costs of the Company's Year 2000 Program
As of September 30, 1999, the Company has incurred approximately $3.0
million cumulatively for the initial Year 2000 Assessment Report, inventory
database and validation, remediation and contingency planning efforts. The total
cost of the Year 2000 project is currently expected to be no more than the $5 to
$6 million originally estimated and will be expensed as incurred and funded with
existing cash resources. The costs of the project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived from numerous assumptions of
future events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved, and actual results could differ
materially from those anticipated.
18
<PAGE> 19
Risks to the Company
There are many risks to the Company associated with the Year 2000 issue.
These risks include outages in the Company's telecommunications network,
critical technology and information systems. While the Company has taken steps
to mitigate the possibility of outages, an outage could have a material adverse
affect on the Company. An outage might prevent the Company from delivering data,
connecting calls, completing construction projects, or hosting Internet
services. A further risk is the failure of other companies to remediate their
own Year 2000 problems. If third party vendors do not remediate prior to the
Year 2000, the most reasonably likely worst case scenario is that the Company
may have significant problems associated with service fulfillment, billing,
trouble reporting and service providing. Third party failures could have a
material adverse impact on the Company. The Company is not presently aware of
any third party Year 2000 issue that is likely to result in this kind of
disruption.
The Company's Contingency Plans
The Company's Year 2000 plan includes risk assessment and contingency
planning processes that are designed to provide alternative courses of action
for the Company to follow if any of the remediation efforts are not successful,
or if a supplier's processes or products are not Year 2000 ready. The Company
has completed the initial phase of its contingency planning process. Final
contingency plans are being developed by the Company's business process owners,
in consultation with the Company's Year 2000 consultants, to address both minor
and catastrophic events occurring as a result of the Year 2000. Throughout the
remainder of the year, the Company will test, assess, and if necessary modify
these contingency plans.
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.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company and its subsidiaries are currently parties to 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 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------
<S> <C> <C>
11 Statement re computation of per share earnings
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On July 8, 1999, e.spire filed an 8-K announcing that the Company had authorized
Goldman Sachs Credit Partners L.P., as Syndication Agent, to seek to arrange
$200 million of 6.5-7.0 year Senior Secured Credit Facilities consisting of $125
million secured pro rata facilities unfunded at closing and a $75 million
secured term loan facility funded at closing; with The Bank of New York serving
as Administrative Agent; First Union National Bank serving as Documentation
Agent; and Newcourt Capital, e.spire's principal then existing secured lender,
serving as Collateral Agent.
On October 28, 1999, e.spire issued a press release announcing its financial
results for the quarter ended September 30, 1999 and a press release announcing
the resignation of its Chief Financial Officer.
On November 1, 1999, e.spire issued a press release announcing that William R.
Huff and Frederick Galland have been named to its Board of Directors. e.spire
also announced that Olivier L. Trouveroy and Benjamin P. Giess had resigned from
e.spire's Board of Directors, effective October 29, 1999.
20
<PAGE> 21
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
e.spire Communications, Inc.
----------------------------
(Registrant)
/s/ George F. Schmitt
----------------------
George F. Schmitt,
Chairman and Interim Chief Executive
May 11, 2000 Officer
/s/ Bradley E. Sparks
---------------------
Bradley E. Sparks
May 11, 2000 Interim Chief Financial Officer
21
<PAGE> 22
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- --- ----------- --------
<S> <C> <C>
11 Statement re: computation of per-share earnings (loss) E-1
27 Financial Data Schedules E-2
</TABLE>
22
<PAGE> 1
EXHIBIT 11
e.spire COMMUNICATIONS, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Loss $ (71,983) $ (38,776) $ (188,548) $ (103,316)
Less: Preferred Stock Accretion 10,305 9,022 30,002 26,122
------------ ------------ ------------ ------------
Net Loss to Common Stockholders (82,288) (47,798) (218,550) (129,438)
Add: Convertible Preferred Dividends Saved 10,305 9,022 30,002 26,122
Net Loss to Common Stockholders, Dilutive Basis $ (71,983) $ (38,776) $ (188,548) $ (103,316)
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING
Weighted Average Number of
Common Shares Outstanding 50,267,001 47,732,934 49,550,227 43,574,670
Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury stock 4,904,199 10,909,882 4,904,199 10,909,882
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares outstanding 55,171,200 58,642,816 54,454,426 54,484,552
============ ============ ============ ============
PER SHARE AMOUNTS
Basic earnings per share $ (1.64) $ (1.00) $ (4.41) $ (2.97)
============ ============ ============ ============
Diluted earnings per share $ (1.30) $ (0.66) $ (3.46) $ (1.90)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM e.spire
COMMUNICATIONS FORM 10-Q A FOR THE NINE MONTHS ENDED 9/30/99 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 92,886
<SECURITIES> 0
<RECEIVABLES> 137,454
<ALLOWANCES> (21,297)
<INVENTORY> 5,699
<CURRENT-ASSETS> 214,742
<PP&E> 811,597
<DEPRECIATION> (139,329)
<TOTAL-ASSETS> 944,739
<CURRENT-LIABILITIES> 215,519
<BONDS> 734,103
0
270,969
<COMMON> 505
<OTHER-SE> (312,747)
<TOTAL-LIABILITY-AND-EQUITY> 944,739
<SALES> 0
<TOTAL-REVENUES> 186,509
<CGS> 117,838
<TOTAL-COSTS> 196,163
<OTHER-EXPENSES> (9,309)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,365
<INCOME-PRETAX> (188,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> (188,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (188,548)
<EPS-BASIC> (4.41)
<EPS-DILUTED> (4.41)
</TABLE>
