Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] 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: 0-23253
----------------
ITC/\DELTACOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2301135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1791 O.G. Skinner Drive, West Point, Georgia 31833
(Address of principal executive offices)
(706) 385-8000
Registrant's telephone number, including area code
----------------
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
----------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant at March 28, 2001, based upon the last reported
sale price of the registrant's common stock on the Nasdaq National Market on
that date, was $267,000,000.
The number of shares of the registrant's common stock outstanding on March
28, 2001 was 62,202,505.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the proxy statement for the 2001 annual meeting of
stockholders of the registrant is incorporated by reference into Part III
hereof.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 23
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 24
Item 6. Selected Financial Data....................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 41
Item 8. Financial Statements and Supplementary Data................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant............ 41
Item 11. Executive Compensation........................................ 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 42
Item 13. Certain Relationships and Related Transactions................ 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 42
Index to Consolidated Financial Statements.............................. F-1
i
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and "plan" as they relate to
ITC/\DeltaCom, Inc. or our management are intended to identify these forward-
looking statements. All statements by ITC/\DeltaCom, Inc. regarding our expected
future financial position and operating results, our business strategy, our
financing plans, forecasted trends relating to the markets in which we operate
and similar matters are forward-looking statements. We cannot assure you that
our expectations expressed or implied in these forward-looking statements will
turn out to be correct. Our actual results could be materially different from
our expectations as a result of, among other factors, the factors discussed
under the caption "Business--Risk Factors." We undertake no obligation to
update or revise publicly any forward-looking statements, whether as a result
of new information, future events or otherwise.
Some of the information contained in this report concerning the markets and
industry in which we operate is derived from publicly available information and
from industry sources. Although we believe that this publicly available
information and the information provided by these industry sources are
reliable, we have not independently verified the accuracy of any of this
information.
Unless we indicate otherwise, references in this report to "we," "us," "our"
and "ITC/\DeltaCom" mean ITC/\DeltaCom, Inc. and its subsidiaries and
predecessors. Unless we indicate otherwise, we have rounded dollar amounts over
$1 million to one decimal place and dollar amounts less than $1 million to the
nearest thousand.
ii
PART I
Item 1. Business.
Overview
We provide integrated voice and data telecommunications services to mid-
sized and major regional businesses in the southern United States and are a
leading regional provider of wholesale long-haul services to other
telecommunications companies. In connection with these businesses, we own,
operate and manage an extensive fiber optic network in the southern United
States. We had revenues of approximately $363.6 million in 2000, which
represented a 49% increase over our revenues of $244.8 million in 1999.
We operate our business in three segments: retail services, broadband
transport services and e/\deltacom. Through our retail services operations, we
provide local telephone services, long distance telephone services, data
services, Internet services, customer premise equipment sale, installation and
maintenance services and related telecommunications services to customers in 37
markets in the southern United States. Through our broadband transport services
operations, we sell wholesale long-haul telecommunications transmission
capacity to, and direct and transport telecommunications traffic for, other
telecommunications companies using our fiber optic network. Through our
e/\deltacom operations, which we inaugurated in March 2000, we provide customers
with colocation services, managed services and professional services primarily
through e/\deltacom's data center in Suwanee, Georgia. As part of these
services, e/\deltacom provides Web server hosting services integral to the
operation of important business applications over the Internet and a wide range
of optional configurations and services that include:
. cabinet, caged and suite space;
. metered power;
. network management;
. firewall management;
. disaster recovery; and
. circuits that connect customer premises to our network.
To accelerate e/\deltacom's positioning in the market place, in May 2000 we
acquired Bay Data Consultants, Inc., a provider of technical solutions
specializing in applications solutions, project management, e-commerce,
security, enterprise solutions, network integration services, wide area network
and carrier relations, storage management, managed services and systems
management. We believe the addition of Bay Data Consultants has provided us
with expertise, staffing and customer relationships that will facilitate our
penetration of e/\deltacom's target market. That market consists primarily of e-
businesses, application service providers and enterprise customers seeking
advanced infrastructure for their important business applications and related
services that are provided by experienced technology professionals.
During 2000, our operational achievements included the following:
. we obtained a $160 million syndicated senior secured credit facility from
Morgan Stanley Senior Funding, Inc., Bank of America, N.A. and other
lenders;
. we reached a settlement with BellSouth Telecommunications, Inc. over
BellSouth's obligation to pay us reciprocal compensation for local calls
placed by customers of BellSouth and terminated to our customers;
. we obtained a $40 million capital lease facility from NTFC Capital
Corporation;
. we launched a suite of product solutions based on the Internet protocol,
including Internet protocol bandwidth, virtual private networks based on
the Internet protocol, Internet security solutions, such as managed
firewalls and intrusion detection services, and remote dial access;
1
. we opened the initial portion of e/\deltacom's data center and began
offering a suite of colocation, hosting, managed and professional
services from the center;
. we completed the installation of 51 access nodes, which facilitate the
efficient delivery of customer traffic from the edges of our fiber optic
network onto our network's core, raising our total number of operational,
colocated access nodes to 176;
. we installed Nortel DMS-500 switches, which are network components that
connect customers to, and transmit voice and data communications over,
our network, in West Palm Beach, Florida, Nashville, Tennessee and
Houston, Texas, increasing our total number of voice switches in
operation to 13;
. we installed 33 Unisphere SMX-2100 switches, which also connect customers
to, and transmit voice and data communications over, our network,
increasing our total number of Unisphere SMX-2100 switches to 37;
. we added Nortel CVX 1800 access switches, which are designed with
universal port capabilities, to each of our 12 DMS-500 switch sites to
facilitate our Internet protocol-based virtual private network service
offering;
. we opened branch offices in Augusta, Georgia and in Chattanooga,
Knoxville and Nashville, Tennessee, increasing our market coverage to 37
branch offices operating in 37 markets; and
. we completed the addition of approximately 1,390 route miles of fiber
optic cable that we own to our network, establishing routes in Tennessee
and Texas and raising our total route miles to approximately 9,640.
We are incorporated in Delaware. Our principal executive offices are located
at 1791 O.G. Skinner Drive, West Point, Georgia 31833, and our telephone number
at that address is (706) 385-8000.
Services and Facilities
Services. We currently provide three basic services:
. integrated voice and data telecommunications services on a retail basis,
which we refer to as our "retail services";
. wholesale long-haul telecommunications transmission services to other
telecommunications companies, which we refer to as our "broadband
transport services"; and
. colocation services, managed services and professional services through
our e/\deltacom division.
Retail Services. Our retail services involve the provision of voice and data
telecommunications services to end users and resellers. These retail services
include:
. local telephone services;
. long distance telephone services;
. toll calling, calling card and operator services;
. asynchronous transfer mode, frame relay and high-capacity broadband
private line services;
. primary rate interface connectivity and colocation services to Internet
service providers;
. enhanced services, including conference calling, fax broadcasting and
pre-paid calling cards;
. consulting, integration, operation and proactive management of data
networks;
. in-depth network performance analysis and implementation and design
services for data network deployment;
. Internet and Web page hosting services; and
. customer premise equipment sales, installation and maintenance.
2
We intend to provide additional types of retail services and expand the
markets in which we offer customers our comprehensive bundle of value-added
telecommunications services generally over our network. Our customer-focused
software and network architecture permits us to present our customers with one
fully-integrated monthly billing statement for the entire package of retail
services they purchase from us.
Local Telephone Services. We currently provide local telephone services by
using our network and facilities and by reselling the services of the former
monopoly local telephone companies, which we refer to as the "incumbent
carriers." Since our initial offering of local service in 1997, we have
steadily increased the percentage of services we provide over our network and
facilities compared to the services we provide by reselling the services of the
incumbent carriers. We offer local telephone services in all 37 markets in
which we currently provide retail services.
In connection with offering local telephone services, we have entered into
interconnection agreements with BellSouth, SBC Communications Inc., Sprint
Corporation and Verizon Communications Inc. to resell the local telephone
services of these incumbent carriers and interconnect our network with the
networks of these incumbent carriers for the purpose of gaining immediate
access to their unbundled network elements. These interconnection agreements
currently allow us to provide local service on a resale basis or by purchasing
the unbundled network elements required to provide local service over our
network and facilities. These agreements allow us to enter new markets with
minimal capital expenditures and to offer local service to our current customer
base. The terms of the interconnection agreements, including interim pricing
terms agreed to by us and these incumbent carriers, have been approved by state
regulatory authorities, although they remain subject to review and modification
by such authorities. We believe, but cannot assure you, that these
interconnection agreements provide a foundation for us to provide local service
on a reasonable commercial basis. Factors that may adversely affect our ability
to provide local service on a reasonable commercial basis include unsettled
legal and regulatory issues, legal and regulatory developments and existing
operational issues with the incumbent carriers that are not resolved by the
interconnection agreements.
BellSouth is the incumbent carrier in a majority of the markets in which we
offer local services. Our interconnection agreement with BellSouth, which we
entered into in March 1997 and that governed our ability to gain access to
BellSouth's unbundled network elements in all states where BellSouth is the
incumbent carrier, expired on July 1, 1999. We have entered into new
interconnection agreements with BellSouth for Florida and North Carolina and
have opted into an additional interconnection agreement between WorldCom, Inc.
and BellSouth for Mississippi. Although the Mississippi agreement has expired,
we will continue to operate under it until a new interconnection agreement is
completed for Mississippi. We are currently in the process of finalizing new
interconnection agreements in Alabama, Georgia, South Carolina and Tennessee
and expect to finalize interconnection agreements with BellSouth for Kentucky,
Louisiana and Mississippi thereafter. We expect that the terms and conditions
of these agreements will be similar to those that we obtained in our Florida
and North Carolina agreements. We will continue to operate under the expired
1997 interconnection agreement in all states where BellSouth is the incumbent
carrier, except Florida, Mississippi and North Carolina, until new
interconnection agreements are completed for those remaining states.
Our strategy is to offer facilities-based local service in a majority of our
markets by colocating our equipment with that of the incumbent carriers with
which we have interconnection agreements. We began colocating our equipment in
some of BellSouth's central office locations during the first quarter of 1998.
As of December 31, 2000, we had completed physical colocation of 176 access
nodes and were offering our "Unity" service in all of the 37 markets in which
we provided our retail services. The Unity service, which we market primarily
to mid-sized and major regional businesses, connects our customer's location to
one of our switches using a direct T-1 digital connection and provides the
customer with local and long distance calling capacity on any of the T-1's 24
available channels.
In June 2000, we signed an agreement with BellSouth to offer a UNE-P, or
unbundled network element- platform, service in all of the BellSouth markets.
To provide the UNE-P service, we purchase all of the required facilities of
BellSouth at advantageous prices. This allows us to convert existing resale
customers to facilities-based customers and facilitates higher gross margins.
Because of BellSouth operational delays, we did
3
not begin to offer this service to our customers until the fourth quarter of
2000. Through February 2001, we had converted over 20,000 resale customers to
our UNE-P service and we expect to continue to convert resale customers to this
service during 2001. We expect that this conversion will have a favorable
impact on our gross margins.
Long Distance Telephone Services. We offer a wide range of retail long
distance telephone services, including traditional switched and dedicated long
distance, toll calling, international, calling card and operator services.
Data Services. We provide a variety of data services to our customers,
including point-to-point, asynchronous transfer mode, frame relay and Internet
protocol-based virtual private networking services. Our network equipment
enables customers to use a single network connection to communicate with
multiple connection sites throughout our fiber optic network. We will continue
to seek, through strategic business relationships with other providers, to
interconnect our fiber optic network with the fiber optic networks of those
other providers.
In the fourth quarter of 1999, we began offering our Integrated-T service,
which allows our customers to use a single digital T-1 transmission line for
both voice and data services, including frame relay, Internet access and
private line services. The Integrated-T service enables our customers to take
advantage of advanced features and lower costs offered by digital access and
offers the convenience of one service provider for voice and data services.
This product enables us to take advantage of our existing voice services and
network infrastructure by selling additional services, such as data services,
over the same transmission line.
In February 2001, we announced three new services intended to enhance our
current data offerings to mid-sized businesses and to take advantage of our
existing network infrastructure. These products include virtual private
networking services based on the Internet protocol, Internet security services,
including managed firewall services and our Intrusion Detection Service, and
network managed services. Our virtual private network offering provides our
customers with a dedicated line or secure dial-up access between multiple sites
allowing the same level of security, performance and availability as a private
network. The managed firewall service and our Intrusion Detection Service
provide our customers security for Internet connections and reduce our
customer's capital expenditures and personnel costs necessary to achieve this
level of security. Our network management services allow our customers to
outsource all of their frame relay network management to us. We intend to
provide those customers with complementary services that will range from
reactive monitoring to proactive vendor management.
Internet Access and Web Development. We provide dedicated Internet access,
electronic mail and Web hosting services. We expect that mid-sized and larger
businesses will require faster Internet access and larger bandwidth in the
future, and we intend to offer products that will meet that demand.
Local Telecommunications Services for Internet Service Providers. We provide
local wholesale telecommunications services to Internet service providers.
These services include primary rate interface connectivity between our network
and the network of the Internet service provider and equipment colocation
services that permit the Internet service provider to colocate its modems,
routers or network servers with our switching facilities.
Customer Premise Equipment. We sell, install and perform on-site maintenance
of equipment, such as telephones, office switchboard systems and, to a lesser
extent, private branch exchanges, for customers in the following markets:
. Anniston, Birmingham, Dothan, Florence, Huntsville, Mobile and
Montgomery, Alabama;
. Atlanta, Columbus and Macon, Georgia;
. Jacksonville, Ocala and Pensacola, Florida;
. Baton Rouge, Louisiana;
4
. Biloxi, Greenwood, Hattiesburg, Jackson and Tupelo, Mississippi;
. Charlotte and Greensboro, North Carolina; and
. Charleston, Columbia and Greenville, South Carolina.
We intend to offer these customer premise equipment sales, installation and
maintenance services in additional markets in the future, with the goals of
augmenting and supporting our sale of local and long distance services and
enhancing customer retention.
Broadband Transport Services. Our broadband transport services customers
include telecommunications carriers and non-facilities based carriers that have
switches but do not own transmission facilities, such as fiber optic cables.
These customers use our broadband transport services to transport their
customers' traffic between local access and transport areas, which are
geographic areas composed of contiguous local exchanges. Calls transmitted over
a long-haul circuit for a customer are generally routed by the customer through
a switch to a receiving terminal in our network. We transmit the signals over a
long-haul circuit to the terminal where the signals are to exit our network.
Our customer then routes the signals through another switch and to the call
recipient through a local carrier. We offer our broadband transport services in
varying degrees of speed and size. Some of our services are used by our
customers for very high capacity inter-city connectivity and specialized high-
speed data networking. We connect our network to our customer's facilities
either by local carrier or by a direct connection. We typically bill our
broadband transport services customers a fixed monthly rate depending on the
capacity and length of the circuit, regardless of the amount that the circuit
is actually used by the customer.
e/\deltacom. As a result of the growing demand for a variety of data
services, we established e/\deltacom in 2000. e/\deltacom provides colocation
services, managed services and professional services, primarily through its
data center near Atlanta, Georgia.
Colocation Services. Our colocation services allow businesses to have a Web
presence without incurring significant capital expenditures, increasing traffic
on their corporate network or burdening their information technology staff. We
offer Web server hosting, security, software updates, monitoring and hardware
solutions. Our colocation services include Internet connectivity with varying
speeds of bandwidth, primary and secondary domain name services support, timely
reporting of system performance and continuous monitoring by our network
operations staff.
Managed Services. The four basic managed services we offer encompass
enhanced monitoring, managed security services, storage management services and
hardware management services. Our enhanced monitoring services consist of
extended monitoring to include not only port level monitoring, but also server
monitoring and detailed reporting. Our managed security services involve
firewall deployment, virtual private networks, vulnerability assessments,
content and virus scanning and authentication systems. e/\deltacom's storage
management services include the assessment and implementation of storage
solutions, which offer customers multiple technology and hardware choices. Our
hardware management services offer the customer e/\deltacom's ability to provide
hardware maintenance for servers from numerous vendors.
Professional services. Our professional services provide our customers with
a single source for the design and implementation of an e-business solution
from the needs assessment phase to the design, implementation and support
phases. These professional services include project management and methodology,
consulting, system design, implementation and deployment services, and
maintenance and support services.
Facilities. As of December 31, 2000, we owned or managed approximately 9,640
route miles of a fiber optic network which covered portions of ten states in
the southern United States. As of the same date, our network extended to
approximately 120 points of presence, which are the locations along our network
where we are able to deliver telecommunications traffic to, and receive
telecommunications traffic from, other carriers for further transmission or
ultimate delivery to an end-user. These points of presence are located in most
major
5
population centers in the areas covered by our fiber optic network and in a
significant number of smaller cities where our only competitor is the incumbent
carrier.
As of December 31, 2000, we owned approximately 5,940 route miles of our
fiber optic network, which we have built or acquired since 1992. In addition,
we have strategic relationships principally with three public utilities, Duke
Power Company, Florida Power & Light Company and Entergy Technology Company,
pursuant to which we market, sell and manage capacity on approximately 3,700
route miles of network owned and operated by these three utilities. In
addition, we are able to purchase network capacity to some cities not covered
by our owned and managed network in North Carolina and South Carolina under a
buy-sell agreement with CFN FiberNet, LLC, which manages fiber optic facilities
in those two states and in one additional state. This agreement enables the
parties to buy and sell capacity on each other's networks at pre-established
prices, which are generally more favorable than the prices for such capacity
available in the open market. Under this agreement, neither party is
responsible for network maintenance charges relating to the other party's
network.
We expect to add approximately 300 to 400 owned and operated route miles to
our fiber network by the end of 2001 through a combination of construction and
long-term dark fiber leases. In addition, as part of our network construction
strategy, we intend to continue to evaluate the potential expansion of our
network through a combination of new construction, long-term dark fiber leases
and fiber swap transactions, depending on the extent of capital required over
the economic life of the fiber assets we will deploy. Our decision to expand
our fiber optic network will be based on various factors, including the number
of our customers in a market, the anticipated operating cost savings associated
with such construction, and any strategic relationships with owners of existing
infrastructure, including utilities and cable operators. We believe that we
will be able to achieve capital efficiencies in constructing and expanding our
fiber optic network through strategic relationships with public utility
companies. We also believe that our fiber optic network, in combination with
our personalized approach to customer service, will create an attractive
customer-focused platform for the provision of local, long distance and
enhanced telecommunications services.
We have implemented electronic redundancy, which enables traffic to be
rerouted to another fiber in the same fiber sheath in the event of a partial
fiber cut or electronic failure, throughout our network. At December 31, 2000,
over 60% of our network traffic was also protected by geographical diverse
routing, a network design also called a "self healing ring," which enables
traffic to be rerouted in the event of a total cable cut to an entirely
different fiber optic cable, assuming capacity is available.
We purchase much of our network equipment, including switches, optical
transport products and access nodes, from Nortel Networks Inc. Under the
purchase agreement we entered into in November 2000, we have committed to
purchase up to $250 million of products and services from Nortel Networks
through December 31, 2002.
A key component of our network is our switches, which are the primary
electronic components that connect customers to our network and transmit voice
and data communications over our network. Our primary switching facilities for
voice and data communications consist of a Nortel DMS-250 switch in Arab,
Alabama and Nortel DMS-500 switches in the following locations:
. Anniston, Birmingham and Montgomery, Alabama;
. Jacksonville, Ocala and West Palm Beach, Florida;
. Atlanta, Georgia;
. Gulfport, Mississippi;
. Greensboro, North Carolina;
. Columbia, South Carolina;
6
. Nashville, Tennessee; and
. Houston, Texas.
The Nortel DMS-500 switches are capable of handling both local and long
distance voice and data traffic, while the Nortel DMS-250 switch is capable of
handling long distance voice and data traffic only.
We expect to continue to evaluate our network and assess the need for
additional switching capacity. We also have colocated 176 Nortel access nodes
in various markets in the southern United States. These access nodes enable us
to perform remote local and long distance switching in additional markets where
we do not have switches by using our Nortel DMS-500 switches as hosts to the
access nodes we locate in remote markets. The Nortel access nodes are connected
to our Nortel DMS-500 switching platform using our fiber optic network wherever
possible. This networking design, together with our interconnection agreements
with incumbent carriers, such as BellSouth, will enable us to be a facilities-
based provider of local and long distance telephone services in all of the
markets that we intend to enter.
We are a member of the Associated Communications Companies of America, a
ten-member trade association that negotiates with carriers for wholesale
telecommunications services for its members. The collective buying power of its
members enables the association to negotiate as if it were one of the larger
long distance providers in the United States.
In November 2000, we opened and commenced operations at an initial portion
of e/\deltacom's data center in Suwanee, Georgia. The data center, which will
serve as e/\deltacom's headquarters, is a centralized facility that provides
advanced Web server hosting, server colocation and other services. Our
e/\deltacom management team is managing the implementation and integration of
e/\deltacom's services from this facility, the initial opening of which included
approximately 45% of the planned data center space. The remainder of the
facility is expected to be completed in 2001. The data center floor space
contains open racks, enclosed cabinets, caged areas and suites or fully
enclosed vaults. The center is connected through multiple and diverse
connections to our fiber optic network. Site access is controlled by security
officers, video surveillance and enhanced security procedures, and the center
is protected by advanced fire protection devices. Temperature, humidity and
dust are carefully maintained to promote uninterrupted server operation. The
data center also has redundant power supply systems to provide a constant
source of power in the event of a component failure.
Sales and Marketing
Retail Services. We focus our retail sales efforts on mid-sized and major
regional businesses in the southern United States. We market our retail
services through a sales force composed of direct sales personnel, technical
consultants and technicians. We believe that high-quality employee training is
a prerequisite for superior customer service and, as a result, require each
member of our retail sales force to complete our intensive training program.
Our marketing strategy is built upon the belief that customers prefer to hold
one company accountable for all of their telecommunications services. Each
branch office provides technical assistance for its voice, data, Internet and
customer premise equipment as required. Our customers are assured that they
will have a single point of contact, 24 hours a day, seven days a week, to
support all of the services they receive from us.
Our sales personnel make direct calls to prospective and existing business
customers, conduct analyses of business customers' usage histories and service
needs, and demonstrate how our service package will improve a customer's
communications capabilities and costs. Sales personnel locate potential
business customers by several methods, including customer referrals, market
research, telemarketing, and networking alliances, such as endorsement
agreements with trade associations and local chambers of commerce. Our sales
personnel work closely with our network engineers and information systems
consultants to design new service products and applications. Our branch offices
also are primarily responsible for coordinating service and customer premise
equipment installation activities. Technicians survey customers' premises to
assess power and space requirements, and coordinate delivery, installation and
testing of equipment.
7
Our retail services contracts generally provide for payment in arrears based
on minutes of use for long distance services and in advance for local telephone
and data services. The agreements also generally provide that the customer may
terminate the affected service without penalty in the event of substantial and
prolonged outages arising from causes within our control and for other
specified causes. Generally, the agreements provide that the customer must
utilize at least a minimum amount, measured by dollars or minutes of use, of
switched long distance services per month for the term of the agreement.
We also market our retail services through public relations, advertisements,
event sponsorships, trade journals, direct mail and trade forums. Because we
seek to distinguish our retail services largely based on the convenience of our
integrated bundle of these services and the benefits of our comprehensive and
individualized customer support, we continue to believe that advertising and
public relations will play a significant role in our retail services marketing
strategy.
Broadband Transport Services. We provide long-haul voice and data
transmission services through long-haul circuit contracts with other long
distance carriers, including AT&T Corp., WorldCom, Sprint, Qwest Communications
International Inc., Cable & Wireless plc, Frontier Corporation and Broadwing,
Inc. As of December 31, 2000, we had remaining future long-term contract
commitments for broadband transpoprt services totaling approximately $95.3
million. These contracts expire on various dates through 2008 and are expected
to generate approximately $88.2 million in revenues for us through 2005. We
also provide our long-haul transmission services to customers after contract
expiration on a month-to-month basis. Our long-haul contracts provide for fixed
monthly payments, which are generally made in advance. Although sales volumes
from particular customers vary from year to year, we have historically enjoyed
high customer retention and circuit renewal rates.
e/\deltacom. Our newest division, e/\deltacom, provides colocation services,
managed services and professional services from our data center in Suwanee,
Georgia to business customers primarily located in the Atlanta, Georgia area.
We believe that e/\deltacom's technology solutions complement our retail service
offerings, increase our bundle of integrated telecommunications services and
advance our strategy of being a single source for all of our customers'
communications needs. As part of this strategy, e/\deltacom's sales personnel
make direct calls to prospective and existing business customers, work closely
with our engineering staff to design specific solutions for each customer and
seek to market e/\deltacom's services along with our bundle of retail service
offerings.
e/\deltacom markets its brand and services through advertising and public
relations campaigns, event sponsorships, trade journals, and trade forums. As
e/\deltacom continues to build its brand in the marketplace, we expect that
advertising and public relations will continue as a focus in our marketing
strategy for e/\deltacom.
Competition
The telecommunications industry is highly competitive. We compete primarily
on the basis of price, availability, transmission quality, reliability,
customer service and variety of product offerings. Our ability to compete
effectively depends on our ability to maintain high-quality services at prices
generally equal to or below those charged by our competitors. In particular,
price competition in the retail services and broadband transport services
markets generally has been intense and is expected to increase. Our competitors
include, among others, AT&T, Sprint and WorldCom for long distance telephone
services and BellSouth for local telephone services. These companies, among
others, have substantially greater financial, personnel, technical, marketing
and other resources, larger numbers of established customers and more prominent
name recognition than ITC/\DeltaCom. These companies also operate more extensive
transmission networks than we do. In addition, companies such as Broadwing,
Qwest and Williams Communications Group, Inc. have constructed or are
constructing nationwide fiber optic systems, including routes through portions
of the southern United States in which we operate our fiber optic network. We
also increasingly face competition in the long distance market from local
carriers, resellers, cable companies and satellite carriers, and will likely
compete with electric utilities. We also may increasingly face competition from
businesses offering long distance data and voice services over the Internet.
These businesses could enjoy a significant cost advantage because, at this
time, they generally do not pay carrier access charges or universal service
fees.
8
Our principal competitor for local services is the incumbent carrier in the
particular market, including BellSouth in a large majority of our market areas.
The incumbent carriers enjoy substantial competitive advantages arising from
their historical monopoly position in the local telephone market, including
their pre-existing customer relationship with all or virtually all end-users.
Further, we are highly dependent on the competing incumbent carrier for local
network facilities and wholesale services required in order for us to assemble
our own local retail services. We also face competition from local carriers
other than the incumbent carrier, which we refer to as "competitive carriers,"
some of which have already established local operations in some of our current
and target markets. In addition, incumbent carriers are expected to compete in
each other's markets in some cases. Wireless telecommunications providers may
develop into effective substitutes for wireline local telephone service, which
would further increase competition.
Local and long distance marketing is converging, as other carriers offer
integrated retail services. For example, many competitive local carriers also
offer long distance service to their customers and large long distance
carriers, such as AT&T, Sprint and WorldCom, have begun to offer local services
in some markets. We also compete with numerous direct marketers, telemarketers
and equipment vendors and installers with respect to portions of our business.
Regional Bell operating companies, such as BellSouth, are allowed to provide
outside their home regions "interLATA" long distance services, which are long
distance services that originate and terminate in different local access and
transport areas, as well as interLATA mobile services within their regions.
Under the Telecommunications Act of 1996, the regional Bell operating companies
will be allowed to provide interLATA long distance services within their
regions after meeting requirements intended to foster opportunities for local
telephone competition. These companies already have extensive fiber optic
cable, switching and other network facilities in their respective regions that
they can use to provide long distance services. BellSouth and other regional
Bell operating companies are taking significant steps toward obtaining approval
to provide in-region long distance service. The FCC has approved applications
of Verizon Communications to provide in-region long distance service in New
York and of SBC Communications to provide in-region long distance service in
Texas, Kansas and Oklahoma. Verizon Communications has an additional
application pending in Massachusetts and BellSouth may file for approval to
enter the long distance market in Florida and Georgia by the end of 2001. If
the FCC permits BellSouth to provide long distance service in those or other
states before meeting our local interconnection needs, BellSouth would be able
to duplicate our integrated local and long distance services and could have a
significant competitive advantage in marketing those services to its existing
local customers.
A continuing trend toward consolidation, mergers, acquisitions and strategic
alliances in the telecommunications industry could also increase the level of
competition faced by our broadband transport customers or us. For example,
WorldCom acquired MCI Communications Corporation in September 1998, AT&T
acquired Tele-Communications, Inc. in March 1999, SBC Communications acquired
Ameritech Corporation in October 1999, GTE Corporation and Bell Atlantic
Corporation merged to form Verizon Communications in June 2000, Qwest acquired
US WEST, Inc. in June 2000 and Time Warner, Inc. merged into America Online,
Inc. to form AOL Time Warner Inc. in January 2001. Also, in January 2000, AT&T
and British Telecommunications plc entered into a joint venture, Concert, to
combine the international assets and operations of each company, including
their existing international networks. In addition, SBC Communications and
Williams Communications, a long distance services provider, entered into a
strategic alliance pursuant to which the two companies have agreed to supply
services to each other. The telecommunications market is very dynamic, and we
believe additional competitive changes are likely in the future.
Regulation
Overview. Our services are subject to federal, state and local regulation.
Through our wholly-owned subsidiaries, we hold numerous federal and state
regulatory authorizations. The FCC exercises jurisdiction over
telecommunications common carriers to the extent they provide, originate or
terminate interstate or international communications. The FCC also establishes
rules and has other authority over some issues related
9
to local telephone competition. State regulatory commissions retain
jurisdiction over telecommunications carriers to the extent they provide,
originate or terminate intrastate communications. Local governments may require
us to obtain licenses, permits or franchises in order to use the public rights-
of-way necessary to install and operate our networks.
Federal Regulation. We are categorized as a non-dominant carrier by the FCC
and, as a result, are subject to relatively limited regulation of our
interstate and international services. Some general policies and rules of the
FCC apply to us and we are subject to some FCC reporting requirements, but the
FCC does not review our billing rates. We possess all operating authority
required by the FCC to conduct our long distance business as it is currently
conducted. As a non-dominant carrier, we may install and operate additional
facilities for the transmission of domestic interstate communications without
prior FCC authorization, except to the extent that radio licenses are required.
The FCC has required non-dominant long distance companies, including us, to
detariff our interstate long distance domestic and international services
during 2001. Tariffs set forth the terms, conditions and prices for services
and must be updated or amended when rates are adjusted or new products are
added. Tariffs currently govern our relationship with most of our long distance
customers. The detariffing process requires us to enter into individual
contracts with each of our customers and to notify all of our customers of the
change. This may increase our costs of doing business. For example, instead of
filing a new rate with the FCC in an existing tariff, we may be required to
notify all of our customers of all changes to their rates and service terms. In
addition, our large business customers may use the detariffing process as an
opportunity to attempt to renegotiate existing contracts with us.
The FCC's role with respect to local telephone competition arises
principally from the Telecommunications Act of 1996. The Telecommunications Act
pre-empts state and local laws to the extent that they prevent competitive
entry into the provision of any telecommunications service. Subject to this
limitation, however, the state and local governments retain telecommunications
regulatory authority. The Telecommunications Act imposes a variety of new
duties on local carriers, including competitive carriers such as ITC/\DeltaCom,
in order to promote competition in local telephone services. These duties
include requirements to:
. complete calls originated by customers of competing carriers on a
reciprocal basis;
. permit the resale of services;
. permit users to retain their telephone numbers when changing carriers;
and
. provide competing carriers access to poles, ducts, conduits and rights-
of-way at regulated prices.
Incumbent carriers are also subject to additional duties. These duties
include obligations of the incumbent carriers to:
. interconnect their networks with networks or facilities of competitors;
. offer colocation of competitors' equipment at their premises;
. make available elements of their networks, including network facilities,
features and capabilities, on non-discriminatory, cost-based terms; and
. offer wholesale versions of their retail services for resale at
discounted rates.
Collectively, these requirements recognize that local telephone service
competition is dependent upon cost-based and non-discriminatory interconnection
with and use of incumbent carrier networks and facilities. Failure to achieve
such arrangements could have a material adverse impact on our ability to
provide competitive local telephone services. Under the Telecommunications Act,
incumbent carriers are required to negotiate in good faith with carriers
requesting any or all of the foregoing arrangements. In addition, in August
1996, the FCC released the "interconnection decision" implementing the
interconnection portions of the Telecommunications
10
Act. The FCC subsequently adopted further specific rules to implement these
requirements. The interconnection decision has been the subject of significant
legal dispute. In January 1999, the U.S. Supreme Court rejected most of the
challenges to the interconnection decision and affirmed the authority of the
FCC to establish rules governing interconnection. The Supreme Court required
the FCC to revise its method for determining which network elements incumbent
carriers must provide to competitive carriers. The FCC's actions in response to
the decision of the Supreme Court resulted in changes to the number and type of
network elements available to competitive carriers. Additional disputes
regarding the interconnection decision and other related FCC actions are
pending, and we believe additional disputes are likely. Currently, the FCC is
considering changes to the rule on compensation for services provided by one
carrier to another and on the provision of unbundled network elements by
incumbent carriers. Any changes to these rules could have a significant impact
on the industry and on ITC/\DeltaCom.
We cannot assure you that the FCC's rules, together with rules adopted by
state public utility commissions, will be implemented in a manner that will
permit local telephone competition to develop to a substantial extent and
without significant delays. For example, many new carriers, including
ITC/\DeltaCom, have experienced problems with respect to the operations support
systems used by new carriers to order and receive network elements and
wholesale services from the incumbent carriers. These systems are necessary for
new carriers like us to provide local service to customers on a timely and
competitive basis. The FCC has created a task force to examine problems that
have slowed the development of local telephone competition, but has not taken
any enforcement actions. In September 1999, the FCC adopted revised rules
defining the circumstances under which incumbent carriers must make network
elements available to competitors. In a number of ways, these rules are more
favorable to competitors than prior rules, but the FCC's pricing methodology
for network elements included in these rules remains subject to judicial
challenge. In other ways, however, these rules are less favorable to
competitors than the prior rules. The revised rules restrict in some respects
the availability of some network elements and limit in some respects the
services that competitors can provide over those elements. Any restriction on
the availability of network elements could have a material adverse effect on
us.
Among other interconnection agreements, we entered into an interconnection
agreement with BellSouth in 1997 that enabled us to provide in all nine
BellSouth states local service on either a resale basis or by purchasing all
unbundled network elements required to provide local service on a facilities
basis, without using facilities we own. We agreed with BellSouth on interim
pricing terms for such resale and purchase of unbundled network elements, and
the public utilities commissions for those nine BellSouth states approved the
terms of the interconnection agreement. The initial term of the interconnection
agreement expired in 1999, but, according to the agreement, we are entitled to
continue to operate under the agreement and obtain such unbundled network
elements from BellSouth until we reach agreement with BellSouth on new terms
and conditions for the various BellSouth states. Since the expiration of the
initial agreement, we have become a party to three new interconnection
agreements with BellSouth. These interconnection agreements enable us to
provide in Florida, North Carolina and Mississippi local service on either a
resale basis or by purchasing all unbundled network elements required to
provide local service on a facilities basis, without using facilities we own.
In addition, the rates, terms and conditions of the expired 1997
interconnection agreement remain in effect while we negotiate new
interconnection agreements with BellSouth for the six BellSouth states that
remain subject to the terms and conditions of the expired 1997 interconnection
agreement. The expired 1997 interconnection agreement did not resolve, and the
other BellSouth interconnection agreements to which we are a party do not
resolve, all operational issues, including those relating to the colocation of
our equipment with that of BellSouth. Strengthened equipment colocation
requirements were adopted by the FCC in 1999, but portions of the FCC decision
were recently sent back to the FCC for reconsideration by the reviewing court.
As a result, a number of colocation issues are still undecided. We expect, but
cannot assure you, that each new BellSouth interconnection agreement we become
a party to will provide a foundation for us to provide local service in the
nine BellSouth states on a reasonable commercial basis.
The Telecommunications Act also eliminates previous prohibitions on the
provision of interLATA long distance services by the regional Bell operating
companies and GTE Corporation, which is now part of Verizon
11
Communications. The regional Bell operating companies are permitted to provide
interLATA long distance service outside those states in which they provide
local service, or "out-of-region long distance service," upon receipt of any
necessary state and federal regulatory approvals that are otherwise applicable
to the provision of intrastate and interstate long distance service. Under the
Telecommunications Act, the regional Bell operating companies will be allowed
to provide long distance service within the regions in which they also provide
local service, or "in-region long distance service," on a state-by-state basis
upon specific approval of the FCC and satisfaction of other conditions,
including a checklist of interconnection requirements intended to open local
telephone markets to competition.
In the future, an important element of providing competitive local services
may be the ability to offer customers high-speed broadband local connections.
The FCC has considered a proposal that would allow regional Bell operating
companies to offer these and other services through separate affiliates, in
which case their network elements for providing these services would not need
to be made available to us or other competitors. However, a Washington, D.C.
court vacated an FCC decision that in part permitted a similar structure in
connection with the merger of SBC Communications and Ameritech. AT&T has
entered arrangements with cable companies for the exclusive use of their local
networks for broadband telecommunications, and several cable companies are
offering broadband Internet access over their network facilities. If we are
unable to meet future demands of our customers for broadband local access on a
timely basis at competitive rates, we may be at a significant competitive
disadvantage.
The FCC also regulates the interstate access rates charged by incumbent
carriers for the origination and termination of interstate long distance
traffic. These access rates make up a significant portion of the cost of
providing long distance service. The FCC is in the process of implementing
access policy changes that over time are expected to reduce access rates and
the cost of providing long distance service, especially to business customers.
In 2000, the FCC adopted a plan to lower access charges. However, further FCC
action in this area is necessary, and a current proposal to reduce access
charges levied by rural carriers is pending. The full impact of the FCC's
decisions will not be known until those decisions are implemented over the next
several years. More generally, the FCC has indicated that it may consider
whether to streamline or restructure the manner in which all payments are made
by carriers to other carriers, including access charges and the payments paid
by carriers to each other for the transport of local calls, commonly known as
reciprocal compensation. Any decision in this area could have a material
adverse effect on our revenues from other carriers.
The FCC has granted incumbent carriers some flexibility in pricing their
interstate special and switched access services. Under this pricing scheme,
local carriers may establish pricing zones based on access traffic density and
charge different prices for access provided in each zone. The FCC recently
granted incumbent carriers additional pricing flexibility as local competition
develops in their markets. We cannot assure you that such pricing flexibility
will not place us at a competitive disadvantage, either as a purchaser of
access for our long distance operations or as a vendor of access to other
carriers or end-user customers.
In a related proceeding, the FCC has adopted changes to the methodology by
which access has been used in part to subsidize universal telephone service and
other public policy goals. Telecommunications providers like us now pay a fee
calculated as a percentage of revenues to support these goals. Some states are
also implementing universal service funds. The effects of these decisions are
uncertain and subject to change.
In addition, the FCC continues to consider related questions regarding the
applicability of access charges and universal service fees to Internet service
providers. Currently, Internet service providers are not subject to these
expenses, and the U.S. Court of Appeals for the Eighth Circuit has upheld the
FCC's decision not to impose such fees. However, the incumbent carriers and
other parties argue that this exemption unfairly benefits Internet service
providers, particularly when they provide data, voice or other services in
direct competition with conventional telecommunications services. We are not in
a position to determine how these issues regarding access charges and universal
service fees will be resolved or whether such resolution will be harmful to our
competitive position or our results of operations.
12
The FCC also imposes prior approval requirements on transfers of control and
assignments of radio licenses and operating authorizations. The FCC has the
authority generally to condition, modify, cancel, terminate or revoke licenses
and operating authority for failure to comply with federal laws and the rules,
regulations and policies of the FCC. Fines or other penalties also may be
imposed for such violations. We cannot assure you that the FCC or third parties
will not raise issues with regard to our compliance with applicable laws and
regulations.
As a general matter, we cannot provide assurance regarding how quickly or
how adequately we will be able to take advantage of the opportunities created
by the Telecommunications Act. We could be materially adversely affected if a
court decision reversing some of the FCC's rules or problems in the related
arbitration and negotiation process increase our costs of using incumbent
carrier network elements or services, or if such actions otherwise delay or
impede the development of local telephone competition.
State Regulation. We are subject to various state laws and regulations. Most
state public utility commissions require providers such as ITC/\DeltaCom to
obtain authority from the commission before initiating service in that state.
In most states, including Alabama, Georgia and Florida, we also are required to
file tariffs or price lists setting forth the terms, conditions and prices for
services that are classified as intrastate and to update or amend our tariffs
when we adjust our rates or add new products. We also are subject to various
reporting and record-keeping requirements. In addition, some states are
ordering the detariffing of services, which may increase our costs of doing
business and provide our customers an opportunity to renegotiate existing
contracts with us.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply
with state law or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
We cannot assure you that public utility commissions or third parties will not
raise issues with regard to our compliance with applicable laws or regulations.
We have authority to offer intrastate long distance services in all 50 U.S.
states and the District of Columbia. We have obtained authority to provide long
distance service in states outside of our current and target markets to enhance
our ability to attract business customers with offices, or whose employees
travel, outside of our markets.
We provide local services in our region by reselling the retail local
services of the incumbent carrier in a given territory and, in some established
markets, using incumbent network elements and our own local switching
facilities. We possess authority to provide local telephone services in
Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North
Carolina, South Carolina, Tennessee and Texas.
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications Act
preempts the ability of states to forbid local service competition, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. These
statutes and related issues arising from the Telecommunications Act will be
refined through rules and policy decisions made by public utility commissions
as they address local service competition issues.
We also will be affected by state public utility commission decisions
related to the incumbent carriers despite recent U.S. Supreme Court decisions
upholding the FCC's rule-making power under the Telecommunications Act. For
example, public utility commissions have responsibility under the
Telecommunications Act to oversee relationships between incumbent carriers and
their new competitors with respect to such competitors' use of the incumbent
carriers' network elements and wholesale local services.
13
Public utility commissions arbitrate interconnection agreements between the
incumbent carriers and competitive carriers such as us when necessary.
Important issues regarding the scope of the authority of public utility
commissions in this area and the extent to which the commissions will adopt
policies that promote local telephone service competition remain unresolved. We
believe it is too early to evaluate how these matters will be resolved or their
impact on our ability to pursue our business plan.
States also regulate the intrastate carrier access services of the incumbent
carriers. We are required to pay access charges to the incumbent carriers when
they originate or terminate our intrastate long distance traffic. We could be
materially adversely affected by high access charges, particularly to the
extent that the incumbent carriers do not incur the same level of costs with
respect to their own intrastate long distance services. States also will be
developing intrastate universal service charges parallel to the interstate
charges created by the FCC. For example, incumbent carriers such as BellSouth
advocate the formation of state-level funds that would be supported by
potentially large payments by businesses such as ITC/\DeltaCom based on their
total intrastate revenues. Another issue is the use by some incumbent carriers,
with the approval of the relevant public utility commissions, of extended local
area calling that converts otherwise competitive intrastate toll service to
local service. States also are or will be addressing various intraLATA dialing
parity issues that may affect competition. Our business could be materially
adversely affected by these or other developments.
We also will be affected by how states regulate the retail prices of the
incumbent carriers with which we compete. We believe that, as the degree of
intrastate competition increases, the states will offer the incumbent carriers
increasing pricing flexibility. This flexibility may present the incumbent
carriers with an opportunity to subsidize services that compete with our
services with revenues generated from non-competitive services, thereby
allowing incumbent carriers to offer competitive services at prices lower than
most or all of their competitors. In addition, BellSouth has obtained authority
to create affiliates that would operate on a much less regulated basis and,
therefore, could provide significant competition whether or not the traditional
BellSouth local business receives more pricing flexibility. Kentucky has placed
limitations on such affiliates, while Tennessee has refused such affiliate
applications of BellSouth. We cannot predict the extent to which these
developments may affect our business.
Local Government Authorizations and Related Rights-of-Way. We are required
to obtain street use and construction permits and licenses or franchises to
install and expand our fiber optic network using municipal rights-of-way. In
some municipalities where we have installed or anticipate constructing
networks, we will be required to pay license or franchise fees based on a
percentage of gross revenues or a per linear foot basis. We cannot assure you
that, following the expiration of existing franchises, fees will remain at
their current levels. In many markets, the incumbent carriers do not pay these
franchise fees or they pay fees that are substantially less than those required
to be paid by us, although the Telecommunications Act requires that, in the
future, such fees be applied in a competitively neutral manner. To the extent
that competitors do not pay the same level of fees as we do, we could be at a
competitive disadvantage. Termination of the existing franchise or license
agreements before their expiration dates, or a failure to renew the franchise
or license agreements, and a requirement that we remove the corresponding
portion of our facilities or abandon the corresponding portion of our network
could have a material adverse effect on us. In addition, we would be adversely
affected if we are unable to obtain additional authorizations for new network
construction on reasonable terms. Further, unresolved issues exist regarding
the ability of new local service providers to gain access to commercial office
buildings to serve tenants.
Employees
As of December 31, 2000, we had more than 2,400 full-time employees, none of
whom was represented by a union or covered by a collective bargaining
agreement. We believe that our relationship with our employees is good. In
connection with the construction and maintenance of our fiber optic network and
the conduct of our other business operations, we use third-party contractors,
some of whose employees may be represented by unions or covered by collective
bargaining agreements.
14
Executive Officers
The following presents information about our executive officers.
Name Age Positions with Company
---- --- ----------------------
Andrew M. Walker........ 59 Vice Chairman, Chief Executive Officer, President and Director
Douglas A. Shumate...... 35 Senior Vice President-Chief Financial Officer
Steven D. Moses......... 51 Senior Vice President-Network Services
J. Thomas Mullis........ 57 Senior Vice President-Legal and Regulatory, General Counsel
and Secretary
Roger F. Woodward....... 48 Senior Vice President-Sales and Account Services
J. Stephen Johnson...... 41 Senior Vice President-General Manager, e/\deltacom
Thomas P. Schroeder..... 53 Senior Vice President-Large Account Sales
Sara L. Plunkett........ 51 Vice President-Finance
Andrew M. Walker has served as our Chief Executive Officer since March 1997,
our President since April 2000 and as our Vice Chairman of the Board of
Directors since April 1998. He served as President and Chief Executive Officer
of the managing partner of each of Interstate FiberNet and Gulf States
FiberNet, predecessors to Interstate FiberNet, Inc., a wholly-owned subsidiary
of ITC/\DeltaCom, from November 1994 until March 1997. Mr. Walker has served as
a director of KNOLOGY Holdings, Inc., a broadband telecommunications services
company, since July 1996 and as Chief Executive Officer and President of
KNOLOGY Holdings from July 1996 to February 1997.
Douglas A. Shumate has served as our Senior Vice President-Chief Financial
Officer since March 1997. He served as Chief Financial Officer of the Managing
Partners of each of Interstate FiberNet and Gulf States FiberNet from January
1995 until March 1997. From May 1991 to January 1995, he served as Vice
President- Finance and Chief Financial Officer of Interstate Telephone Company,
a local telephone service provider and wholly-owned subsidiary of ITC Holding.
From December 1986 through April 1991, Mr. Shumate was employed as a C.P.A. at
Arthur Andersen LLP.
Steven D. Moses has served as our Senior Vice President-Network Services
since March 1997. He served as Vice President of Interstate FiberNet from
January 1992 until April 1995 and Chief Operating Officer of Interstate
FiberNet from April 1995 until March 1997. From May 1991 to January 1992, Mr.
Moses was Director-Special Projects of Interstate Telephone and Valley
Telephone Company, a local telephone service provider and a wholly owned-
subsidiary of ITC Holding.
J. Thomas Mullis has served as our Senior Vice President-Legal and
Regulatory, General Counsel and Secretary since March 1997. Mr. Mullis served
as General Counsel and Secretary of DeltaCom, Inc., the predecessor of
ITC/\DeltaCom Communications, Inc. that was a provider of long distance
telecommunications services, from May 1985 to March 1997 and as Executive Vice
President of DeltaCom from January 1994 to November 1996. From November 1996 to
March 1997, he also served as Senior Vice President of DeltaCom. From January
1990 to December 1993, Mr. Mullis was President, General Counsel and Secretary
of Southern Interexchange Services, Inc., a switched services carrier, and
Southern Interexchange Facilities, Inc., a private line carriers' carrier.
Roger F. Woodward has served as our Senior Vice President-Sales and Account
Services since July 2000. He also served as our Senior Vice President-Sales,
Marketing and Customer Support from March 1997 to July 2000. Mr. Woodward was
Senior Vice President-Sales of DeltaCom, Inc. from October 1996 until March
1997. From March 1990 until July 1996, Mr. Woodward served in a variety of
positions, including Regional Sales Director and Vice President-Sales, with
Allnet Communications, Inc., which was acquired by Frontier Communications
Corporation in August 1995.
J. Stephen Johnson has served as our Senior Vice President-General Manager,
e/\deltacom, since May 2000. Mr. Johnson founded and served as President and
Sales Manager for Bay Data Consultants, LLC., a
15
provider of technical solutions, from November 1997 until Bay Data Consultants
was acquired by ITC/\DeltaCom in May 2000. From May 1994 to November 1997, he
served as Vice President-Sales of UDC/G.E. Network Services, Inc.
Thomas P. Schroeder has served as our Senior Vice President-Large Account
Sales since April 2000. He served as Senior Vice President-Carrier Sales of
ITC/\DeltaCom from April 1999 until April 2000 and as Vice President-Carrier
Sales of ITC/\DeltaCom from March 1997 until April 1999. From June 1995 until
March 1997, Mr. Schroeder served as Vice President-Sales and Marketing of
Interstate FiberNet and, from April 1994 to June 1995, as the Director of Sales
and Marketing of Interstate FiberNet.
Sara L. Plunkett has served as our Vice President-Finance since March 1997.
She also served as our Treasurer from March 1997 through March 2000. Ms.
Plunkett was Vice President-Finance of DeltaCom, Inc. from October 1996 until
March 1997. From May 1989 through October 1996, she served as Chief Financial
Officer of DeltaCom.
Risk Factors
Our business is subject to a number of risks, including the following:
We expect to continue to have operating losses and negative cash flow after
capital expenditures, which may result in our failure to meet our working
capital and debt service requirements.
As we have implemented our business strategy to increase our
telecommunications service offerings, expand our fiber optic network and enter
new markets, we have experienced operating losses and negative cash flow after
capital expenditures. We expect operating losses and such negative cash flow
will continue at least through 2002 as we continue to expand our business and
make substantial capital expenditures. We cannot assure you that we will
achieve or sustain operating profitability or positive net cash flow at any
time after 2002. If we cannot achieve or sustain operating profitability and
positive net cash flow, we may not be able to obtain the funds necessary to
continue our operations or to repay amounts due on our outstanding
indebtedness.
We may not have, or be able to obtain, the significant amounts of capital that
we need to expand our network, operations and services as currently planned.
We need significant capital to expand our network, operations and services
according to our business plans. Our current business plans require us to
continue to make significant capital expenditures primarily in connection with
the expansion of our business. During 2000, we made capital expenditures of
approximately $309.8 million. We currently estimate that our capital
expenditures will total approximately $190 million to $205 million in 2001, and
we expect to make substantial capital expenditures after 2001. These estimates
may turn out to be inaccurate or otherwise may change as a result of factors
such as the following:
. adverse regulatory, technological, or competitive developments;
. unforeseen delays;
. cost overruns;
. changes in demand for our services; or
. new market developments or opportunities.
In such an event, we may need to change our business plans. Such a change or
our inability to obtain the capital necessary to expand our network, operations
and services could have a material adverse effect on our business, financial
condition and results of operations.
We have significant debt and may be unable to service that debt.
We have significant debt. As of December 31, 2000, we had indebtedness of
$713.9 million and stockholders' equity of $181.1 million. For the year ended
December 31, 2000, as adjusted to reflect $160.0
16
million of indebtedness we incurred under our senior secured credit facility in
April 2000, as if that issuance had occurred on January 1, 2000, our earnings
were insufficient to cover our fixed charges by $73.9 million and EBITDA, as
adjusted, less capital expenditures and interest expense, was negative $311.6
million. EBITDA, as adjusted, represents earnings before extraordinary item,
preacquisition loss, equity in losses of unconsolidated subsidiaries, net
interest, other income and other expenses, income taxes, and depreciation and
amortization. EBITDA, as adjusted, is not a measure of financial performance
under accounting principles generally accepted in the United States and should
not be considered an alternative to net income as a measure of performance or
to cash flow as a measure of liquidity.
To meet our debt service requirements we must successfully implement our
business strategy. Therefore, we will need to:
. expand our network;
. obtain and retain a significant number of customers; and
. experience significant and sustained growth in our cash flow.
We cannot assure you that we will successfully implement our business
strategy or that we will be able to generate sufficient cash flow from
operating activities to meet our debt service obligations and working capital
requirements. Our ability to meet our obligations will be dependent upon our
future performance, which will be subject to prevailing economic conditions and
to financial, business and other factors.
Agreements governing our current indebtedness contain restrictive covenants
that place limits on our business activities.
We are subject to restrictions under the indentures pursuant to which we
issued our publicly traded senior notes, under our $160 million senior secured
credit facility and under our $40 million capital lease facility. These
restrictions affect and, in some cases, significantly limit or prohibit, among
other things, our ability and the ability of our subsidiaries to incur
additional indebtedness, create liens, make investments, issue stock and sell
assets. Our senior note indentures restrict our ability to incur indebtedness,
other than indebtedness to finance the acquisition of equipment, inventory or
network assets and other specified indebtedness, by requiring compliance with
specified leverage ratios. Our senior secured credit facility and our capital
lease facility also contain restrictions on our ability to incur indebtedness.
The amount of debt we have could adversely affect us in a number of ways,
including by:
. limiting our ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes;
. limiting our flexibility in planning for, or reacting to, changes in our
business;
. placing us at a competitive disadvantage relative to our competitors who
have less debt;
. making us more vulnerable to a downturn in our business or the economy
generally; and
. requiring us to use a substantial portion of our cash flow from
operations to pay principal and interest on our debt, rather than for
working capital and capital expenditures.
We may not be able to manage our growth successfully.
The expansion and development of our business will depend upon, among other
things, our ability to:
. secure financing;
. successfully implement our sales and marketing strategy;
. evaluate markets;
. design fiber routes;
17
. install facilities;
. acquire rights-of-way;
. obtain any required government authorizations;
. interconnect to, and colocate with, facilities owned by incumbent
carriers; and
. obtain appropriately priced unbundled network elements and wholesale
services from incumbent carriers.
Our inability to manage our growth effectively could have a material adverse
effect on our business, results of operations and financial condition. We must
accomplish the foregoing tasks in a timely manner, at reasonable cost and on
satisfactory terms and conditions. Our growth has placed, and our anticipated
future growth may also place, a significant strain on our administrative,
operational and financial resources. Our ability to manage our growth
successfully will require us to enhance our operational, management, financial
and information systems and controls, and to hire and retain qualified sales,
marketing, administrative, operating and technical personnel. We cannot assure
you that we will be able to do so. In addition, as we increase our service
offerings and expand our targeted markets, there will be additional demands on
customer support, sales and marketing, administrative resources and network
infrastructure.
Development and expansion of our business, including through acquisitions, is
subject to regulatory and market risks.
The successful implementation of our business strategy to provide an
integrated bundle of telecommunications services and expand our operations will
be subject to a variety of risks, including the following:
. competition and pricing;
. the availability of capital on favorable terms;
. regulatory uncertainties;
. operating and technical problems;
. the need to establish and maintain interconnection and colocation
arrangements with incumbent carriers in our target markets; and
. the potential difficulties of offering local telephone services.
In addition, the expansion of our business may involve acquisitions of other
telecommunications businesses and assets that, if made, could divert our
resources and management time and could require integration with our existing
operations. We cannot assure you that any acquisitions could be successfully
integrated into our operations or that any acquired business will perform as
expected. Our failure to implement our expansion and growth strategy
successfully would have a material adverse effect on our business, results of
operations and financial condition.
Our business is subject to significant competitive pressures.
Our industry is highly competitive, and the level of competition,
particularly with respect to pricing, is increasing. For example, prices for
long distance services and for data transmission services have declined
substantially in recent years. These prices may continue to decline, which will
adversely affect our gross margins as a percentage of revenues. In addition, if
the FCC authorizes BellSouth to provide in-region long distance services in one
or more of our markets, we anticipate that local and long distance pricing in
these markets will become even more competitive. Many of our existing and
potential competitors also have financial, technical and other resources and
customer bases and name recognition far greater than our own. We cannot assure
you that we will be able to achieve or maintain adequate market share or
revenues or compete effectively in any of our markets. For additional
information on the competitive environment in which we operate and on how
regulatory developments may increase competition, see "Competition" and
"Regulation" above.
18
We face significant challenges in offering local telephone services, including
the need to make significant investments and compete with established
providers.
We will have to continue to make significant operating and capital
investments and to address numerous operating complexities to implement our
local telephone services strategy. Because of these and possible other unknown
factors, we cannot assure you that we will be successful in implementing our
local services strategy. Our inability to implement this strategy could have a
material adverse affect on our business, results of operations and financial
condition. To implement our local services strategy, we are required to:
. develop new products, services and systems;
. develop new marketing initiatives;
. train our sales force in connection with selling these services; and
. implement the necessary billing and collecting systems for these
services.
We expect to continue to face significant pricing and product competition
from the regional Bell operating companies, whose core business is providing
local dial tone service and who are currently the dominant providers of
services in their markets. We also will face significant competitive product
and pricing pressures from other incumbent carriers and from other companies
like us that attempt to compete in the local services market.
The long distance transmission industry is subject to pricing pressures and
risks of industry over-capacity.
The long distance transmission industry generally has experienced over-
capacity and declining prices. These trends have exerted downward pressure on
the prices we charge for our broadband transport services, and we anticipate
that prices for these services will continue to decline over the next several
years. Dramatic and substantial price reductions in the long distance industry
could force us to reduce our prices significantly, which could have a material
adverse effect on our business, financial condition and results of operations.
We expect these price declines will occur because:
. some long distance carriers are expanding their capacity generally;
. other existing long distance carriers and potential new carriers are
constructing new fiber optic and other long distance transmission
networks in the southern United States, and BellSouth is likely to
receive authority to use its excess capacity to market long distance
service to customers in its primary markets;
. expansion and new construction of transmission networks is likely to
create substantial excess capacity relative to demand in the short- or
medium-term, and companies building these networks are likely to install
fiber optic cable that provides substantially more transmission capacity
than will be needed because the cost of fiber is a relatively small
portion of the overall cost of constructing new lines;
. recent technological advances may also greatly expand the capacity of
existing and new fiber optic cable; and
. the marginal cost of carrying an additional call over existing fiber
optic cable is extremely low.
An increase in the capacity of our competitors could adversely affect our
business, even if we are also able to increase our capacity. If industry
capacity expands so much that available capacity exceeds overall demand along
any of our routes, severe additional pricing pressure could develop.
The local and long distance industries are subject to significant government
regulation, and the regulations may change.
We are required to obtain authorizations from the FCC and state public
utility commissions to offer some of our telecommunications services. We are
also required to file tariffs for many of our services and to comply with local
license or permit requirements relating to installation and operation of our
network. Any of the following could have a material adverse effect on our
business, results of operations and financial condition:
19
. failure to maintain proper federal and state tariffs;
. failure to maintain proper state certifications;
. failure to comply with federal, state or local laws and regulations;
. failure to obtain and maintain required licenses and permits;
. burdensome license or permit requirements to operate in public rights-of-
way; and
. burdensome or adverse regulatory requirements or developments.
Although the local telephone services market was opened to competition
through the passage of the Telecommunications Act in 1996, the FCC and the
states are still implementing many of the rules and policies necessary for
local telephone competition and addressing other related consumer issues. As a
result, we believe that we may see increased state regulation of competitive
carriers.
We depend on access service from incumbent carriers to provide long distance
and interexchange private services, and we could be adversely affected if we do
not benefit from reduced access charges at least as much as our competitors.
We depend on incumbent carriers to provide access service for the
origination and termination of our toll long distance traffic and interexchange
private lines.We could be adversely affected if we do not experience access
cost reductions proportionally equivalent to those of our competitors.
Historically, charges for access service have made up a significant percentage
of the overall cost of providing long distance service. In 1998, the FCC
implemented changes to its interstate access rules that, among other things,
have reduced per-minute access charges and substituted new per-line flat rate
monthly charges. The FCC also approved reductions in overall access rates, and
established new rules to recover subsidies to support universal service and
other public policies. Additional access charge adjustments were implemented in
July 2000, and others are expected in the future. The impact of these changes
on our competitors or us is not yet clear. New Internet-based competitors
generally are exempt from these charges, which could give them a significant
cost advantage in this area.
If we are unable to interconnect with BellSouth and other incumbent carriers on
acceptable terms, our ability to offer local telephone services will be
adversely affected.
Incumbent carriers meet their obligations under the Telecommunications Act
through the use of interconnection agreements negotiated under regulatory
supervision with competitive carriers like ITC/\DeltaCom. We cannot assure you
that we will be able to enter into or renew interconnection agreements that
permit us to offer local services at rates that are profitable or competitive.
These agreements have been the subject of ongoing disputes and key issues
remain open. Our ability to negotiate interconnection agreements on a timely
basis and on favorable terms is critical to our ability to provide local
services on a competitive and profitable basis. Any successful effort by the
incumbent carriers to deny or substantially limit our access to their network
elements or wholesale services would have a material adverse effect on our
ability to provide local telephone services.
Our March 1997 interconnection agreement with BellSouth, which expired on
July 1, 1999, was our most significant interconnection agreement and enabled us
to provide local telephone services in all nine states in which BellSouth
operates. The agreement provides that the parties will continue to exchange
traffic according to the terms and conditions of the agreement until new terms,
conditions and prices are ordered by a state public utility commission or
negotiated by the parties. The new terms, conditions and prices would then be
effective retroactive to July 1, 1999. We have negotiated new interconnection
agreements with BellSouth for services in Florida and North Carolina and have
opted into an existing interconnection agreement between BellSouth and another
carrier for services in Mississippi. We continue to negotiate new
interconnection agreements with BellSouth for the remaining six BellSouth
states. We cannot assure you that we will be able to enter into new
interconnection agreements with BellSouth for these remaining states on
favorable terms, if at
20
all. If we are unable to enter into favorable interconnection agreements in our
current or target markets, our business, results of operations and financial
condition may be materially adversely affected.
Under the Telecommunications Act, the regional Bell operating companies will
not be permitted to provide in-region long distance service to customers in
their primary markets until there is adequate competition in the local services
industry. This provides some incentive to these carriers to provide access to
their facilities to competitive new entrants such as ITC/\DeltaCom. We cannot
assure you, however, that once BellSouth or other regional Bell operating
companies are permitted to offer in-region long distance service, they will
continue to be willing to enter into interconnection agreements with us that
will enable us to provide local services on competitive and profitable terms.
We are dependent upon rights-of-way and other third-party agreements to expand
and maintain our fiber optic network.
To construct and maintain our fiber optic network, we have obtained
easements, rights-of-way, franchises and licenses from various private parties,
including actual and potential competitors and local governments. We cannot
assure you that we will continue to have access to existing rights-of-way and
franchises after the expiration of our current agreements, or that we will
obtain additional rights necessary to extend our network on reasonable terms.
In addition, third parties have challenged and may challenge in the future our
use of rights-of-way obtained by others. If a franchise, license or lease
agreement were terminated and we were forced to remove or abandon a significant
portion of our network, such termination could have a material adverse effect
on our business, results of operations, and financial condition. Similarly, our
business plans could be adversely affected if our network expansion is hindered
through delays or denials of rights-of-way, easements or related licenses on
competitive terms. For information on legal proceedings related to some of our
rights-of-way, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
Our inability to maintain our network infrastructure, portions of which we do
not own, could adversely affect our business, results of operations and
financial condition.
Cancellation or non-renewal of any of our significant network agreements
could materially adversely affect our business, results of operations and
financial condition. We have effectively extended our network with minimal
capital expenditures by entering into marketing and management agreements with
three public utility companies to sell long-haul private line services on the
fiber optic networks owned by these companies. Under these agreements, which
have remaining terms ranging from one to four years, we generally earn a
commission based upon a percentage of the gross revenues generated by the sale
of capacity on the utility's networks. We also purchase network capacity to
some cities in North Carolina and South Carolina not covered by the owned and
operated portion of our network under a buy-sell agreement with CFN FiberNet,
which manages fiber optic facilities in those two states and in one additional
state. Our agreement with CFN FiberNet expires in February 2004.
Two of our three agreements with the public utility companies are
nonexclusive. We may encounter competition for capacity on the utilities'
networks from other service providers that enter into comparable arrangements
with the utilities. Any reduction in the amount of capacity that is made
available to us could adversely affect us. To the extent that we are unable to
establish similar arrangements in new markets, we may be required to make
additional capital expenditures to extend our fiber optic network.
Our business also could be materially adversely affected by a cable cut or
equipment failure along our fiber optic network. A portion of our fiber optic
network is not protected by electronic redundancy or geographical diverse
routing. Our lack of these protections would not enable us to reroute traffic
to another fiber in the same fiber sheath in the event of a partial fiber cut
or electronics failure or to an entirely different fiber optic route, assuming
capacity is available, in the event of a total cable cut.
21
We depend on a few large customers for a significant percentage of our revenues
and cannot assure you that we will be able to retain those customers.
The table below sets forth, for 2000 and 1999, the approximate percentages
of our consolidated revenues generated by our five largest retail services
customers and our two largest broadband transport services customers:
Year Ended Year Ended
December 31, 2000 December 31, 1999
----------------- -----------------
Five largest retail services customers.... 7.5% 11.3%
Two largest broadband transport services
customers................................ 11.5% 10.6%
We cannot assure you that we will be able to retain our customers. The loss
of, or a significant decrease of business from, any of our largest customers
would have a material adverse effect on our business, results of operations and
financial condition.
For both retail services and broadband transport services, our customers
generally have concurrent arrangements with more than one service provider.
This enables our customers to reduce their use of our services and switch to
other providers without incurring significant expense. Our agreements with our
customers generally provide that the customer may terminate service without an
early discontinuance charge in the event of specified types of outages in
service and for other defined causes. As of December 31, 2000, our broadband
transport services business had remaining future long-term contract commitments
totaling approximately $95.3 million. Some of those contractual commitments
provide that, if the customer is offered lower pricing with respect to any
circuit by another carrier, the customer's commitment to us will be reduced to
the extent we do not match the price for such circuit and the customer
purchases such circuit from the other carrier.
We depend on sophisticated billing, customer service and information systems.
We depend on sophisticated information and processing systems to grow,
monitor costs, bill customers, provision customer orders and achieve operating
efficiencies. As we increase our provision of dial tone and switched local
access services, the need for enhanced billing and information systems will
also increase. Our inability to identify adequately all of our information and
processing needs, or to upgrade systems as necessary, could have a material
adverse effect on our ability to reach our objectives and on our financial
condition and results of operations.
We are subject to risks associated with rapid changes in technology.
The telecommunications industry is subject to rapid and significant changes
in technology. We may be required to select one emerging technology over
another, but it will be impossible to predict with any certainty, at the time
we are required to make our investment, which technology will prove to be the
most economic, efficient or capable of attracting customer usage. Unexpected
developments, or our failure to adapt to them, could have a material adverse
effect on our business, results of operations and financial condition.
Our success depends on our ability to attract and retain key personnel.
Our business is currently managed by a small number of key management and
operating personnel, including our executive officers. We do not have
employment agreements with, nor do we maintain "key man" insurance on, these
employees. The loss of the services of key personnel, or the inability to
attract, recruit and retain sufficient or additional qualified personnel, could
have a material adverse effect on our business, results of operations and
financial condition.
22
Our operating results could vary significantly from period to period.
Our revenues and operating results could vary significantly from period to
period for many reasons, including:
. significant expenses associated with the construction and expansion of
our network and services;
. competition and regulatory developments;
. changes in market growth rates for our products and services;
. availability or announcement of alternative technologies; and
. general economic conditions.
These factors and any resulting fluctuations in our operating results will
make period-to-period comparisons of our financial condition less meaningful
and could have a material adverse effect on our business, results of operations
and financial condition.
Item 2. Properties.
We have completed construction on approximately 45% of the total planned
floor space of approximately 376,000 square feet for e/\deltacom's data center
in Suwanee, Georgia. The remaining construction on the data center is expected
to be completed during 2001.
We completed construction of our new corporate headquarters in West Point,
Georgia in April 1999.
We own switch sites in Anniston, Birmingham and Montgomery, Alabama and
Nashville, Tennessee and lease space for a network operations center and a
switch site in Arab, Alabama. We also lease space for our switch sites in the
following locations:
. Jacksonville, Ocala and West Palm Beach, Florida;
. Atlanta, Georgia;
. Gulfport, Mississippi;
. Greensboro, North Carolina;
. Columbia, South Carolina; and
. Houston, Texas.
The leases for these switch sites expire on various dates from 2002 to 2014.
We have constructed a multi-service facility in Anniston, Alabama to
function as a centralized switching control center for our network and an
operator services center. In addition, we lease space to operate a customer
network operations center in Atlanta, Georgia.
We operate branch offices in the following locations:
. Anniston, Birmingham, Dothan, Florence, Huntsville, Mobile and
Montgomery, Alabama;
. Daytona, Ft. Lauderdale, Jacksonville, Ocala, Orlando, Pensacola,
Tallahassee and Tampa, Florida;
. Albany, Atlanta (two offices), Augusta, Columbus and Macon, Georgia;
. New Orleans and Baton Rouge, Louisiana;
. Biloxi, Greenwood, Hattiesburg, Jackson and Tupelo, Mississippi;
. Charlotte, Greensboro and Raleigh, North Carolina;
23
. Charleston, Columbia and Greenville, South Carolina; and
. Chattanooga, Knoxville and Nashville, Tennessee.
The leases for these branch offices expire on various dates from 2001 through
2005. We also lease office space for various administrative functions,
including accounting, legal, sales and human resources in Huntsville, Alabama,
and own an administrative office in Arab, Alabama.
As part of our fiber optic network and switched service system, we own or
lease rights-of-way, land, office space and towers throughout the southern
United States.
We own land and microwave transmission towers at various locations in
Alabama.
We expect to lease or purchase additional office space and switching and
other network facilities in connection with the planned expansion of our
network.
Item 3. Legal Proceedings.
We are a party to legal proceedings in the ordinary course of our business,
including disputes with contractors or vendors, which we believe are not
material to our business. We also are a party to regulatory proceedings
affecting the relevant segments of the communications industry generally. For a
description of legal proceedings involving rights-of-way upon which portions of
our network are dependent, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to our security holders in the fourth
quarter of 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is traded on the Nasdaq National Market under the symbol
"ITCD." The following table sets forth for the last two years the high and low
sales prices per share of the common stock as reported by the Nasdaq National
Market:
1999 High Low
---- ------- -------
First Quarter................................................ $22.000 $12.500
Second Quarter............................................... 40.750 19.750
Third Quarter................................................ 32.500 22.063
Fourth Quarter............................................... 31.500 22.500
2000 High Low
---- ------- -------
First Quarter................................................ $43.500 $24.750
Second Quarter............................................... 35.625 16.312
Third Quarter................................................ 23.250 8.375
Fourth Quarter............................................... 12.500 4.375
On March 28, 2001, there were approximately 835 holders of record of our
common stock.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. It is the current policy of our Board of Directors to retain earnings
to finance the expansion of our operations. Future declaration and payment of
dividends, if any, will be determined in light of the then-current conditions,
including our earnings, operations, capital
24
requirements, financial condition, restrictions in financing agreements and
other factors deemed relevant by the Board of Directors. The indentures under
which we have issued our publicly traded senior notes, the agreement for our
$160 million senior secured credit facility and the agreement for our $40
million capital lease facility contain restrictions on our ability to pay cash
dividends. We must satisfy debt incurrence and other financial tests to pay
cash dividends under these agreements.
Item 6. Selected Financial Data.
The following table sets forth selected financial and operating data for
ITC/\DeltaCom. The selected historical statement of operations data for each of
the years ended December 31, 2000, 1999, 1998, 1997 and 1996 and the selected
historical balance sheet data for the years then ended have been derived from
the consolidated financial statements that have been audited by Arthur
Andersen LLP, independent public accountants.
Year Ended December 31,
----------------------------------------------------------
2000 1999 1998 1997(a)(b) 1996(c)
---------- ---------- ---------- ---------- ----------
Income Statement Data:
Operating revenues...... $ 363,648 $ 244,844 $ 171,838 $ 114,590 $ 66,518
---------- ---------- ---------- ---------- ----------
Expenses:
Cost of services....... 155,000 118,721 82,979 54,550 38,756
Selling, operations and
administration........ 151,050 96,854 64,901 38,255 18,876
Depreciation and
amortization.......... 86,519 53,810 30,887 18,332 6,438
---------- ---------- ---------- ---------- ----------
Total expenses......... 392,569 269,385 178,767 111,137 64,070
---------- ---------- ---------- ---------- ----------
Operating (loss)
income................. (28,921) (24,541) (6,929) 3,453 2,448
Equity in losses of
unconsolidated
subsidiaries........... 0 0 0 0 (1,590)
Interest expense........ (55,482) (45,293) (31,930) (21,367) (6,173)
Interest and other
income (expense), net.. 14,337 14,949 6,499 4,251 172
---------- ---------- ---------- ---------- ----------
Loss before income
taxes, preacquisition
loss and extraordinary
item................... (70,066) (54,885) (32,360) (13,663) (5,143)
Income tax (benefit)
expense................ (512) 94 (6,454) (3,324) (1,233)
Preacquisition loss..... 0 0 0 74 0
Extraordinary item (net
of tax)................ (1,321) 0 (8,436) (508) 0
---------- ---------- ---------- ---------- ----------
Net loss............... $ (70,875) $ (54,979) $ (34,342) $ (10,773) $ (3,910)
========== ========== ========== ========== ==========
Basic and diluted net
loss per common
share:(d)(e)
Before extraordinary
loss.................. $ (1.14) $ (0.98) $ (0.51) $ (0.26) $ (0.10)
Extraordinary loss..... (0.02) 0.00 (0.16) (0.01) 0.00
---------- ---------- ---------- ---------- ----------
Net loss............... $ (1.16) $ (0.98) $ (0.67) $ (0.27) $ (0.10)
========== ========== ========== ========== ==========
Basic weighted average
common shares
outstanding(d)(e)...... 60,928,387 56,370,269 50,972,361 40,249,816 38,107,350
Diluted weighted average
common shares
outstanding(d)(e)...... 60,928,387 56,370,269 50,972,361 40,249,816 38,203,852
Balance Sheet Data:
Working capital......... $ 85,094 $ 244,913 $ 190,118 $ 116,446 $ 3,415
Total assets............ 1,048,526 807,598 587,517 386,104 113,208
Long-term debt, advances
from ITC Holding and
capital lease
obligations, including
current portions....... 713,869 516,907 417,934 203,889 75,443
Stockholders' equity.... 181,053 218,162 118,200 148,266 19,257
Other Financial Data:
Capital expenditures.... 309,831 165,540 147,842 43,874 6,173
Cash flows provided by
(used in) operating
activities............. 45,931 (5,334) 9,512 6,302 8,189
Cash flows used in
investing activities... 305,208 149,995 118,166 93,854 72,694
Cash flows provided by
financing activities... 151,986 219,593 198,447 180,625 65,150
EBITDA, as adjusted(f).. 57,598 29,269 23,958 21,785 8,886
Ratio of earnings to
fixed charges(g)....... -- -- -- -- --
- --------
(a) On March 27, 1997, ITC/\DeltaCom purchased fiber and fiber-related assets,
including a significant customer contract for network services in Georgia,
from SCANA Corporation. The results of operations for these assets are
included in ITC/\DeltaCom's consolidated statements of operations beginning
March 27, 1997.
25
(b) On March 27, 1997, ITC/\DeltaCom purchased the remaining 64% partnership
interest in Gulf States FiberNet that it did not already own from SCANA.
Gulf States FiberNet's revenues and expenses have been included in the
consolidated statement of operations data effective January 1, 1997, with
the preacquisition loss attributable to the previous owner deducted to
determine the consolidated net loss for the year ended December 31, 1997.
(c) On January 29, 1996, our predecessor purchased DeltaCom, Inc., which
subsequently was renamed ITC/\DeltaCom Communications, Inc. and became one
of our subsidiaries as part of a 1997 reorganization of ITC Holding
Company, Inc. and its affiliated entities. That company's results of
operations are included in the historical statement of operations data
since the date of acquisition.
(d) On September 4, 1998, ITC/\DeltaCom effected a two-for-one stock split of
its common stock in the form of a stock dividend. All references to number
of shares, except shares authorized, and to per share information in the
consolidated financial statements have been adjusted to reflect the stock
split on a retroactive basis.
(e) Pursuant to SEC Staff Accounting Bulletin 98, for periods prior to the
completion of the initial public offering of our common stock, basic net
loss per share is computed using the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per share is
computed using the weighted average number of shares of common stock
outstanding during the period and nominal issuances of common stock and
common stock equivalents, regardless of whether they are anti-dilutive.
(f) EBITDA, as adjusted, represents earnings before extraordinary item,
preacquisition loss, equity in losses of unconsolidated subsidiaries, net
interest, other income and other expenses, income taxes, and depreciation
and amortization. EBITDA, as adjusted, is provided because it is a measure
commonly used in the industry. EBITDA, as adjusted, is not a measurement of
financial performance under accounting principles generally accepted in the
United States and should not be considered an alternative to net income as
a measure of performance or to cash flow as a measure of liquidity. EBITDA,
as adjusted, is not necessarily comparable with similarly titled measures
for other companies.
(g) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consist of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing
interest, estimated to be one-third of such expense. Earnings were
insufficient to cover fixed charges for the years ended December 31, 2000,
1999, 1998, 1997 and 1996 by $70.1 million, $54.9 million, $32.4 million,
$13.7 million and $5.1 million, respectively.
26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We have included data with respect to EBITDA, as adjusted, in the following
analysis because it is a measure commonly used in our industry. EBITDA, as
adjusted, represents earnings before extraordinary item, preacquisition loss,
equity in losses of unconsolidated subsidiaries, net interest, other income and
other expenses, income taxes, and depreciation and amortization. EBITDA, as
adjusted, is not a measure of financial performance under accounting principles
generally accepted in the United States and should not be considered an
alternative to net income as a measure of performance or to cash flow as a
measure of liquidity. EBITDA, as adjusted, is not necessarily comparable with
similarly titled measures for other companies.
Overview
We provide integrated voice and data telecommunications services on a retail
basis to mid-size and major regional businesses in the southern United States.
We also are a leading regional provider of wholesale long-haul services, which
we refer to as our "broadband transport services," to other telecommunications
companies. In connection with these businesses, we own, operate and manage an
extensive fiber optic network in the southern United States.
We provide our retail services individually or in a bundled package tailored
to the business customer's specific needs. At December 31, 2000, we provided
our retail services to approximately 13,700 business customers in 37
metropolitan areas and had sold approximately 303,700 access lines, of which
approximately 226,650 had been installed. Our retail services business
generated revenues of $269.9 million in 2000, $172.0 million in 1999 and $119.9
million in 1998.
Our broadband transport services include the provision of long-haul
telecommunications transmission capacity on our network to other
telecommunications carriers and the switching and transportation of
telecommunications traffic for these carriers. During 2000, we extended our
fiber network approximately 1,390 route miles to approximately 9,640 route
miles. We own the network fiber and related electronics for approximately 5,940
of our total network route miles and we manage and market under our own name
the network fiber and related electronics for the remaining 3,700 route miles
under long-term agreements with the owners of those networks. Our broadband
transport services business generated revenues of $83.3 million in 2000, $72.9
million in 1999 and $51.9 million in 1998.
In March 2000, we inaugurated a new line of business, which we refer to as
e/\deltacom. e/\deltacom provides colocation services, managed services and
professional services integral to operating important business applications
over the Internet. e/\deltacom also provides a wide range of optional
configurations and services. e/\deltacom, which began generating revenues in May
2000, had revenues of $10.4 million in 2000.
Operating Revenues. Retail services and broadband transport services
currently account for the vast majority of our operating revenues.
Retail Services. We currentl