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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
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
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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) (Zip Code)
(706) 385-8000
(Registrant's telephone number, including area code)
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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)
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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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [_] No [X]
The aggregate market value of the registrant's voting and non-voting common
equity held by non-affiliates of the registrant at June 28, 2002, based upon the
last reported sale price of the registrant's common stock on the NASDAQ National
Market on that date, was approximately $3.0 million.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding on March
21, 2003 was 44,848,300.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business ............................................................................. 1
Item 2. Properties ........................................................................... 18
Item 3. Legal Proceedings .................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders .................................. 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................ 24
Item 6. Selected Financial Data .............................................................. 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ........................................................................ 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................... 52
Item 8. Financial Statements and Supplementary Data .......................................... 53
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure ........................................................................ 53
PART III
Item 10. Directors and Executive Officers of the Registrant ................................... 54
Item 11. Executive Compensation ............................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ............................................................... 63
Item 13. Certain Relationships and Related Transactions ....................................... 70
Item 14. Controls and Procedures .............................................................. 74
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 75
Index to Consolidated Financial Statements ............................................................ F-1
i
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report contains 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. We intend our forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements in these sections. All
statements regarding our expected financial position and operating results, our
business strategy, our financing plans, forecasted demographic and economic
trends relating to our industry and the markets in which we operate, and similar
matters are forward-looking statements. These statements can sometimes be
identified by our use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect" or "intend." We cannot promise you that our
expectations in such forward-looking statements will turn out to be correct. Our
actual results could be materially different from our expectations because of
various factors, including those discussed under "Business--Risks" in
this report.
ii
PART I
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 the nearest hundred thousand and dollar amounts less than $1
million to the nearest thousand.
Item 1. Business.
Overview
ITC/\DeltaCom, Inc. is a competitive telecommunications company that
provides voice and data telecommunications services on a retail basis to
businesses and residential customers in the southern United States and regional
telecommunications transmission services over its network on a wholesale basis
to other telecommunications companies. In connection with these services, we
own, operate or manage an extensive fiber optic network, which extends
throughout ten southern states.
Beginning in the third quarter of 2001, we initiated a strategic and
operational restructuring intended to accelerate positive cash flow from
operations by emphasizing our core retail services and reducing operating costs.
In addition to de-emphasizing some non-core services, the key elements of this
strategy include reduction of our employee base, consolidation of facilities and
operations, and reduction of capital expenditures. We also have sought to
eliminate a substantial portion of our existing indebtedness and reduce our
fixed interest costs so that we are able to achieve and maintain positive cash
flow from operations through the current period of uncertainty affecting the
telecommunications industry and competitive telecommunications companies.
In order to complete our reorganization expeditiously, we filed a voluntary
petition for relief under Chapter 11 of the United States bankruptcy code on
June 25, 2002. On October 17, 2002, the United States bankruptcy court entered
an order confirming our plan of reorganization. We consummated our
reorganization under the plan on October 29, 2002.
As a consequence of our reorganization and in accordance with applicable
accounting rules, we have separately presented our financial results for 2002 in
the accompanying audited consolidated financial statements and in other portions
of this report as follows: results for the period from January 1, 2002 to
October 29, 2002 are reported under "Predecessor" and the results for the period
from October 30, 2002 to December 31, 2002 are reported under "Successor." To
compare our 2002 financial results, after giving effect to our reorganization,
to our 2001 financial results for purposes of the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere in
this report, we have combined the periods from January 1, 2002 to October 29,
2002 and from October 30, 2002 to December 31, 2002.
We were incorporated in Delaware in 1997. 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. Our web site may be found at
www.itcdeltacom.com. The contents of our web site do not form part of this
report.
Services and Facilities
Services. We currently provide our services in two business segments:
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. integrated voice and data telecommunications services on a retail
basis, which we refer to as our "retail services"; and
. regional telecommunications transmission services to other
telecommunications companies on a wholesale basis using our fiber
optic network and directory assistance services, which we refer to as
our "broadband transport services."
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-free 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 and fax broadcasting;
. consulting, integration, operation and proactive management of data
networks;
. in-depth network performance analysis and implementation and design
services for data network deployment;
. Internet access services;
. customer premise equipment sales, installation and maintenance; and
. managed services, professional services and hardware and software
sales.
Our customer-focused software and network architecture permit us to present our
customers with one fully integrated monthly billing statement for the entire
package of telecommunications services they purchase from us.
We previously provided our managed services, professional services and
hardware and software sales operations through our e/\deltacom business, which
we reported as a separate business segment through December 31, 2001. Because we
no longer manage e/\deltacom as a separate business segment, we integrated these
services into our suite of retail services beginning in the first quarter of
2002.
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." We offer local telephone services in all 35 markets in which we have
a branch office.
In connection with offering local telephone services, we have entered into
interconnection agreements with BellSouth Telecommunications, Inc., CenturyTel,
Inc., SBC Communications Inc., Sprint Communications Company, L.P. 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 reduced capital expenditures and
to offer local service to our customer base. State regulatory authorities have
approved the terms of our interconnection agreements. Our interconnection
agreements will remain subject to review and modification by these state
regulatory 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
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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.
Our interconnection agreements with BellSouth expire in June 2003. We will
continue to operate under the terms of the existing agreements until new
agreements are reached. We are arbitrating, or plan to initiate arbitration of,
the rates and terms of new interconnection agreements with BellSouth in all nine
BellSouth states. We are unable to determine the impact, if any, these
arbitration proceedings or any new interconnection agreements will have on our
results of operations and financial condition.
Our strategy is to offer facilities-based local service in a majority of
our markets by connecting, or "colocating," our equipment with the equipment of
the former monopoly local telephone companies with which we have interconnection
agreements. As of December 31, 2002, we had installed our telecommunications
equipment in 185 locations and were offering our "Infinity" local telephone
service, as well as our "Unity," "DUNE" and data services, in all of the 35
markets in which we have a branch office. The Unity service typically connects
our customer's telecommunications equipment to our network using a direct T-1
digital transmission line and provides the customer with local and long distance
calling capacity on any of the T-1's 24 available channels. DUNE is an offering
of individual telephone lines on a T-1 digital transmission line and is
connected directly to a customer's telephone or other telecommunications
equipment.
Since the fourth quarter of 1999, we have offered 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 service enables us to take advantage of our existing voice services and
network infrastructure by selling data services over the same transmission line.
In the fourth quarter of 2000, we began to offer, under an agreement we
signed with BellSouth in June 2000, a UNE-P, or unbundled network
element-platform, service in all of the BellSouth markets in which we operate.
To provide the UNE-P service, we purchase all of the required elements from
BellSouth at reduced prices. This has allowed us to earn higher gross margins on
the sale of our services. Through December 31, 2002, we had installed over
52,950 UNE-P lines. We expect to continue to convert resale customers to this
service during 2003. We anticipate that this conversion will continue to have a
favorable impact on our gross margins.
Long Distance Telephone Services. We offer a range of retail long distance
telephone services, including traditional switched and dedicated long distance,
toll-free 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.
Since 2001, we have offered 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.
Internet Access. We provide dedicated Internet access, electronic mail and
web hosting services. We expect businesses will require faster Internet access
and larger bandwidth in the future, and we intend to offer products that will
meet that demand.
3
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 network equipment.
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;
. Albany, Atlanta, Augusta, Columbus and Macon, Georgia;
. Pensacola, Florida;
. Baton Rouge and New Orleans, Louisiana;
. Biloxi, Greenwood, Gulfport, Hattiesburg, Jackson and Tupelo,
Mississippi;
. Charlotte, North Carolina;
. Charleston, Columbia and Greenville, South Carolina; and
. Nashville, Tennessee.
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.
Colocation Services. Our colocation services allow businesses to have a
secure data center presence without incurring significant capital expenditures,
increasing traffic on their corporate network or burdening their information
technology staff. We offer hosting, security, data storage, monitoring,
networking 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. Our managed services include system monitoring, managed
messaging, managed system and e-mail security services, storage management
services and hardware management services. Our system monitoring services
include the monitoring of critical system thresholds, problem resolution and
detailed reporting. Our managed security services include managed firewalls,
virtual private networks, intrusion detection, vulnerability assessments,
content and virus scanning and authentication systems. Our 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 our 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.
Hardware and software sales. We sell hardware and software from various
manufacturers, including Sun Microsystems, Inc., Cisco Systems, Inc., EMC
Corporation, Hewlett-Packard Company, Microsoft Corporation, Checkpoint Systems,
Inc. and Oracle Corporation.
Broadband Transport Services. Our broadband transport services customers
include telecommunications
4
companies that own transmission facilities, such as fiber optic cables, as well
as telecommunications companies that do not own transmission facilities. These
customers use our broadband transport services to transport the traffic of their
customers 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 of capacity that is actually used by the customer. We
also offer directory assistance services through our broadband transport
services business.
As a result of general market conditions and continued reductions in the
rates we charge for our broadband transport services, we have decreased the
amount of capital we invest in our broadband transport business. We expect that
our broadband transport services will continue to experience less favorable
market conditions and a decline in revenues in 2003 compared to 2002.
Consolidation of Retail Services and Broadband Transport Services Segments.
As a result of cost-reducing measures we implemented in connection with our
reorganization and the changing environment of the telecommunications business.
We expect to consolidate, beginning with the first quarter of 2003, our
broadband transport services segment into our retail services segment, which
will be managed and reported as a single business segment. We expect to continue
to provide detailed revenue disclosure concerning our end-user, retail customers
and our wholesale customers.
Facilities. As of December 31, 2002, we owned or managed approximately
10,088 route miles of a fiber optic network that covered portions of ten states
in the southern United States. As of the same date, our network extended to
approximately 188 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 population centers in the areas covered by our fiber optic network and in
a significant number of smaller cities, including in some smaller cities where
our only competitor is the former monopoly local telephone company.
As of December 31, 2002, we owned approximately 6,143 route miles of our
fiber optic network, which we have built or acquired since 1992, either directly
or through indefeasible rights of use arrangements. 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 3,945 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
PalmettoNet, Inc. and SCANA Communications, Inc., which manage fiber optic
facilities in those two states. This agreement enables us to buy capacity on the
networks of these two companies at pre-established prices, which are generally
more favorable than the prices for such capacity available in the open market.
As a result of cost-reducing measures we implemented in connection with our
2002 reorganization and the continued revenue decline experienced by our
broadband transport business, we do not expect to spend a significant amount of
capital on the development of our fiber optic network in 2003 or, possibly,
thereafter. We expect little, if any, expansion of our network route mileage
during 2003, and anticipate that any capital expenditures associated with our
network will be applied to maintain the existing capabilities of the network.
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, over a portion of our network. At December 31,
2002, over 63% 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
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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 before
a deadline that has been extended to April 4, 2003. As of December 31, 2002, we
had purchased $115.9 million of such products and services. For additional
information about our agreement with Nortel Networks, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
A key component of our network is our switches, which are the primary
electronic components that connect customers to our network and transmit voice
communications over our network. Our primary switching facilities for voice
communications consist of 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;
. Nashville, Tennessee; and
. Houston, Texas.
The Nortel DMS-500 switches are capable of handling both local and long distance
voice and data traffic.
We expect to continue to evaluate our network and assess the need for
additional switching capacity. We also have colocated telecommunications
equipment in various markets in the southern United States. Colocation enables
us to provide remote local and long distance services in additional markets
where we do not have switches by using our Nortel DMS-500 switches as hosts to
the equipment we locate in remote markets. This equipment is connected to our
Nortel DMS-500 switching platform using our fiber optic network wherever
possible. This networking design, together with our interconnection agreements
with large local telephone companies such as BellSouth, has enabled us to be a
facilities-based provider of local and long distance telephone services in all
of our markets.
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
telecommunications services providers in the United States.
In November 2000, we opened and commenced operations in an initial portion
of our data center in Suwanee, Georgia. We completed the remainder of the
facility in 2001. The data center is a centralized facility that provides
advanced hosting, colocation and other services. The data center floor space
contains open racks, enclosed cabinets, caged areas and suites. 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 air quality 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.
6
Sales and Marketing
Retail Services. We focus our retail sales efforts on 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 have 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.
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, data and Internet services. The agreements also generally provide
that the customer may terminate the affected service without a charge for early
termination in the event of substantial and prolonged outages arising from
causes within our control and for other specified causes. The agreements
generally 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.
We also offer colocation services, managed services, professional services
and hardware and software sales from our data center in Suwanee, Georgia to
business customers. The sales personnel for these services and products 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 these services as part of our bundle of retail service offerings.
During the first quarter of 2003, we initiated our "Grapevine" offering of
local services to residential customers. Grapevine customers receive our local
telephone services bundled with one of our long distance service plans. We
expect the incremental revenues generated by Grapevine will augment our existing
customer base, although we currently do not expect that our offering of
residential services will capture a significant share of the residential market
for local telephone service.
Broadband Transport Services. We provide long distance voice and data
transmission services through long distance circuit contracts with other long
distance carriers, including WorldCom, Inc., Sprint, Qwest Communications
International Inc. and Cable & Wireless plc. As of December 31, 2002, we had
remaining future long-term contract commitments for broadband transport services
totaling approximately $62.7 million, which expire on various dates through
2007. 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.
7
Competition
The telecommunications industry is highly competitive. We compete primarily
on the basis of the price, availability, reliability, variety and quality of our
offerings and on the quality of our customer service. 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 Corp., Sprint, WorldCom and BellSouth. 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 Inc. and Qwest 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 local and long distance market from
local carriers, resellers, cable companies, wireless carriers and satellite
carriers, and may 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.
Our principal competitor for local services is the incumbent carrier in the
particular market, which is BellSouth in a large majority of our market areas.
Incumbent carriers enjoy substantial competitive advantages arising from their
historical monopoly position in the local telephone market, including
pre-existing customer relationships with all or virtually all end-users.
Further, we are highly dependent on incumbent carriers 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
incumbent carriers, which we refer to as "competitive carriers," some of which
already have 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 are competing with
wireline local telephone service providers, which further increases competition.
Local and long distance marketing is converging, as other carriers offer
integrated retail services. For example, many competitive 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
are 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. The regional Bell operating companies have
already obtained approval to provide in-region long distance service in many
states. As of December 31, 2002, the FCC had approved applications of BellSouth
to provide in-region long distance service throughout its region, in Alabama,
Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina, and Tennessee. SBC Communications has been authorized to provide
in-region long distance service in Arkansas, Texas, California, Kansas, Missouri
and Oklahoma. Verizon Communications has been authorized to provide in-region
long distance service in Connecticut, Delaware, Maine, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont and
Virginia, and has additional applications pending in the District of Columbia,
Maryland, and West Virginia. Qwest Communications has been authorized to provide
in-region long distance service in Colorado, Idaho, Iowa, Montana, Nebraska,
North Dakota, Utah, Washington and Wyoming. By offering in-region long distance
services in our markets, BellSouth is able to offer substantially the same
integrated local and long distance services as ITC/\DeltaCom, and will 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
8
industry also could increase the level of competition faced by our broadband
transport customers and us. 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,
Time Warner, Inc. merged with America Online, Inc. to form AOL Time Warner Inc.
in January 2001, and the AT&T Broadband unit merged with Comcast Corporation in
November 2002. In addition, SBC Communications and Williams Communications, a
long distance services provider, entered into a strategic alliance in 2000
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 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 classified 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 the 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 required non-dominant long distance companies, including us, to
detariff interstate long distance domestic and international services in 2001.
In 2001, the FCC also permitted competitive local carriers, including us, to
choose either to detariff the interstate access services that we sell to long
distance companies that originate or terminate traffic from or to our local
customers, or to maintain tariffs but comply with rate caps. Tariffs set forth
the rates, terms and conditions for service and must be updated or amended when
rates are adjusted or products are added or removed. Before detariffing, we
filed tariffs with the FCC to govern our relationship with most of our long
distance customers and with long distance companies that originated or
terminated traffic from or to our local customers. The detariffing process has
required us, among other things, to post these tariffs on our web site instead
of filing them at the FCC. Because detariffing precludes us from filing our
tariffs at the FCC, we are no longer subject to the "filed rate doctrine," under
which the tariff controls all contractual disputes between a carrier and its
customers. The detariffing process has effectively required us to enter into
individual contracts with each of our customers and to notify our customers when
rates are adjusted or products are added or removed. This process increases our
costs of doing business. Detariffing may expose us to legal liabilities and
costs if we can no longer rely on the filed rate doctrine to settle contract
disputes with our customers.
The FCC's role with respect to local telephone competition arises
principally from the Telecommunications Act of 1996. The Telecommunications Act
preempts state and local laws to the extent that they prevent competition in the
provision of any telecommunications service. Subject to this limitation, state
and local governments retain telecommunications regulatory authority over
intrastate telecomunications. The Telecommunications Act imposes a variety of
duties on local carriers, including competitive carriers such as ITC/\ltaCom,
in order to promote competition in the provision of local telephone services.
These duties include requirements for local carriers to:
. complete calls originated by customers of competing carriers on a
reciprocal basis;
. permit the resale of their services;
. permit users to retain their telephone numbers when changing carriers;
and
9
. provide competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
Incumbent carriers also are subject to additional duties. These duties
include obligations of 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 some elements of incumbent carrier networks and facilities under
specified circumstances. Failure to achieve and maintain 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.
The FCC recently adopted changes to the rules defining the circumstances
under which incumbent carriers must make network elements available to
competitors. The FCC has released a summary of its decision, but as of March 24,
2003 had not released the full text of the order, so many details of the
decision have not been made public. The changes described in the summary could
significantly limit our access to incumbent carriers' network elements. First,
the FCC adopted rules permitting state regulators, under specified
circumstances, to impose significant limitations on the ability of competitive
carriers like us to purchase the "unbundled network element platform," or
"UNE-P," from incumbent local exchange carriers at regulated prices based on the
FCC's "Total Element Long Run Incremental Cost" or "TELRIC" methodology. The
state commissions may impose geographic limitations or time limitations on the
availability of UNE-P at TELRIC rates, and may impose time limitations or phase
out the availability of this offering over a specified time period. Second, the
FCC adopted restrictions on the availability of some broadband loops and network
elements at TELRIC rates and limited the services that competitors can provide
over those elements. In addition, the FCC is eliminating, following a transition
period, the requirement that incumbent local exchange carriers provide "line
sharing" arrangements, which some competitive local carriers use to provide
broadband telecommunications and Internet services. The FCC may further
deregulate the incumbent carriers' broadband offerings and/or restrict the
availability of those carriers' broadband facilities to competitive carriers.
Each of these policy decisions is likely to be challenged on appeal. It is
difficult to predict the length and outcome of the judicial appeal proceedings.
Finally, the FCC is likely to initiate a re-examination of its TELRIC pricing
methodology for network elements. Such a re-examination may lead to unfavorable
changes to these pricing rules. Legislation has been proposed in Congress in the
past and may be proposed in the future that would further restrict competitive
carriers' access to incumbent local carriers' network elements. Any restriction
on, or reduction of, the network elements available to us could have a material
adverse effect on our business.
Among other interconnection agreements, we entered into new interconnection
agreements with BellSouth in 1999 that have enabled us to continue to provide
local service in all nine BellSouth states 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. These interconnection
agreements expire in June 2003. We are arbitrating the rates and terms of a new
agreement with BellSouth. These interconnection agreements have not resolved,
and we do not expect the contemplated new BellSouth interconnection agreements
will resolve, all operational issues, including those relating to the colocation
of our equipment with that of BellSouth. We expect, but cannot assure you, that
each new BellSouth interconnection agreement to which we are a party will
provide us with the ability to provide local service in the nine BellSouth
states on a reasonable commercial basis.
In July 2001, the FCC adopted revised rules affecting its equipment
colocation requirements. In a number of ways, the FCC's revised rules are
favorable to competing carriers such as ITC/\ltaCom. In other ways, however,
10
these rules may prevent competing carriers from colocating their equipment in a
manner that best suits their business needs. We expect that the interconnection
agreements we enter into with BellSouth and with other carriers will be subject
to the FCC's revised colocation rules, but these rules may change or otherwise
operate to the advantage of incumbent carriers.
The Telecommunications Act eliminated 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 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 are 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. BellSouth has completed the process of obtaining long distance
approval in all nine states in its region.
In the future, an important element of providing competitive local services
may be the ability to offer customers high-speed broadband local connections. As
discussed above, the FCC recently adopted significant restrictions on the
unbundled network elements that incumbent carriers must make available to
competitors to enable them to provide broadband services to customers using
incumbent carrier networks. The FCC also is considering what regulatory
treatment, if any, should be accorded to digital subscriber line services
provided by telecommunications companies and to cable modem services, which are
used by cable companies to deploy high-speed Internet access services. The FCC
has sought comment on a number of other regulatory proposals that could affect
the speed and manner in which high-speed broadband local services are deployed
by our competitors. Congress has also considered in the past and may consider in
the future legislation that would deregulate some aspects of the incumbent local
carriers' broadband services and would reduce the extent to which those carriers
must provide access to their networks to competitive local carriers for the
provision of broadband services. Several cable companies already are offering
broadband Internet access over their network facilities, and incumbent carriers
and competitive carriers also offer such service through digital subscriber line
technology. If we are unable to meet the 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 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 2001, the
FCC continued its efforts to lower access charges. We expect further FCC action
in this area. The full impact of the FCC's decisions will not be known until its
decisions are implemented over the next several years, at which time they could
have an adverse impact on our business.
In April 2001, the FCC issued a ruling changing the compensation mechanism
for traffic exchanged between telecommunications carriers that is destined for
Internet service providers. In doing so, the FCC prescribed a new rate structure
for this traffic and prescribed gradually reduced caps for its compensation.
ITC/\DeltaCom may, in the course of its business, exchange the traffic of
Internet service providers with other carriers. The FCC's ruling in connection
with such traffic affected a large number of carriers, including ITC/\DeltaCom,
and further developments in this area could have a significant impact on the
industry and on us. While a federal court remanded that FCC decision for further
consideration, the court did not reverse the decision, so it remains in effect.
The FCC is likely to re-adopt the same substantive requirements but with a
revised rationale in response to the court's remand decision.
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 this pricing flexibility
will not place us at a competitive disadvantage, either as a purchaser of access
for our long distance operations or as
11
a vendor of access to other carriers or end-user customers.
In a related proceeding, the FCC has changed the methodology used to
subsidize universal telephone service and other public policy goals. Beginning
in April 2003, telecommunications providers like us will pay a fee calculated as
a percentage of projected revenues for the quarter of contribution in order to
support these goals. Before April 2003, the calculation was based on historical
revenues. Some states are also implementing universal service funds. The effects
of these decisions are uncertain and subject to change. In particular, the fees
we pay to subsidize universal service may increase or decrease substantially in
the future as a result of these federal and state proceedings.
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 a
federal court of appeals 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. The FCC is in the process of re-examining this
issue. We are not in a position to determine how these issues regarding access
charges and universal service fees will be resolved or whether the resolution of
these issues will be harmful to our competitive position or our results of
operations.
The FCC 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. The FCC or third parties may 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 impede our reliance on the filed rate
doctrine and increase our costs of doing business.
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, cancelled,
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.
Public utility commissions or third parties may 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.
12
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. The scope of
state regulation 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 United States 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. 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. For example, the FCC recently decided
that state commissions would play the main role in determining whether the
elements included in the unbundled network element platform, or "UNE-P," will
continue to be made available at cost-based rates in particular geographic areas
and for purposes of serving particular classes of customers. It is unclear how
particular state commissions will exercise this authority. Moreover, state
commissions may seek to eliminate or restrict network elements or combinations
of elements that the FCC decides to retain, or to retain elements or
combinations that the FCC decides to eliminate or restrict. Any such conflicts
between regulatory authorities are likely to be decided by reviewing courts, and
it is not clear how such differences will be resolved. It is difficult to
predict 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 applicable 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 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 their non-competitive services, thereby
allowing incumbent carriers to offer competitive services at prices lower than
most or all of their competitors. BellSouth has obtained authority to create
affiliates that would operate on a much less regulated basis and, therefore,
could provide significant competition even if the traditional BellSouth local
business does not receive more pricing flexibility. Kentucky has placed
limitations on such affiliates, while Tennessee has refused such affiliate
applications by 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 network equipment, we are required
to pay license or franchise fees based on a percentage of gross revenues or a
per linear foot basis. Following the expiration of existing franchises, these
fees may not 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
13
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 any 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, 2002, we had approximately 1,830 employees, of whom
1,735 were full-time employees. None of our employees is 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.
Risks
Our business and affairs are subject to a number of risks, including the
following:
Our adoption of fresh start reporting will make some period-to-period
comparisons of our financial condition less meaningful.
Our financial statements published for periods following the effectiveness
of our plan of reorganization under Chapter 11 of the United States bankruptcy
code will not be comparable to our financial statements published before the
effectiveness of the plan of reorganization and included elsewhere in this
report. On October 30, 2002, following the consummation of our plan of
reorganization, we implemented fresh start reporting under applicable accounting
principles. As a result, we have allocated the reorganization fair value of
ITC/\DeltaCom to our assets and liabilities, eliminated our deficit, and
reflected the reorganization transactions under stockholders' equity. Our
adoption of Statement of Position 90-7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code," and fresh start reporting have had a
material effect on our financial statements.
Our wholesale services, including our broadband transport services, have been
adversely affected by network overcapacity, service cancellations, bankruptcies
and other factors.
In recent periods, we have experienced adverse trends relating to our
wholesale service offerings, including our broadband transport services, that
have resulted primarily from a reduction in rates charged to our customers due
to overcapacity in the broadband services business and from service
cancellations by some customers, including customers of our local
interconnection business. We expect that these factors will result in continued
declines in revenues and EBITDA, as adjusted, from broadband transport services
in 2003 compared to 2002, while our local interconnection revenues should
stabilize in the second quarter of 2003. EBITDA, as adjusted, represents
earnings before net interest, other income and other expenses, reorganization
items, income taxes and depreciation and amortization. As a result, we have
decreased the amount of capital we invest in our wholesale business, which could
lead to further revenue declines.
We are subject to legal proceedings that could adversely affect our ability to
provide services.
To maintain our fiber optic network, we have obtained easements,
rights-of-way, franchises and licenses from various private parties, including
actual and potential competitors, local governments, private landowners and
others. We may not be able to continue to use or have access to all of our
existing easements, rights-of-way, franchises and licenses or be able to renew
or replace them after they expire. Third parties have initiated legal
proceedings challenging some of our significant licenses to use the
rights-of-way of others, including our licenses to use the rights-of-way of
Mississippi Power Company, Florida Power Company, Gulf Power Company, Georgia
Power Company, Kansas City Southern Railroad and Illinois Central Railroad. If
some of these or similar future challenges are successful, or if we otherwise
are unsuccessful in maintaining or renewing our rights to use our network
14
easements, rights-of-way, franchises and licenses, we may be forced to abandon
significant portions of our network and possibly pay monetary damages. For
information concerning legal proceedings related to some of our rights-of-way,
see "Legal Proceedings."
Our business is subject to significant competitive pressures that could limit
our ability to grow.
Our industry is highly competitive, and the level of competition,
particularly with respect to pricing, is increasing. We may not be able to
achieve or sustain operating profitability, adequate market share or significant
revenue growth in any of our markets. The prices we charge for our retail local,
long distance and data services and for our broadband transport services have
declined significantly in recent years. Some or all of these prices may continue
to decline, which could adversely affect our ability to generate positive cash
flows from operations. We may be required to reduce further our prices for the
local, long distance or data services because BellSouth, our principal
competitor in many of the markets we serve, has been authorized to offer
in-region long distance services throughout its nine-state region. We expect to
continue to face significant pricing and product competition from BellSouth and
the other large, established telephone companies that currently are the dominant
providers of telecommunications services in our markets. We also will continue
to face significant competitive product and pricing pressures from other
companies like us that attempt to compete in the local services market.
Agreements governing our current indebtedness contain restrictive covenants that
place limits on our business activities.
We are subject to restrictions under our $156 million credit facility and
capital lease facilities with NTFC Capital Corporation and General Electric
Capital Corporation. These restrictions affect and, in some cases, significantly
limit or prohibit, among other things, our ability to incur additional
indebtedness, create liens, make investments and sell assets. For us to incur
additional indebtedness under the foregoing agreements, the indebtedness must
meet a specified minimum interest coverage ratio or qualify as one of a limited
number of specified types of permitted indebtedness. These agreements may limit
our flexibility to plan for, or react to, changes in our business, place us at a
competitive disadvantage relative to our competitors who have less debt, make us
more vulnerable to a downturn in our business or the economy generally, and
require 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 will have to generate substantial operating cash flow to meet our obligations
under our debt agreements.
Our ability to make scheduled principal and interest payments under our
$156 million senior credit facility and principal capital lease facilities,
incur additional indebtedness and continue to comply with our loan covenants
will depend primarily on our success in generating substantial operating cash
flow. Our failure to comply with our loan covenants might cause our lenders to
accelerate our repayment obligations under our senior credit facility and under
our principal capital lease facilities, which may be declared payable
immediately based on a senior credit facility default. We will be required
through June 30, 2006 to repay an increasing amount of our $156 million of
outstanding borrowings under our senior credit facility. To remain in compliance
with our senior credit facility covenants, we must comply with financial
covenants and ratios based on our levels of capital expenditures, secured and
total debt, and cash flow. For more information about these covenants and
ratios, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
We may be required to make change of control payments totaling approximately
$19.7 million under one of our rights-of-way agreements, which would
significantly reduce the funds we can invest in our business.
We have obtained a portion of our rights-of-way under an agreement with
Southern Telecom, Inc. and its affiliates that provides for significant annual
fixed payments by us through 2020. Events specified in the agreement, including
a change of control of ITC/\DeltaCom, as defined, can cause termination of the
annual payment provisions and require us to make a one-time payment. In January
2003, Southern Telecom initiated suit against us, claiming that our October 2002
reorganization resulted in a change of control of ITC/\DeltaCom under the
agreement. As a
15
result, Southern Telecom has claimed that we became obligated to pay it a total
of approximately $19.7 million. We do not believe we are obligated to make this
payment. Nevertheless, if we are required to make the payment, the funds we have
available for other uses related to the operation or expansion of our business
would be significantly reduced.
If we are unable to interconnect with BellSouth and other incumbent carriers on
acceptable terms, our ability to offer competitively priced local telephone
services will be adversely affected.
In order to provide local telephone services, we must interconnect with and
resell the services of the incumbent carriers to supplement our own network
facilities. Our interconnection agreements with BellSouth expire in June 2003,
and we are arbitrating the rates and terms of new agreements with BellSouth. We
may not be able to enter into new interconnection agreements with BellSouth or
other carriers on favorable terms, in a timely manner, or at all. Further,
federal regulators have adopted substantial modifications to the requirements
that obligate BellSouth and other former monopoly local telephone companies to
provide to us at regulated rates the elements of their telephone networks that
enable us to offer many of our services at competitive rates. If we are unable
to enter into or maintain favorable interconnection agreements in our markets,
our ability to provide local services on a competitive and profitable basis may
be materially adversely affected. Any successful effort by the incumbent
carriers to deny or substantially limit our access to their network elements or
wholesale services also would have a material adverse effect on our ability to
provide local telephone services.
Our operating performance will suffer if we are not offered competitive rates
for the access services we need to provide our long distance services.
We depend on other telecommunications companies to originate and terminate
a significant portion of the long distance traffic initiated by our customers.
Our operating performance will suffer if we are not offered these access
services at rates that are substantially equivalent to the rates charged to our
competitors and permit profitable pricing of our long distance services. The
charges for access services historically have made up a significant percentage
of our overall cost of providing long distance service. Some of our
Internet-based competitors generally are exempt from these charges, which could
give them a significant cost advantage in this area.
Our inability to maintain our network infrastructure, portions of which we do
not own, could adversely affect our operating results.
We have effectively extended our network with minimal capital expenditures
by entering into marketing and management agreements with public utility
companies to sell long-haul private line services on the fiber optic networks
owned by these companies. Under these agreements, we generally earn a commission
based upon a percentage of the gross revenues generated by the sale of capacity
on the utility's networks. Cancellation or non-renewal of any of these
agreements, or any future failure by us to acquire and maintain similar network
agreements in these or other markets as necessary, could materially adversely
affect our operations. In addition, some of our agreements with the public
utility companies are nonexclusive, and our business would suffer from any
reduction in the amount of capacity that is made available to us.
Our ability to provide service also could be materially adversely affected
by a cable cut or equipment failure along our fiber optic network. A significant
portion of our fiber optic network is not protected by electronic redundancy or
geographical diverse routing. Lack of these safeguards could result in our
inability 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 or if we fail to maintain our rights-of-way on some routes.
We may not be able to retain the few large customers on which we depend for a
significant percentage of our revenues.
We may not be able to retain our large customers or we may be required to
lower significantly our prices to retain these customers. The table below sets
forth the approximate percentages of our total revenues generated in 2002, 2001
and 2000 by our five largest retail services customers and our three largest
broadband transport services
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customers:
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- -----
Five largest retail services customers .......................... 6.4% 6.3% 7.5%
Three largest broadband transport services customers ............ 10.8% 12.6% 15.2%
WorldCom, Inc. and its subsidiaries accounted for approximately 7.4%
of our broadband transport services revenues in 2000, approximately 6.4% of
our broadband transport services revenues in 2001 and approximately 5.6%
of our broadband transport services revenues in 2002. WorldCom filed for
protection under Chapter 11 of the United States bankruptcy code in July 2002
and has recently requested that we reduce the prices for the broadband transport
services we provide to it. We expect that these developments may result in
reduced revenue generation by our broadband transport services business for 2003
and, possibly, future periods.
The local and long distance industries are subject to significant government
regulation, which may change in a manner that is harmful to our business.
We are required to comply with telecommunications regulations implemented
by federal, state and local governments. We are required to obtain
authorizations from the FCC and state public utility commissions to offer some
of our telecommunications services, to file tariffs for many of our services and
to comply with local license, franchise or permit requirements relating to
installation and operation of our network. Many of these regulations continue to
change. Any of the following events related to the manner in which our business
is regulated could limit the types of services we provide or the terms on which
we provide these services:
. our failure to maintain proper federal and state tariffs;
. our failure to maintain proper state certifications;
. our failure to comply with federal, state or local laws and
regulations;
. our failure to obtain and maintain required licenses, franchises and
permits;
. the imposition of burdensome license, franchise or permit requirements
to operate in public rights-of-way; and
. the occurrence of burdensome or adverse regulatory requirements or
developments.
Our failure to maintain adequate billing, customer service and information
systems will limit our ability to increase our services.
Our inability to identify adequately all of our information and processing
needs, to process the information adequately or accurately or to upgrade our
systems as necessary could have a material adverse effect on our operating
results. 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 other services, our
need for enhanced billing and information systems will also increase.
In addition, we have experienced problems with respect to the operations
support systems used by us and other 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. FCC rules, together with rules adopted by state
public utility commissions, may not be implemented in a manner that will permit
us effectively to order, receive and provision network elements and other
facilities necessary for us to provide many of our services.
17
We are subject to risks associated with rapid changes in technology.
Our business could suffer from unexpected developments in technology, or
from our failure to adapt to these changes. The telecommunications industry is
subject to rapid and significant changes in technology and we may be required to
select one emerging technology over another. We will be unable to predict with
any certainty, at the time we are required to make our investments, whether the
technology we have chosen will prove to be the most economic, efficient or
capable of attracting customer usage.
Our success depends on our ability to attract and retain key personnel.
The loss of the services of our key personnel, or our inability to attract,
recruit and retain sufficient or additional qualified personnel, could hurt our
business. Our business is currently managed by a small number of key management
and operating personnel, including our executive officers. Most of our senior
management team has extensive experience in the telecommunications industry
working together as a team and has developed and directed our business strategy
since our formation. We do not maintain "key man" insurance on these employees.
Because of current market conditions, our stock incentive program may not
provide an adequate incentive to current or potential key employees to become or
remain employed by us.
One of our investors owns a significant amount of our common stock, which gives
it the ability to exercise significant influence over major corporate decisions.
Welsh, Carson, Anderson & Stowe VIII, L.P. and its affiliates have reported
that they beneficially owned 49.4% of our common stock as of December 18, 2002
and have obtained clearance under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 to acquire in excess of 50% of our voting securities, as defined in
that Act. The Welsh, Carson, Anderson & Stowe group has stated in its SEC
filings that, among other transactions, it may formulate plans or proposals, and
may from time to time explore, or make formal proposals relating to, a possible
acquisition or restructuring of, or a business combination involving,
ITC/\DeltaCom. As a result:
. the Welsh, Carson, Anderson & Stowe group will have the ability to
exercise significant influence over the election of our directors,
subject to the voting rights of the holders of our Series A preferred
stock;
. the Welsh, Carson, Anderson & Stowe group will have the ability to
exercise significant influence over other major decisions involving our
company or its assets; and
. the Welsh, Carson, Anderson & Stowe group may have interests that
differ from those of our other stockholders as a result of significant
investments by the Welsh, Carson, Anderson & Stowe group in other
telecommunications companies.
Item 2. Properties.
We own our corporate headquarters in West Point, Georgia and our data
center in Suwanee, Georgia.
We own switch sites in Anniston, Birmingham and Montgomery, Alabama and
Nashville, Tennessee and lease space for a network operations center 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;
18
. Columbia, South Carolina; and
. Houston, Texas.
The leases for these switch sites expire on various dates from 2004 to 2014.
We have constructed and own a multi-service facility in Anniston, Alabama,
which functions as a centralized switching control center for our network and as
an operator services center. In addition, we lease space to operate a customer
network operations center in Atlanta, Georgia. The lease for this space is
renewable on an annual basis.
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;
. Baton Rouge and New Orleans, Louisiana;
. Biloxi, Hattiesburg and Jackson, Mississippi;
. Charlotte, Greensboro and Raleigh, North Carolina;
. Charleston, Columbia and Greenville, South Carolina; and
. Chattanooga, Knoxville and Nashville, Tennessee.
The leases for these branch offices expire on various dates from 2003 through
2007. 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.
See "Business-Services and Facilities-Facilities" for additional
information about our facilities.
Item 3. Legal Proceedings.
General. 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.
Regulatory Proceedings. We are a party to numerous regulatory proceedings
affecting the segments of the communications industry in which we operate,
including regulatory proceedings before various state public utility commissions
and the FCC, particularly in connection with actions by the regional Bell
operating companies. We anticipate these companies will continue to pursue
litigation, regulations and legislation in states within our 10-state principal
operating area to reduce regulatory oversight and state regulation over their
rates and operations. These companies are also actively pursuing major changes
in the Telecommunications Act and by litigation and legislation which we believe
would adversely affect competitive telecommunications service providers,
including ITC/\DeltaCom. If adopted, these initiatives could make it more
difficult for us to compete with these companies and other incumbent carriers.
We may not succeed in our challenges to these or other similar actions that
would prevent or deter us from successfully competing with the incumbent
carriers.
19
Proceedings Affecting Rights-of-Way. To maintain our fiber optic network,
we have obtained easements, rights-of-way, franchises and licenses from various
private parties, including actual and potential competitors, local governments,
private landowners and others. We may not be able to continue to use or have
access to all of our existing easements, rights-of-way, franchises and licenses
or be able to renew or replace them after they expire. Third parties have
initiated legal proceedings challenging some of our significant licenses to use
the rights-of-way of others, including our licenses to use the rights-of-way of
Mississippi Power Company, Florida Power Company, Gulf Power Company and Georgia
Power Company. If some of these or similar future challenges are successful, or
if we otherwise are unsuccessful in maintaining or renewing our rights to use
our network easements, rights-of way, franchises and licenses, we may be forced
to abandon significant portions of our network and possibly pay monetary
damages. As indicated below or in note 11 to our audited consolidated financial
statements appearing elsewhere in this report, which is incorporated herein by
reference, the results of these challenges are uncertain and, individually or in
the aggregate, could have a material adverse effect on our results of operations
or financial position. These challenges include, but are not limited to, the
following:
Mississippi Power Company Rights-of-Way. A portion of our network runs
through fiber optic cables owned by the Mississippi Power Company over its
rights-of-way located in Jasper County, Mississippi. A proceeding involving
Mississippi Power Company and several landowners who have granted Mississippi
Power Company rights-of-way in Jasper County resulted in a January 1999 order of
the Mississippi Supreme Court holding that Mississippi Power Company could not
permit third parties to use its rights-of-way at issue for any purpose other
than in connection with providing electricity to customers of Mississippi Power
Company. We became a party to the proceeding after the January 1999 order. The
Circuit Court of the First Judicial District of Jasper County, Mississippi has
directed us not to use that portion of our fiber optic network located on
Mississippi Power Company's rights-of-way in Jasper County, except in an
emergency, pending the outcome of the trial. We have rerouted all of the
circuits on the affected portion of our network so that we may continue to
provide services to our customers along the affected route. If the courts
ultimately agree with the landowners that the existing easements do not permit
our use, we believe our potential liability for damages may be limited to the
value of a permanent easement for that use. We cannot assure you in this
respect, however, since the landowners are seeking damages equal to the profits
or gross revenues received by us from our use of Mississippi Power Company's
rights-of-way in Jasper County and punitive damages for our use of the route.
We initiated civil suits in August 2001 and May 2002 in the United States
District Court for the Southern District of Mississippi in which we seek
declaratory judgments confirming our continued use of cables in Mississippi
Power Company's rights-of-way on 37 parcels of land and 63 parcels of land,
respectively, or, alternatively, condemnation of the right to use the cables
upon payment of just compensation to the landowners. Some of the defendants in
the August 2001 proceeding have filed counterclaims against Mississippi Power
Company and us seeking a constructive trust upon the revenues earned on those
rights-of-way, together with compensatory and punitive damages. Both civil suits
were recently dismissed by the court. The order of dismissal in the civil action
involving the 37 parcels of land has been appealed by us to the United States
Court of Appeals for the Fifth Circuit. We intend to seek reconsideration of the
order of dismissal in the civil action involving the 63 parcels of land. Before
the dismissals, we had resolved the issue of our use of the rights-of-way with
some of the defendants.
In April and May 2002, 190 lawsuits were filed and, in October and December
2002, 30 lawsuits were filed by a single counsel in the Circuit Court for
Harrison County, Mississippi, against Mississippi Power Company, us and
WorldCom, Inc. d/b/a MCI Group. The landowners have voluntarily dismissed
WorldCom from each action due to WorldCom's Chapter 11 bankruptcy filing. Each
plaintiff claims to be the owner of property over which Mississippi Power
Company has an easement from which WorldCom or we have benefited by using the
easement to provide telecommunications services. As a result of these
allegations, each of the plaintiffs claims trespass, unjust enrichment, fraud
and deceit, and civil conspiracy against each of the defendants. Each of the
plaintiffs also seeks $5 million in compensatory damages, $50 million in
punitive damages, disgorgement of the gross revenues derived from the use by
WorldCom and us of the cable over the easements, a percentage of gross profits
obtained from the use of the cable, and the plaintiffs' costs to prosecute the
action. Mississippi Power Company, WorldCom and we have denied all of the
plaintiffs' allegations. Of the 190 lawsuits, we believe only approximately 11
involve parcels of
20
land used by us in the provision of telecommunications services. These lawsuits,
together with all other actions involving WorldCom's use of Mississippi Power
Company's rights-of-way, have been removed to the United States District Court
for the Southern District of Mississippi. Mississippi Power Company has
requested that court to transfer these actions to the United States Bankruptcy
Court for the Southern District of New York, where WorldCom's bankruptcy
proceeding is pending.
In August 2002, we were served with a complaint filed in the Circuit Court
of Hinds County, Mississippi, in which four owners of property located in
Hancock County, Mississippi allege Mississippi Power Company and we have
violated the plaintiffs' rights with regard to the use of Mississippi Power
Company's easement across the plaintiffs' properties. The plaintiffs allege
trespass, unjust enrichment, negligence, breach of contract and tortious breach
of contract, fraudulent concealment, fraudulent misrepresentation, conspiracy,
accounting and seek an unspecified amount of damages. We deny all such
allegations. These lawsuits have been removed to the United States District
Court for the Southern District of Mississippi. Mississippi Power Company has
requested that court to transfer these actions to the United States Bankruptcy
Court for the Southern District of New York, where WorldCom's bankruptcy
proceeding is pending.
In September 2002, Mississippi Power Company and we were served with a
summons and complaint filed in a civil action in the Circuit Court of Jasper
County, Mississippi. The landowners of 75 parcels of property located in various
Mississippi counties allege Mississippi Power Company and we have violated the
landowners' rights with regard to the use of Mississippi Power Company's
easements across the landowners' property similar to other rights-of-way suits
in Mississippi. The plaintiffs allege trespass, unjust enrichment, fraud and
deceit, and civil conspiracy and seek from each plaintiff $5 million in
compensatory damages, $50 million in punitive damage, disgorgement of gross
revenues, a percentage of gross revenues derived from use of the rights-of-way
and court costs. We deny all allegations. These lawsuits have been removed to
the United States District Court for the Southern District of Mississippi.
Mississippi Power Company has requested that court to transfer these actions to
the United States Bankruptcy Court for the Southern District of New York, where
WorldCom's bankruptcy proceeding is pending, although WorldCom is not a party to
this lawsuit.
In October 2001, a civil action was filed in the Chancery Court of Lamar
County, Mississippi against Mississippi Power Company and us by two plaintiffs
seeking to quiet and confirm title to real property, for ejectment and for an
accounting. The plaintiffs are joint owners of a single parcel of property
located in Lamar County, Mississippi. The plaintiffs also were defendants in our
action involving 37 parcels of land described above. The plaintiffs have not
specified the particular dollar amount of damages they are seeking.
Mississippi Power Company and Southern Company Rights-of-Way. In April
2002, a civil action was filed by an individual property owner in the Chancery
Court of Harrison County, Mississippi against Mississippi Power Company,
Southern Company Services and us. The plaintiff seeks to permanently enjoin
Mississippi Power Company and Southern Company from continuing to permit their
rights-of-way across the plaintiff's property to be used by third parties in any
manner that is not related to the transmission of electric power. The plaintiff
also seeks proof of cancellation of all leases and contracts between third
parties and Mississippi Power Company or Southern Company regarding the use of
the fiber optic cable on the rights-of-way across the plaintiff's property,
proof that the use of the rights-of-way is for purposes associated with
providing electricity, an accounting of revenues of third parties from the use
of the rights-of-way, punitive damages of $1 million, and costs and expenses.
Mississippi Power Company, Southern Company and we have denied all of the
plaintiff's allegations.
In July 2002, nine lawsuits on behalf of 101 property owners were filed
against Mississippi Power Company, Southern Company and us in the Chancery Court
of Jones County, Mississippi. All nine complaints are identical in seeking
relief for trespass, nuisance, conversion, unjust enrichment and accounting,
fraudulent concealment, fraud, fraudulent misrepresentation and fraudulent
concealment, and rescission and equitable reformation arising from the alleged
unauthorized use of the subject rights of way in violation of the terms of the
easements held by Mississippi Power Company. The landowners are seeking
unspecified monetary damages and equitable relief. Mississippi Power Company,
Southern Company and we deny all the allegations. These lawsuits have been
removed to the United States District Court for the Southern District of
Mississippi. Mississippi Power Company has requested that court to transfer
these actions to the United States Bankruptcy Court for the Southern District of
New York, where WorldCom's bankruptcy proceeding is pending.
Gulf Power Company Rights-of-Way. We use the rights-of-way of Gulf Power
Company in Florida for a portion of our network. In the fourth quarter of 2000,
Gulf Power was sued in the Circuit Court of Gadsden County,
21
Florida, by two landowners that claim to represent a class of all landowners
over whose property Gulf Power has facilities that are used by third parties.
The landowners have alleged that Gulf Power does not have the authority to
permit us or other carriers to transmit telecommunications services over the
rights-of-way. We were made a party to this litigation in August 2001. In March
2002, the court dismissed this matter without prejudice on the basis that, among
other things, there was no additional burden on the property as a result of
third-party use of the rights-of-way for telecommunications purposes and that
the easements were broad enough in scope to permit such third-party use.
However, the court also has permitted the plaintiffs to amend their complaint to
allege additional facts to support their contention that there is an additional
burden on the property because of the maintenance requirements of the fiber
routes and the placement of buildings and other physical telecommunications
equipment on the rights-of-way.
Georgia Power Company Rights-of-Way. We use rights-of-way of Georgia Power
Company in Georgia for a portion of our network. In July 2001, a suit was filed
in the Superior Court of Decatur County, Georgia by a group seeking compensatory
and punitive damages and claiming to represent a class of landowners alleged
that Georgia Power and other entities do not have the right to grant third
parties the use of the rights-of-way for the transmission of telecommunications
services of such third parties. We were made a party to the suit in January
2002.
In November 2002, a civil action was filed by a plaintiff, claiming to be
representative of a class of all landowners over whose land Georgia Power
Company maintains facilities, in the Superior Court of Walton County, Georgia,
against Georgia Power Company and us. The plaintiff alleges the documents
granting Georgia Power Company the rights to cross the plaintiff's property do
not grant the right to Georgia Power Company to allow third parties to use the
rights-of-way for the transmission of telecommunications services of such third
parties. The civil action claims trespass and unjust enrichment. There are no
specified dollar amounts demanded in the complaint. The plaintiff seeks
compensatory damages, punitive damages, attorney fees, and injunctive relief
requiring the removal of the fiber optic facilities from the plaintiff's land.
Georgia Power Company and we deny the allegations.
Kansas City Southern Railroad and Illinois Central Railroad Rights-of-Way.
In March 2003, a civil action was filed in the United States District Court for
the Southern District of Mississippi, Jackson Division, by plaintiffs claiming
to represent a class of Mississippi property owners across which rights-of-way
of Kansas City Southern Railroad and Illinois Central Railroad run. The
plaintiffs claim that the rights-of-way of Kansas City Southern Railroad and
Illinois Central Railroad do not permit third parties, including ITC/\DeltaCom,
to install or operate telecommunication facilities of third parties within the
rights-of-way. The plaintiffs allege trespass, unjust enrichment and conversion,
and seek declaratory relief, unspecified compensatory and punitive damages,
restitution, disgorgement, attorney fees and an accounting of amounts paid to
the railroads. We deny that our use of the rights-of-way has resulted in the
alleged trespass, unjust enrichment or conversion, and we otherwise deny the
plaintiffs' allegations.
ITC/\DeltaCom's Suit for Rights-of-Way Indemnification. In August 2001, we
filed suit in the Superior Court of Troup County, Georgia, against Southern
Telecom, Inc., Alabama Power Company, Georgia Power Company, Mississippi Power
Company, Gulf Power Company and related entities from which we have obtained
rights to use the rights-of-way for portions of our fiber optic
telecommunications network. We seek a declaratory judgment that the defendants
are required to use their best efforts to defend and indemnify us against any
claims alleging that we do not have the right to use the rights-of-way of these
entities. In December 2001, we filed for summary judgment and, subsequently, the
defendants have filed for summary judgment, but the court has not ruled on these
motions. The defendants also have filed a counterclaim requesting, among other
items, that we reimburse them for the cost of perfecting the applicable
rights-of-way.
BellSouth Deposit Contingency. We depend on BellSouth for the provision of
wholesale telecommunications services under our interconnection agreements with
BellSouth and pursuant to various access tariffs that BellSouth has filed with
federal and state regulatory agencies. As previously reported, BellSouth
requested by letter dated March 8, 2002 that we provide a $10 million security
deposit by March 29, 2002 in connection with BellSouth's provision of services
to us. On March 28, 2002, we filed a petition for declaratory judgment in
Georgia state court seeking a ruling from the court that, based upon the terms
of our interconnection agreements with BellSouth,
22
BellSouth may not require us to place a $10 million deposit with BellSouth as
security for future payment for services to be rendered to us by BellSouth.
BellSouth responded to our petition by seeking to have the matter heard before
the Georgia Public Service Commission, rather than in Georgia state court.
BellSouth filed a petition with the Georgia Public Service Commission seeking a
determination that we should be required to place a security deposit of
approximately $17 million with BellSouth. BellSouth has subsequently withdrawn
this petition. Based on our payment history with BellSouth, including the fact
that BellSouth received all payments due from us during our reorganization
process, our strengthened liquidity position as a result of the reorganization,
and other relevant factors, we do not believe that BellSouth is entitled to any
amount of the deposit it has sought. If it is determined that BellSouth may
require a substantial deposit, our cash reserves may be insufficient to fund the
deposit, which could have a material adverse effect on our ability to provide
services to our customers.
Southern Telecom Change of Control Payment. In January 2003, Southern
Telecom, Inc. filed a civil action against us in Troup County, Georgia Superior
Court, alleging breach of contract by us under the Revised and Restated Fiber
Optic Facilities and Services Agreement, dated June 9, 1995, as amended, between
us and Southern Telecom, on behalf of itself and as agent for affiliated power
companies. We have obtained a significant portion of our network rights-of-way
pursuant to this agreement. Southern Telecom alleges that we breached the
agreement by failing to pay Southern Telecom approximately $125,000 by November
29, 2002 and approximately $19.6 million by January 28, 2003, for a total of
approximately $19.7 million, that it alleges became due and payable as a result
of an alleged "change of control" of ITC/\DeltaCom under the agreement. Southern
Telecom contends that such a change of control occurred on October 29, 2002,
when our plan of reorganization became effective. We have denied all of the
allegations in Southern Telecom's complaint.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 26, 2002, as part of our plan of reorganization under Chapter 11
of the United States bankruptcy code that became effective on October 29, 2002,
the bankruptcy court authorized ITC/\DeltaCom to solicit acceptances of the
proposed plan of reorganization by delivering copies of the proposed plan,
related disclosure statement and other information to each creditor and interest
holder entitled to vote on the proposed plan, which included all of the former
holders of our old common stock, preferred stock, senior notes and convertible
subordinated notes. The deadline for voting on approval of the proposed plan of
reorganization was October 1, 2002. The proposed plan of reorganization was
approved by the vote of all classes of creditors and interest holders entitled
to vote.
Except as described above, there were no matters submitted to, or voted on
by, our security holders in the fourth quarter of 2002.
23
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters.
Market for the Common Stock. Our common stock has been listed on the OTC
Bulletin Board and has traded under the symbol "ITCD.OB" since November 6, 2002.
Our common stock was issued effective as of October 29, 2002 upon consummation
of our plan of reorganization described elsewhere in this report. Our common
stock, which was provisionally approved for listing on the NASDAQ National
Market, subject to compliance with the minimum bid price requirement and other
initial listing requirements of the NASDAQ Marketplace Rules, was quoted on the
NASDAQ National Market from October 30, 2002 through November 5, 2002. We were
notified by the NASDAQ Stock Market that the listing of our common stock would
be transferred to the OTC Bulletin Board because the common stock had failed to
achieve a minimum closing bid price of at least $5.00 on any of the five trading
days immediately following the effective date of our plan of reorganization.
During the period from October 30, 2002 through December 31, 2002, the high
and low sale prices for the common stock were $4.04 per share and $1.99 per
share. These high and low sale prices both occurred on trading days when the
common stock was quoted on the NASDAQ National Market.
There is no public trading market for the Series A preferred stock or the
warrants.
On March 21, 2003, there were approximately 1,200 record holders of the
common stock, approximately 35 record holders of the Series A preferred stock,
and approximately 35 record holders of the warrants. For information on shares
of our common stock authorized for issuance under our equity compensation plans,
see "Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters-Equity Compensation Plan Information."
The following table sets forth the high and low sale prices for our old
common stock during 2001 and during 2002 through our reorganization plan
effective date of October 29, 2002. Our old common stock was quoted on the
NASDAQ National Market through August 27, 2002 and listed on the OTC Bulletin
Board thereafter.
2001 High Low
---- ---- ---
First Quarter ................................. $ 11.44 $ 4.75
Second Quarter ................................ 6.70 2.91
Third Quarter ................................. 4.50 1.06
Fourth Quarter ................................ 1.33 0.51
2002 High Low
---- ---- ---
First Quarter ................................. $ 0.98 $ 0.26
Second Quarter ................................ 0.35 0.04
Third Quarter (through October 29, 2002) ...... 0.14 0.02
Dividend Policy. We did not declare or pay any cash dividends on our
capital stock that was outstanding before we consummated our plan of
reorganization on October 29, 2002. Future declaration and payment of dividends,
if any, on our new common stock or Series A preferred stock will be determined
in light of factors deemed relevant by our board of directors, including our
earnings, operations, capital requirements and financial condition and
restrictions in our financing agreements. The agreements governing our $156
million senior credit facility and our capital lease facilities with NTFC
Capital Corporation and General Electric Capital Corporation limit our ability
to pay cash dividends by prohibiting our operating subsidiaries from
distributing funds to ITC/\DeltaCom for this purpose. Under the certificate of
designation of our Series A preferred stock, we have the option, instead of
paying cash dividends, to pay dividends in additional shares of Series A
preferred stock.
Recent Sales of Unregistered Securities. As of October 29, 2002, under our
plan of reorganization:
. As consideration for the cancellation of all of our outstanding senior
notes, in a total principal amount of $415 million plus accrued and
unpaid interest, we issued to the former holders of those notes a total
of 40,750,000 shares of the common stock of our reorganized company.
. As consideration for the cancellation of all of our outstanding
convertible subordinated notes, in a total principal amount of $100
million plus accrued and unpaid interest, we issued to the former
holders of those notes a total of 2,500,000 shares of our new common
stock.
. As consideration for the cancellation of all of our outstanding common
stock, Series A preferred stock and Series B preferred stock, including
accumulated and undistributed dividends on the Series B preferred
stock, we issued to the former holders of those securities a total of
500,000 shares of our new common stock.
. We issued and sold in a rights offering to holders of our old common
stock and old preferred stock, for a total purchase price of $184,600,
1,846 shares of 8% Series A convertible redeemable preferred stock of
our reorganized company and warrants to purchase approximately 6,276
shares of our new common stock.
24
In connection with these issuances, we relied on the exemption from
registration under the Securities Act of 1933 provided in Section 1145(a) of the
United States bankruptcy code. We issued all of these securities pursuant to our
plan of reorganization, which was confirmed by the United States Bankruptcy
Court for the District of Delaware on October 17, 2002 and became effective on
October 29, 2002.
On October 29, 2002, in connection with our plan of reorganization, we
issued and sold in a private offering 298,154 shares of our new Series A
preferred stock, warrants to purchase approximately 1,013,724 shares of our new
common stock, and 1,000,000 shares of our new common stock for a total cash
purchase price of $29.8 million. In connection with the private offering, which
was made exclusively to accredited investors, we relied on the exemption from
registration under the Securities Act of 1933 provided in Section 4(2) of the
Securities Act and Regulation D thereunder.
Conversion of Series A Preferred Stock. If not redeemed by us before the
mandatory redemption date of October 29, 2012, each share of Series A preferred
stock is convertible at the holder's option, in whole or in part, at any time
after such share is issued, into a number of shares of common stock which is
obtained by dividing the $100 liquidation preference per share plus the amount
of any accrued and unpaid dividends accrued to, but not including, the
conversion date by the conversion price applicable to such share. The initial
conversion price of the Series A preferred stock is $5.7143 per share of common
stock. The conversion price is subject to reduction from time to time under the
circumstances described below. The right to convert shares of Series A preferred
stock called for redemption will terminate at the close of business on the last
business day before the date fixed for optional or mandatory redemption, unless
we default in paying the redemption price. We will not issue fractional shares
of common stock upon the conversion of any share of Series A preferred stock.
Instead, in our discretion, we may either round up a fractional share of common
stock to the nearest whole share of common stock or pay cash in lieu of the
fractional share based on the market price of the common stock on the business
day preceding the conversion date.
In order to prevent dilution of the foregoing conversion rights, the
conversion price of the Series A preferred stock will be subject to reduction,
subject to specified exceptions, if at any time through October 29, 2004 we
issue or sell, or we are deemed to have issued or sold, shares of common stock
for no consideration or for a consideration per share less than the exercise
price in effect on the date of issuance or sale, or deemed issuance or sale, of
such common stock. The conversion price of the Series A preferred stock will be
proportionately reduced if we subdivide the shares of common stock into a
greater number of shares by any