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EXCEL - IDEA: XBRL DOCUMENT - ITC DELTACOM INC | Financial_Report.xls |
EX-31.2 - EX-31.2 - ITC DELTACOM INC | a11-14192_1ex31d2.htm |
EX-31.1 - EX-31.1 - ITC DELTACOM INC | a11-14192_1ex31d1.htm |
EX-32.1 - EX-32.1 - ITC DELTACOM INC | a11-14192_1ex32d1.htm |
EX-32.2 - EX-32.2 - ITC DELTACOM INC | a11-14192_1ex32d2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-23253
ITC^DELTACOM, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
58-2301135 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
1375 Peachtree St., Atlanta, Georgia |
|
30309 |
(Address of principal executive offices) |
|
(Zip Code) |
(404) 815-0770
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report date)
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
|
Accelerated filer o |
|
|
|
Non-accelerated filer x |
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of July 29, 2011, 250 shares of common stock, $0.01 par value per share, were outstanding. (all shares are issued to EarthLink, Inc.)
ITC^DELTACOM, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H)(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH THE REDUCED DISCLOSURE FORMAT.
ITC^DELTACOM, INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2011
Part I | |
| |
Item 1. Financial Statements |
1 |
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
11 |
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22 | |
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23 | |
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23 | |
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23 | |
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23 | |
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24 |
ITC^DELTACOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
December 31, |
|
June 30, |
| ||
|
|
2010 |
|
2011 |
| ||
|
|
|
|
(unaudited) |
| ||
ASSETS | |||||||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
43,585 |
|
$ |
43,715 |
|
Restricted cash |
|
2,270 |
|
1,068 |
| ||
Accounts receivable, net of allowance of $276 and $1,699 as of December 31, 2010 and June 30, 2011, respectively |
|
40,242 |
|
42,867 |
| ||
Prepaid expenses |
|
8,494 |
|
9,364 |
| ||
Other current assets |
|
5,522 |
|
4,566 |
| ||
Total current assets |
|
100,113 |
|
101,580 |
| ||
Property and equipment, net |
|
206,988 |
|
208,082 |
| ||
Purchased intangible assets, net |
|
129,650 |
|
134,672 |
| ||
Goodwill |
|
170,126 |
|
191,448 |
| ||
Other long-term assets |
|
170 |
|
178 |
| ||
Total assets |
|
$ |
607,047 |
|
$ |
635,960 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS EQUITY | |||||||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
11,734 |
|
$ |
5,630 |
|
Accrued payroll and related expenses |
|
4,053 |
|
8,643 |
| ||
Accrued interest |
|
8,622 |
|
8,635 |
| ||
Other accrued liabilities |
|
37,845 |
|
38,556 |
| ||
Deferred revenue |
|
19,844 |
|
24,376 |
| ||
Current portion of long term debt and capital lease obligations |
|
|
|
599 |
| ||
Total current liabilities |
|
82,098 |
|
86,439 |
| ||
|
|
|
|
|
| ||
Long-term debt and capital lease obligations |
|
351,251 |
|
349,796 |
| ||
Other long-term liabilities |
|
7,874 |
|
7,459 |
| ||
Total liabilities |
|
441,223 |
|
443,694 |
| ||
|
|
|
|
|
| ||
Stockholders equity: |
|
|
|
|
| ||
Common stock, $0.01 par value, 1,000 shares authorized, 150 and 250 shares issued and outstanding as of December 31, 2010 and June 30, 2011, respectively |
|
|
|
|
| ||
Additional paid-in capital |
|
176,194 |
|
214,473 |
| ||
Accumulated deficit |
|
(10,370 |
) |
(22,207 |
) | ||
Total stockholders equity |
|
165,824 |
|
192,266 |
| ||
Total liabilities and stockholders equity |
|
$ |
607,047 |
|
$ |
635,960 |
|
The accompanying notes are an integral part of these financial statements.
ITC^DELTACOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||||
|
|
Predecessor |
|
|
Successor |
|
Predecessor |
|
|
Successor |
| ||||
|
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Entity |
|
|
Entity |
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Entity |
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Entity |
| ||||
|
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June 30, 2010 |
|
|
June 30, 2011 |
|
June 30, 2010 |
|
|
June 30, 2011 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
| ||||
Integrated communications services |
|
$ |
91,287 |
|
|
$ |
92,230 |
|
$ |
184,405 |
|
|
$ |
180,589 |
|
Wholesale services |
|
15,281 |
|
|
17,580 |
|
29,570 |
|
|
35,148 |
| ||||
Equipment sales and related services |
|
4,332 |
|
|
3,969 |
|
8,065 |
|
|
7,858 |
| ||||
Total revenues |
|
110,900 |
|
|
113,779 |
|
222,040 |
|
|
223,595 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues (exclusive of depreciation and amortization shown separately below) |
|
50,920 |
|
|
55,546 |
|
103,269 |
|
|
109,924 |
| ||||
Selling, general and administrative (exclusive of depreciation and amortization shown separately below) |
|
36,688 |
|
|
37,302 |
|
73,583 |
|
|
73,006 |
| ||||
Depreciation and amortization |
|
13,648 |
|
|
18,230 |
|
28,470 |
|
|
34,896 |
| ||||
Acquisition-related costs |
|
|
|
|
1,057 |
|
|
|
|
1,882 |
| ||||
Total operating costs and expenses |
|
101,256 |
|
|
112,135 |
|
205,322 |
|
|
219,708 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income from operations |
|
9,644 |
|
|
1,644 |
|
16,718 |
|
|
3,887 |
| ||||
Interest expense and other, net |
|
(16,160 |
) |
|
(8,137 |
) |
(20,845 |
) |
|
(15,691 |
) | ||||
Loss before income taxes |
|
(6,516 |
) |
|
(6,493 |
) |
(4,127 |
) |
|
(11,804 |
) | ||||
Income tax benefit (provision) |
|
|
|
|
254 |
|
|
|
|
(33 |
) | ||||
Net loss |
|
$ |
(6,516 |
) |
|
$ |
(6,239 |
) |
$ |
(4,127 |
) |
|
$ |
(11,837 |
) |
The accompanying notes are an integral part of these financial statements.
ITC^DELTACOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Predecessor Entity |
|
|
Successor Entity |
| ||
|
|
Six Months |
|
|
Six Months |
| ||
|
|
Ended |
|
|
Ended |
| ||
|
|
June 30, 2010 |
|
|
June 30, 2011 |
| ||
|
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
|
$ |
(4,127 |
) |
|
$ |
(11,837 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
28,470 |
|
|
34,896 |
| ||
Stock-based compensation |
|
1,117 |
|
|
2,146 |
| ||
Amortization of debt discount, premium and issuance costs |
|
1,308 |
|
|
(2,062 |
) | ||
(Gain) loss on sale of fixed assets |
|
(340 |
) |
|
559 |
| ||
Write-off of unamortized debt discount and issuance cost |
|
7,948 |
|
|
|
| ||
Other operating activities |
|
|
|
|
(415 |
) | ||
Decrease (increase) in accounts receivable, net |
|
1,831 |
|
|
(786 |
) | ||
Increase in prepaid expenses and other assets |
|
(1,778 |
) |
|
(5,613 |
) | ||
Increase (decrease) in accounts payable and accrued and other liabilities |
|
4,563 |
|
|
(3,651 |
) | ||
(Decrease) increase in deferred revenue |
|
(533 |
) |
|
4,187 |
| ||
Net cash provided by operating activities |
|
38,459 |
|
|
17,424 |
| ||
|
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
|
| ||
Purchase of business, net of cash acquired |
|
|
|
|
(22,759 |
) | ||
Purchases of property and equipment |
|
(29,806 |
) |
|
(22,457 |
) | ||
Proceeds received from sale of fixed assets |
|
622 |
|
|
12 |
| ||
Proceeds from sale of investments |
|
1,706 |
|
|
|
| ||
Change in restricted cash |
|
|
|
|
1,202 |
| ||
Other investing activities |
|
(570 |
) |
|
67 |
| ||
Net cash used in investing activities |
|
(28,048 |
) |
|
(43,935 |
) | ||
|
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
|
| ||
Proceeds from issuance of stock |
|
|
|
|
30,000 |
| ||
Proceeds from issuance of debt, net of issuance cost |
|
308,535 |
|
|
|
| ||
Repayment of long-term debt and capital lease obligations |
|
(308,075 |
) |
|
(3,381 |
) | ||
Taxes paid on vested restricted shares |
|
(2,112 |
) |
|
|
| ||
Other financing activities |
|
|
|
|
22 |
| ||
Net cash (used in) provided by financing activities |
|
(1,652 |
) |
|
26,641 |
| ||
|
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
|
8,759 |
|
|
130 |
| ||
Cash and cash equivalents, beginning of period |
|
67,786 |
|
|
43,585 |
| ||
Cash and cash equivalents, end of period |
|
$ |
76,545 |
|
|
$ |
43,715 |
|
The accompanying notes are an integral part of these financial statements.
ITC^DELTACOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Organization
ITC^DeltaCom, Inc. (ITC^DeltaCom or the Company), together with its wholly-owned subsidiaries, provides integrated communications services in the southeastern United States. The Company delivers a comprehensive suite of high-quality data and voice communications services, including high-speed or broadband data communications, local exchange, long-distance and conference calling, mobile data and voice services and customer premises equipment. The Company offers these services primarily over its 14-state fiber optic network. The Companys fiber optic network provides the Company with transmission capacity that it also sells to other communications providers on a wholesale basis.
On December 8, 2010, ITC^DeltaCom was acquired by EarthLink, Inc. (EarthLink) with ITC^DeltaCom, Inc. becoming a wholly-owned subsidiary of EarthLink, Inc. (the Acquisition). The accounting for the Acquisition has been pushed-down in the accompanying condensed consolidated financial statements. See Note 3, Acquisitions, for more detail.
2. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements of ITC^DeltaCom, which include the accounts of its wholly-owned subsidiaries, for the three and six months ended June 30, 2011 and the related footnote information are unaudited and have been prepared on a basis consistent with the Companys audited consolidated financial statements as of December 31, 2010 contained in the Companys Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the Annual Report). All significant intercompany transactions have been eliminated.
These financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto contained in the Companys Annual Report. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments), which management considers necessary to present fairly the Companys financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2011.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates.
Segment Disclosure
The Company operates in one segment.
Predecessor and Successor Accounting
As a result of the Acquisition, certain of ITC^DeltaComs predecessor accounting policies were changed to conform to EarthLinks current accounting policies. These changes did not have a significant impact on ITC^DeltaComs consolidated financial statements. The accounting for the Acquisition has been pushed-down to reflect the assets acquired and liabilities assumed at Acquisition date fair value. Accordingly, the Companys financial position and results of operations may not be comparable between the accompanying Successor and Predecessor periods.
ITC^DELTACOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
3. Acquisitions
Acquisition by EarthLink
On December 8, 2010, the Company was acquired by EarthLink, Inc. for $3.00 per share. Under the terms of the merger agreement, EarthLink acquired 100% of ITC^DeltaCom in a merger transaction with ITC^DeltaCom surviving as a wholly-owned subsidiary of EarthLink.
The total consideration transferred was $253.8 million, which consisted of $251.4 million in cash paid to acquire the outstanding common stock of ITC^DeltaCom and $2.3 million for the fair value of restricted stock units assumed and converted. In allocating the consideration transferred based on estimated fair values, ITC^DeltaCom recorded approximately $170.0 million of goodwill, $131.2 million of identifiable intangible assets, $200.5 million of property and equipment, $351.2 million of long-term debt, $18.0 million of other net assets and an $85.3 million reduction of additional paid-in capital. The reduction in additional paid-in capital resulted from a valuation allowance being reported for an increase in deferred tax assets in ITC^DeltaComs financial statements, but not in the consolidated financial statements of EarthLink. The accounting for the Acquisition was pushed-down to reflect the Acquisition at fair value of the assets acquired and liabilities assumed. The Company allocated the consideration transferred to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess of the consideration transferred over those fair values was recorded as goodwill.
During the six months ended June 30, 2011, the Company finalized certain provisional amounts recognized at the acquisition date related to deferred taxes and other tax positions. The Company retrospectively adjusted the provisional amounts recorded at the acquisition date to reflect the new information obtained. As a result, the carrying amount of additional paid-in capital was reduced by $18.8 million as of December 31, 2010, with a corresponding decrease to goodwill. The reduction in additional paid-in capital resulted from a valuation allowance being reported for an increase in deferred tax assets in ITC^DeltaComs financial statements, but not in the consolidated financial statements of EarthLink. The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income based taxes and residual goodwill.
In connection with the acquisition, ITC^DeltaComs outstanding $325.0 million aggregate principal amount of 10.5% senior secured notes due 2016 (the Notes) were recorded at acquisition date fair value, which was based on publicly-quoted market prices. The resulting debt premium of $26.3 million is being amortized over the remaining life of the Notes. The Notes were not repaid or guaranteed by EarthLink and remain obligations of ITC^DeltaCom. Under the indenture for the Notes, following the consummation of the Acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 1010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011. The remaining Notes remain outstanding as obligations of ITC^DeltaCom and its subsidiaries following the Acquisition.
Saturn Telecommunication Services, Inc.
In March 2011, the Company acquired Saturn Telecommunication Services Inc. and affiliates (STS Telecom), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom currently operates a sophisticated voice-over-Internet-protocol (VoIP) platform. The primary reason for the acquisition was for the Company to leverage STS Telecoms expertise in managed hosted VoIP on a nationwide basis as part of its VoIP offerings.
ITC^DELTACOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)
The total consideration transferred was $22.9 million, which consisted of cash paid to acquire the outstanding equity interests of STS Telecom. In allocating the consideration transferred based on estimated fair values, the Company recorded approximately $21.5 million of goodwill, $17.9 million of identifiable intangible assets, $2.8 million of tangible assets and $19.3 million of net liabilities assumed. The preliminary allocation of the consideration transferred was based upon a preliminary valuation and the Companys estimates and assumptions are subject to change. The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income based taxes and residual goodwill. The Company has included the financial results of STS Telecom in its consolidated financial statements from the date of acquisition. Pro forma financial information for STS Telecom has not been presented, as the effects were not material to the Companys consolidated financial statements.
Acquisition-Related Costs
Acquisition-related costs consist of costs directly related to acquisitions, such as employee severance and retention costs; transaction related costs, which include external costs directly related to acquisitions such as advisory, legal, accounting, valuation and other professional fees; and other integration related costs. Acquisition-related costs consisted of the following during the three and six months ended June 30, 2011:
|
|
Three Months |
|
Six Months |
| ||
|
|
Ended |
|
Ended |
| ||
|
|
June 30, |
|
June 30, |
| ||
|
|
2011 |
|
2011 |
| ||
|
|
(in thousands) |
| ||||
|
|
|
|
|
| ||
Severance and retention costs |
|
$ |
569 |
|
$ |
1,218 |
|
Transaction related costs |
|
|
|
176 |
| ||
Integration related costs |
|
488 |
|
488 |
| ||
Total acquisition-related costs |
|
$ |
1,057 |
|
$ |
1,882 |
|
4. Purchased Intangible Assets and Goodwill
Goodwill
The changes in the carrying amount of goodwill during the six months ended June 30, 2011 were as follows (in thousands):
Balance as of December 31, 2010 |
|
|
| |
Goodwill |
|
$ |
170,126 |
|
Accumulated impairment loss |
|
|
| |
|
|
170,126 |
| |
|
|
|
| |
Goodwill acquired during year |
|
21,479 |
| |
Goodwill adjustments |
|
(157 |
) | |
|
|
|
| |
Balance as of June 30, 2011 |
|
|
| |
Goodwill |
|
191,448 |
| |
Accumulated impairment loss |
|
|
| |
|
|
$ |
191,448 |
|
Goodwill acquired during the period resulted from the Companys acquisition of STS Telecom, which is more fully described in Note 3, Acquisitions.
ITC^DELTACOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)
Purchased Intangible Assets
The following table presents the components of the Companys acquired identifiable intangible assets included in the accompanying Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2011 (in thousands):
|
|
As of December 31, 2010 |
|
As of June 30, 2011 |
| ||||||||||||||
|
|
Gross |
|
|
|
Net |
|
Gross |
|
|
|
Net |
| ||||||
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Carrying |
|
Accumulated |
|
Carrying |
| ||||||
|
|
Value |
|
Amortization |
|
Value |
|
Value |
|
Amortization |
|
Value |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Customer relationships |
|
$ |
117,600 |
|
$ |
(1,358 |
) |
$ |
116,242 |
|
$ |
133,300 |
|
$ |
(12,411 |
) |
$ |
120,889 |
|
Developed technology |
|
9,900 |
|
(110 |
) |
9,790 |
|
11,600 |
|
(1,208 |
) |
10,392 |
| ||||||
Trade name |
|
3,700 |
|
(82 |
) |
3,618 |
|
3,700 |
|
(699 |
) |
3,001 |
| ||||||
Other |
|
|
|
|
|
|
|
450 |
|
(60 |
) |
390 |
| ||||||
|
|
$ |
131,200 |
|
$ |
(1,550 |
) |
$ |
129,650 |
|
$ |
149,050 |
|
$ |
(14,378 |
) |
$ |
134,672 |
|
The gross carrying value of identifiable intangible assets as of June 30, 2011 includes $15.7 million of customer relationships, $1.7 million of developed technology and $0.5 million of other intangible assets resulting from the STS Telecom acquisition. Customer relationships represent the fair values of the underlying relationships and agreements with the Companys customers. Developed technology represents the fair values of the Companys processes, patents and trade secrets related to the design and development of the Companys internally used software and technology. Trade name represents the fair values of brand and name recognition. Other represents the fair value of non-compete agreements. As of June 30, 2011, the weighted average amortization periods were 5.8 years for customer relationships, 5.6 years for developed technology, 3.0 years for the trade name and 2.5 years for other identifiable intangible assets. The customer relationships are being amortized using the straight-line method because this matches the estimated cash flow generated by such asset, and the developed technology and trade name are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined.
Amortization expense for definite-lived intangible assets was $0.7 million and $6.7 million during the three months ended June 30, 2010 and 2011, respectively, and $1.3 million and $12.8 million during the six months ended June 30, 2010 and 2011, respectively. Amortization of definite-lived intangible assets is included in depreciation and amortization in the Condensed Consolidated Statements of Operations. Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $13.3 million in the remaining six months in the year ending December 31, 2011 and $26.6 million, $26.5 million, $24.7 million, $24.3 million, $18.9 million and $0.4 million during the years ending December 31, 2012, 2013, 2014, 2015 and 2016 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of asset acquisitions, changes in estimated useful lives and other relevant factors.
ITC^DELTACOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)
5. Long-Term Debt
The Companys long-term debt consisted of the following as of December 31, 2010 and June 30, 2011:
|
|
As of |
|
As of |
| ||
|
|
December 31, |
|
June 30, |
| ||
|
|
2010 |
|
2011 |
| ||
|
|
(in thousands) |
| ||||
Senior secured notes due April 1, 2016 |
|
$ |
325,000 |
|
$ |
324,800 |
|
Unamortized premium on senior secured notes due April 1, 2016 |
|
26,251 |
|
24,189 |
| ||
Capital lease obligations |
|
|
|
1,406 |
| ||
Carrying value of debt and capital lease obligations |
|
351,251 |
|
350,395 |
| ||
Less current portion of long-term debt and capital lease obligations |
|
|
|
(599 |
) | ||
Long-term debt and capital lease obligations |
|
$ |
351,251 |
|
$ |
349,796 |
|
Senior Secured Notes due April 1, 2016
In April 2010, ITC^DeltaCom issued $325.0 million aggregate principal amount of 10.5% senior secured notes due on April 1, 2016 at an offering price of 97.857% and received net proceeds of $308.5 million after transaction fees of $9.5 million. In July 2010, the Company completed an exchange offer and exchanged the Notes for an identical series of Notes registered with the Securities and Exchange Commission. The Company applied the net proceeds to repay $305.5 million aggregate amount of indebtedness, including all principal plus accrued and unpaid interest, outstanding under its first lien and second lien senior secured credit facilities and its former revolving credit facility, which were terminated. The Notes accrue interest at a rate of 10.5% per year. Interest on the Notes is payable semi-annually in cash in arrears on April 1 and October 1 of each year. The Notes will mature on April 1, 2016. As a result of purchase accounting, the Notes were recorded at acquisition date fair value. The fair value was based on publicly-quoted market prices. The resulting debt premium is being amortized over the remaining life of the Notes.
Under the indenture for the Notes, following the consummation of the Acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 2010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011.
ITC^DeltaCom may redeem some or all of the Notes, at any time before April 1, 2013, at a redemption price equal to 100% of their principal amount plus a make-whole premium. ITC^DeltaCom may redeem some or all of the Notes at any time on or after April 1, 2013, at specified redemption prices declining from 105.250% to 100% of their principal amount. In addition, before April 1, 2013, ITC^DeltaCom may redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 110.5% of their principal amount with the net proceeds of certain equity offerings. During any 12-month period before April 1, 2013, ITC^DeltaCom may redeem up to 10% of the aggregate principal amount of the Notes at a redemption price equal to 103% of their principal amount. If (1) ITC^DeltaCom sells certain of its assets and does not either (a) apply the net sale proceeds to repay indebtedness under the senior secured revolving credit facility, the Notes, or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business, or (2) ITC^DeltaCom experiences a change of control, it may be required to offer to purchase Notes from holders at 100% of their principal amount, in the case of a sale of assets, or 101% of their principal amount, in the case of a change of control. ITC^DeltaCom would be required to pay accrued and unpaid interest, if any, on the Notes redeemed or purchased in each of the foregoing events of redemption or purchase.
The Notes are ITC^DeltaComs general senior obligations and rank equally in right of payment with any future senior indebtedness. The Notes are secured on a first-priority basis, along with any future pari passu secured obligations, subject to specified exceptions and permitted liens, by substantially all of the assets of ITC^DeltaCom and its subsidiaries that are deemed to be restricted subsidiaries under the indenture governing
ITC^DELTACOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)
the Notes. Currently all of ITC^DeltaCom subsidiaries are deemed to be restricted subsidiaries under the indenture. The Notes are guaranteed on a senior secured basis by each of ITC^DeltaComs restricted subsidiaries on the initial issue date of the Notes and will be guaranteed on a senior secured basis by each future domestic restricted subsidiary, other than certain excluded subsidiaries, and by any foreign restricted subsidiary that guarantees any indebtedness of ITC^DeltaCom or any domestic restricted subsidiary. The guarantees are the subsidiary guarantors general senior obligations and rank equally in right of payment with all of the subsidiary guarantors existing and future senior indebtedness.
The indenture governing the Notes contains covenants that, among other things, limit ITC^DeltaComs ability, and the ability of ITC^DeltaComs restricted subsidiaries, to incur additional indebtedness, create liens, pay dividends on, redeem or repurchase ITC^DeltaComs capital stock, make investments or repay subordinated indebtedness, engage in sale-leaseback transactions, enter into transactions with affiliates, sell assets, create restrictions on dividends and other payments to ITC^DeltaCom from its subsidiaries, issue or sell stock of subsidiaries, and engage in mergers and consolidations. All of the covenants are subject to a number of important qualifications and exceptions under the indenture. As of December 31, 2010 and June 30, 2011, the Company was in compliance with all of its financial covenants.
As of December 31, 2010 and June 30, 2011, the fair value of the ITC^DeltaCom Notes was approximately $352.6 million and $346.1 million, respectively, based on quoted market prices.
The subsidiary guarantors are wholly owned, directly or indirectly, by ITC^DeltaCom, Inc. and have, jointly and severally, fully and unconditionally guaranteed, to each holder of the notes, the full and prompt performance of ITC^DeltaComs obligations under the notes and the indenture governing the notes, including the payment of principal (or premium, if any) and interest on the notes, on an equal and ratable basis. Further, ITC^DeltaCom has no independent assets or operations, and there are no significant restrictions on the ability of its consolidated subsidiaries to transfer funds to ITC^DeltaCom in the form of cash dividends, loans or advances. ITC^DeltaComs assets consist solely of cash representing less than 1% of consolidated assets and investments it has made in its consolidated subsidiaries, and its operations consist solely of changes in its investment in subsidiaries and interest associated with the senior indebtedness. Based on these facts, and in accordance with Securities and Exchange Commission Regulation S-X Rule 3-10, Financial statements of guarantors and issuers of guaranteed securities registered or being registered, ITC^DeltaCom is not required to provide condensed consolidating financial information for the subsidiary guarantors.
Capital Leases
The Company leases certain equipment that is accounted for as capital leases. All of these capital leases were assumed by the Company through its acquisition of STS Telecom. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense.
6. Equity
In March 2011, ITC^DeltaCom issued 100 shares of Common Stock, par value $0.01 per share, to EarthLink for $30.0 million in cash pursuant to a stock subscription agreement.
7. Income Taxes
The income tax provision for the six months ended June 30, 2011 represents an effective rate of -2.08%. The income tax provision consisted of state income tax amounts payable due to the net operating loss carryforward limitations associated with provisions of the Internal Revenue Code which limit an entitys ability to utilize net operating loss carryforwards in the case of certain events, including significant changes in ownership interests.
The Companys income tax provision is prepared on a stand-alone basis, including the determination of the need for a valuation allowance. For federal income tax purposes, the Company will be filing a consolidated income tax return with EarthLink, its parent company. For state income tax purposes, the Company will be filing on a combined or consolidated basis where required or allowable by law. The Companys tax attributes are presented as if the Company files a separate return for federal and state tax purposes. The Companys attributes used by EarthLink are presented as if they were unused on a separate company basis.
EarthLink has determined that it is not necessary to report a valuation allowance for deferred tax assets on a consolidated basis. However, it is necessary to report a valuation allowance in the separate financial statements of ITC^DeltaCom. The difference in valuation allowance in ITC^DeltaComs financial statements has been recorded to stockholders equity.
The Company will reduce the valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets can be realized on a stand-alone
ITC^DELTACOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - (Continued)
basis. Provisions of the Internal Revenue Code limit an entitys ability to utilize net operating loss carryforwards in the case of certain events, including significant changes in ownership interests.
As part of the acquisition of ITC^DeltaCom by EarthLink, $17.6 million of unrecognized tax benefits, including $0.1 million of accrued interest and penalties, were identified. Of this amount, $15.9 million would reduce prior net operating losses if assessed. Of the $1.7 million reflected on the balance sheet, $1.3 million would result in tax payments, $0.3 million would be offset by net operating losses and $0.1 million relates to interest and penalties as disclosed below.
The Companys policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2011, the Company had $0.1 million of interest and penalties recorded.
8. Related Party Transactions
ITC^DeltaCom has a services agreement with EarthLink pursuant to which EarthLink provides ITC^DeltaCom certain support services in exchange for management fees. The management fees were determined based on EarthLinks costs to provide the services, and management believed such fees were reasonable. During the three and six months ended June 30, 2011, ITC^DeltaCom recognized $0.8 million and $1.3 million, respectively, of operating expenses for services received from EarthLink.
As of December 31, 2010, the Company had accounts receivable from EarthLink of approximately $1.2 million. As of June 30, 2011, the Company had accounts receivable from EarthLink and its subsidiaries of approximately $0.4 million.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words estimate, plan, intend, expect, anticipate, believe and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report. ITC^DeltaCom disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although ITC^DeltaCom believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ from estimates or projections contained in the forward-looking statements are described under Safe Harbor Statement in this Item 2.
The following discussion should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related Notes thereto and with Managements Discussion and Analysis of Financial Condition and Results of Operations and the audited Consolidated Financial Statements and the Notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2010.
Overview
ITC^DeltaCom, Inc., together with its wholly-owned subsidiaries, provides integrated communications services in the southeastern United States. We deliver a comprehensive suite of high-quality data and voice communications services, including high-speed or broadband data communications, local exchange, long-distance and conference calling, and mobile data and voice services. We also sell customer premises equipment to our business customers. We offer these services primarily over our 14-state fiber optic network. Our fiber optic network provides us with transmission capacity that we also sell to other communications providers on a wholesale basis.
In December 2010, we were acquired by EarthLink, Inc. (EarthLink) for $3.00 per share, with ITC^DeltaCom, Inc. surviving as a wholly-owned subsidiary of EarthLink. Subsequent to the acquisition, our integrated communication services were rebranded as EarthLink Business and our wholesale services were rebranded as EarthLink Carrier.
Revenue Sources
We derive revenues from providing integrated communications services, wholesale services and equipment sales and related services.
Integrated Communications Services. We deliver integrated voice and data communications services to end-users on a retail basis, including high-speed or broadband data communications (which consist of Ethernet and Internet access connectivity), local exchange, long-distance and conference calling, and mobile data and voice services. Revenues primarily consist of monthly recurring fees. Revenues from our integrated communications services were approximately 82% and 81% of our total revenues during the three months ended June 30, 2010 and 2011, respectively.
Wholesale Services. We deliver wholesale communications services to other communications businesses. Revenues from these services are generated from sales to a limited number of other communications companies, including incumbent local exchange carriers, competitive local exchange carriers, wireless service providers, cable companies, Internet service providers and other carriers. Our wholesale services include regional communications transmission capacity over our fiber optic network, which we refer to as our broadband transport services, local interconnection services to Internet service providers and local dial tone communications services to other competitive exchange carriers, operator and directory assistance services, and dedicated Internet access services through our IP network and our direct connectivity to the IP networks of other Internet service providers. Our broadband transport services include private line services, Ethernet private line services and wavelength services, which allow other communications providers to transport the traffic of their
end-user or wholesale customers across our local and intercity network. Revenues consist of fees charged for network services, termination fees, fees for equipment and usage fees. Revenues from our wholesale services were approximately 14% and 15% of our total revenues during the three months ended June 30, 2010 and 2011, respectively.
Equipment Sales and Related Services. We derive non-recurring revenues from selling, installing and providing maintenance services for customer premises equipment. Revenues from these services, which are primarily generated from sales to our integrated communications services customers, were approximately 4% and 3% of our total revenues during the three months ended June 30, 2010 and 2011, respectively.
Trends in our Business
We operate in the communications industry. The communications industry is highly competitive, and we expect this competition to intensify. These markets are rapidly changing due to industry consolidation, an evolving regulatory environment and the emergence of new technologies. We sell our services to end user business customers and to wholesale customers. Our wholesale customers consist primarily of telecommunications carriers and network resellers. Our business has become more focused on end users as a result of consolidation in the telecommunications industry. In addition, merger and acquisition transactions have created more significant competitors for us and have reduced the number of vendors from which we may purchase network elements we leverage to operate our business.
Our business customers are particularly exposed to a weak economy. We believe that the financial and economic pressures faced by our business customers in this environment of diminished consumer spending, corporate downsizing and tightened credit have had, and may continue to have, an adverse effect on billable minutes of use and on customer attrition rates, and have resulted in and may continue to result in increased customer demands for price reductions in connection with contract renewals. We have experienced pressure on revenue and operating expenses for our services as a result of current economic conditions, including increased subscriber acquisition and retention costs necessary to attract and retain subscribers.
Acquisition
In March 2011, we acquired Saturn Telecommunication Services Inc. and affiliates (STS Telecom), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom operates a sophisticated voice-over-IP (VoIP) platform. The primary reason for the acquisition is to leverage STS Telecoms expertise in managed hosted VoIP on a nationwide basis as part of our VoIP offerings.
Results of Operations
On December 8, 2010, we were acquired by EarthLink. The accounting for the acquisition has been pushed-down in our consolidated financial statements. Due to EarthLinks acquisition of us, the financial results have been presented separately for the Predecessor Entity period, January 1, 2010 through June 30, 2010, and for the Successor Entity period, January 1, 2011 through June 30, 2011.
The following table sets forth statement of operations data for the three months ended June 30, 2010 and 2011 (in thousands):
|
|
Predecessor Entity |
|
|
Sucessor Entity |
|
|
|
|
| |||
|
|
Three Months |
|
|
Three Months |
|
Change Between |
| |||||
|
|
Ended |
|
|
Ended |
|
2010 and 2011 |
| |||||
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
Amount |
|
% |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
| |||
Integrated communications services |
|
$ |
91,287 |
|
|
$ |
92,230 |
|
$ |
943 |
|
1 |
% |
Wholesale services |
|
15,281 |
|
|
17,580 |
|
2,299 |
|
15 |
% | |||
Equipment sales and related services |
|
4,332 |
|
|
3,969 |
|
(363 |
) |
-8 |
% | |||
Total revenues |
|
110,900 |
|
|
113,779 |
|
2,879 |
|
3 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
| |||
Cost of revenues (exclusive of depreciation and amortization shownseparately below) |
|
50,920 |
|
|
55,546 |
|
4,626 |
|
9 |
% | |||
Selling, general and administrative (exclusive of depreciation and amortization shown separately below) |
|
36,688 |
|
|
37,302 |
|
614 |
|
2 |
% | |||
Depreciation and amortization |
|
13,648 |
|
|
18,230 |
|
4,582 |
|
34 |
% | |||
Acquisition-related costs |
|
|
|
|
1,057 |
|
1,057 |
|
* |
| |||
Total operating costs and expenses |
|
101,256 |
|
|
112,135 |
|
10,879 |
|
11 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
Income from operations |
|
9,644 |
|
|
1,644 |
|
(8,000 |
) |
-83 |
% | |||
Interest expense and other, net |
|
(16,160 |
) |
|
(8,137 |
) |
8,023 |
|
-50 |
% | |||
Loss before income taxes |
|
(6,516 |
) |
|
(6,493 |
) |
23 |
|
0 |
% | |||
Income tax benefit |
|
|
|
|
254 |
|
254 |
|
* |
| |||
Net loss |
|
$ |
(6,516 |
) |
|
$ |
(6,239 |
) |
$ |
277 |
|
-4 |
% |
* Denotes percentage is not meaningful.
The following table sets forth statement of operations data for the six months ended June 30, 2010 and 2011 (in thousands):
|
|
Predecessor Entity |
|
|
Sucessor Entity |
|
|
|
|
| |||
|
|
Six Months |
|
|
Six Months |
|
Change Between |
| |||||
|
|
Ended |
|
|
Ended |
|
2010 and 2011 |
| |||||
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
Amount |
|
% |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
| |||
Integrated communications services |
|
$ |
184,405 |
|
|
$ |
180,589 |
|
$ |
(3,816 |
) |
-2 |
% |
Wholesale services |
|
29,570 |
|
|
35,148 |
|
5,578 |
|
19 |
% | |||
Equipment sales and related services |
|
8,065 |
|
|
7,858 |
|
(207 |
) |
-3 |
% | |||
Total revenues |
|
222,040 |
|
|
223,595 |
|
1,555 |
|
1 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
| |||
Cost of revenues (exclusive of depreciation and amortization shownseparately below) |
|
103,269 |
|
|
109,924 |
|
6,655 |
|
6 |
% | |||
Selling, general and administrative (exclusive of depreciation and amortization shown separately below) |
|
73,583 |
|
|
73,006 |
|
(577 |
) |
-1 |
% | |||
Depreciation and amortization |
|
28,470 |
|
|
34,896 |
|
6,426 |
|
23 |
% | |||
Acquisition-related costs |
|
|
|
|
1,882 |
|
1,882 |
|
* |
| |||
Total operating costs and expenses |
|
205,322 |
|
|
219,708 |
|
14,386 |
|
7 |
% | |||
|
|
|
|
|
|
|
|
|
|
| |||
Income from operations |
|
16,718 |
|
|
3,887 |
|
(12,831 |
) |
-77 |
% | |||
Interest expense and other, net |
|
(20,845 |
) |
|
(15,691 |
) |
5,154 |
|
-25 |
% | |||
Loss before income taxes |
|
(4,127 |
) |
|
(11,804 |
) |
(7,677 |
) |
186 |
% | |||
Income tax provision |
|
|
|
|
(33 |
) |
(33 |
) |
* |
| |||
Net loss |
|
$ |
(4,127 |
) |
|
$ |
(11,837 |
) |
$ |
(7,710 |
) |
187 |
% |
* Denotes percentage is not meaningful.
The following table sets forth certain operating data as of June 30, 2010 and 2011:
|
|
June 30, |
|
June 30, |
|
|
|
2010 |
|
2011 |
|
|
|
|
|
|
|
Colocations (1) |
|
294 |
|
296 |
|
Voice and data switches |
|
20 |
|
20 |
|
Employees (2) |
|
1,357 |
|
1,292 |
|
|
|
|
|
|
|
Retail business voice lines in service (3) |
|
|
|
|
|
UNE-T and other UNE lines (4) |
|
368,739 |
|
373,768 |
|
Resale and UNE-P lines (5) |
|
46,975 |
|
44,124 |
|
Total retail voice lines in service |
|
415,714 |
|
417,892 |
|
Wholesale lines in service (6) |
|
6,900 |
|
6,417 |
|
Total business lines in service (7) |
|
422,614 |
|
424,309 |
|
(1) Two colocations in the same physical facility are reflected as one location.
(2) Includes full-time and part-time employees.
(3) Lines in service include only voice lines in service. Conversion of data services provided to customers to a voice line equivalent is excluded.
(4) Facilities-based service offering in which we provide local transport through our owned and operated switching facilities.
(5) Resale service offerings in which we provide local and mobile services.
(6) Represents primary rate interface circuits provided as part of our local interconnection services for Internet service providers.
(7) Reported net of lines disconnected or canceled.
Revenues
Total revenues increased $2.9 million, or 3%, from the three months ended June 30, 2010 to the three months ended June 30, 2011, and increased $1.6 million, or 1%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. The increases were primarily due to the inclusion of STS Telecom revenues and an increase in wholesale revenues, offset by declining business demand and competitive pricing pressures for our retail integrated communications services and equipment.
Integrated communications services. Revenues from our integrated communications services increased $0.9 million, or 1%, from the three months ended June 30, 2010 to the three months ended June 30, 2011. The increase was primarily due to the inclusion of STS Telecom revenues. This was partially offset by a decrease in local service revenues and data revenues. Our local service and data revenues decreased due to pricing pressures related to increased competition and the overall economy. Revenues from our integrated communications services decreased $3.8 million, or 2%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. The decrease was primarily due to a decrease in local service revenues and data revenues, offset by the inclusion of STS Telecom revenues and an increase in long distance services revenue.
We experienced an increase of approximately 5,029 facilities-based local lines and a decrease of approximately 2,851 resale and UNE-P lines from June 30, 2010 to June 30, 2011, for a net increase of 2,178 total lines. We continue to pursue a strategy to improve the profitability of our integrated communications services by reducing the proportion of our local lines provided through higher cost resale and UNE-P services.
Wholesale services. Revenues from our wholesale services increased $2.3 million, or 15%, from the three months ended June 30, 2010 to the three months ended June 30, 2011, and increased $5.6 million, or 19%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. The increases were primarily attributable to an increase in broadband transport services revenues. The increase in broadband transport service revenues resulted from actions on our part to secure our customer relationships in which we entered into new contracts with utilities to acquire facilities for our use in serving our customers and canceled contracts with the utilities to market their facilities to our customers. As a result, our broadband transport revenues and our cost of revenues increased during the three and six months ended June 30, 2011 compared to the prior year periods.
Equipment sales and related services. Revenues from communication equipment sales and related services decreased $0.4 million, or 8%, from the three months ended June 30, 2010 to the three months ended June 30, 2011, and decreased $0.2 million, or 3%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. The decreases resulted from reduced demand for telephone systems.
Cost of revenues
Cost of revenues includes costs directly associated with providing services to our customers. Cost of revenues does not include depreciation and amortization. Cost of revenues primarily consists of the cost of connecting customers to our networks via leased facilities; the costs of leasing components of our network facilities; costs paid to third-party providers for interconnect access and transport services; and the costs of equipment sold to customers for use with our services. We utilize other carriers to provide services where we do not have facilities. We utilize a number of different carriers to terminate our long distance calls outside the southeastern United States. The provision of local services over our network generally reduces the amounts we otherwise would be required to pay to other telephone companies to use their networks and facilities in order to provide local services.
Total cost of revenues increased $4.6 million, or 9%, from the three months ended June 30, 2010 to the three months ended June 30, 2011 and increased as a percent of revenues from 46% during the three months ended June 30, 2010 to 49% during the three months ended June 30, 2011. Total cost of revenues increased $6.7 million, or 6%, from the six months ended June 30, 2010 to the six months ended June 30, 2011 and increased as a percent of revenues from 47% during the six months ended June 30, 2010 to 49% during the six months ended June 30, 2011. The increases in cost of revenues both in absolute terms and as a percentage of total revenues were primarily due to the inclusion of STS Telecom cost of revenues and an increase in wholesale services cost of revenues resulting from new contracts, as discussed above.
Selling, general and administrative expense
Selling, general and administrative expense consists of expenses of selling and marketing, field personnel engaged in direct network maintenance and monitoring, customer service and corporate administration.
Selling, general and administrative expense increased $0.6 million, or 2%, from the three months ended June 30, 2010 to the three months ended June 30, 2011. The increase was primarily due to the inclusion of STS Telecoms selling, general and administrative expenses and an increase in stock-based compensation expense, partially offset by decreases in facilities costs, professional fees, data processing, bad debt expense and other corporate overhead expenses. Selling, general and administrative expense decreased $0.6 million, or 1%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. The decrease was attributable to decreases in facilities costs, professional fees, data processing, bad debt expense
and other corporate overhead expenses, partially offset by the inclusion of STS Telecoms selling, general and administrative expenses and an increase in stock-based compensation expense.
Depreciation and amortization
Depreciation and amortization includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the various asset classes. Definite-lived intangible assets, which primarily consist of customer relationships, developed technology and trade names, are amortized on a straight-line basis over their estimated useful lives, which range from three to six years. The customer relationships are being amortized using the straight-line method because this matches the estimated cash flow generated by such assets, and the developed technology and trade names are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined.
Depreciation and amortization expense increased $4.6 million, or 34%, from the three months ended June 30, 2010 to the three months ended June 30, 2011, and increased $6.4 million, or 23%, from the six months ended June 30, 2010 to the six months ended June 30, 2011. The increases were due to increases in amortization expense, offset by decreases in depreciation expense. The increases in amortization expense compared to the prior year periods were due to amortization related to identifiable intangible assets established in connection with EarthLinks acquisition of us and our acquisition of STS telecom. The decreases in depreciation expense compared to the prior year periods were due to a reduction in property equipment recorded at fair value in connection with EarthLinks acquisition of us and property and equipment becoming fully depreciated over the past year, partially offset by an increase in depreciation expense resulting from property and equipment obtained in the acquisition of STS Telecom.
Acquisition-related costs
Acquisition-related costs consist of costs directly related to acquisitions, such as employee severance and retention costs; transaction related costs, which include external costs directly related to acquisitions such as advisory, legal, accounting, valuation and other professional fees; and other integration related costs. Acquisition-related costs are expensed in the period in which the costs are incurred and the services are received. These expenses are included in acquisition-related costs in the Companys Condensed Consolidated Statement of Operations. During the three and six months ended June 30, 2011, acquisition-related costs consisted of the following:
|
|
Three Months |
|
Six Months |
| ||
|
|
Ended |
|
Ended |
| ||
|
|
June 30, |
|
June 30, |
| ||
|
|
2011 |
|
2011 |
| ||
|
|
(in thousands) |
| ||||
|
|
|
|
|
| ||
Severance and retention costs |
|
$ |
569 |
|
$ |
1,218 |
|
Transaction related costs |
|
|
|
176 |
| ||
Integration related costs |
|
488 |
|
488 |
| ||
Total acquisition-related costs |
|
$ |
1,057 |
|
$ |
1,882 |
|
Interest expense and other, net
Interest expense and other, net, is primarily comprised of interest expense incurred on our outstanding indebtedness, including our 10.5% senior secured notes due 2016 (the Notes); interest income earned on our cash and cash equivalents; and other miscellaneous income and expense items.
Interest expense and other, net, decreased $8.0 million, or 50%, from the three months ended June 30, 2010 to the three months ended June 30, 2011, and decreased $5.2 million, or 25%, from the six months ended
June 30, 2010 to the six months ended June 30, 2011. Interest expense and other, net, for the three and six months ended June 30, 2010 includes a write-off of $7.9 million of unamortized debt discount and issuance costs in connection with the repayment of indebtedness outstanding under our first lien and second lien senior secured credit facilities and our former revolving credit facility from the proceeds of our Notes offering in April 2010. The decrease in interest expense and other, net, during the three months ended June 30, 2011 compared to the prior year period was primarily attributable to the write-off of unamortized debt discount and issuance costs recognized in the prior year period and the amortization of debt premium resulting from the increase in fair value of debt recorded through purchase accounting. The decrease in interest expense and other, net, during the six months ended June 30, 2011 compared to the prior year period was primarily attributable to the write-off of unamortized debt discount and issuance costs recognized in the prior year period, partially offset by an increase in the weighted average interest rate on our outstanding borrowings and an increase in our outstanding debt balance due to the issuance of the Notes in April 2010 and the repayment of $305.5 million aggregate amount of indebtedness with the proceeds of the Notes offering.
Income Tax Provision
We recognized an income tax provision of $33,000 during the six months ended June 30, 2011, which consisted of state income amounts payable due to the net operating loss carryforward limitations associated with provisions of the Internal Revenue Code which limit an entitys ability to utilize net operating loss carryforwards in the case of certain events, including significant changes in ownership interests.
We continue to maintain a full valuation allowance of $94.6 million against our unrealized deferred tax assets, which include net operating loss carryforwards. We will reduce the valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets can be realized on a stand-alone basis.
To the extent we report income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Our ability to use our federal and state net operating loss carryforwards and federal and state tax credit carryforwards may be subject to restrictions attributable to equity transactions in the future resulting from changes in ownership as defined under the Internal Revenue Code.
Liquidity and Capital Resources
The following table sets forth summarized cash flow data for the six months ended June 30, 2010 and 2011 (in thousands):
|
|
Predecessor Entity |
|
Successor Entity |
| ||
|
|
Six Months |
|
Six Months |
| ||
|
|
Ended |
|
Ended |
| ||
|
|
June 30, 2010 |
|
June 30, 2011 |
| ||
|
|
|
|
|
| ||
Net loss |
|
$ |
(4,127 |
) |
$ |
(11,837 |
) |
Non-cash items |
|
38,503 |
|
35,124 |
| ||
Changes in working capital |
|
4,083 |
|
(5,863 |
) | ||
Net cash provided by operating activities |
|
$ |
38,459 |
|
$ |
17,424 |
|
|
|
|
|
|
| ||
Net cash used in investing activities |
|
$ |
(28,048 |
) |
$ |
(43,935 |
) |
|
|
|
|
|
| ||
Net cash (used in) provided by financing activities |
|
$ |
(1,652 |
) |
$ |
26,641 |
|
Operating activities
Net cash provided by operating activities was $38.5 million and $17.4 million during six months ended June 30, 2010 and 2011, respectively. Net cash provided by operating activities decreased during the six months ended June 30, 2011 compared to the six months ended June 30, 2010 primarily due to an increase in cash used for accounts payable, accrued and other liabilities.
Investing activities
Cash used for investing activities was $28.0 million during the six months ended June 30, 2010. This primarily consisted of $29.8 million of capital expenditures, offset by $1.7 million of proceeds from the sale of short-term investments and $0.6 million of proceeds from the sale of fixed assets. Cash used for investing activities was $43.9 million during the six months ended June 30, 2011. This primarily consisted of $22.8 million of cash paid to acquire STS Telecom and $22.5 million of capital expenditures.
Financing activities
Cash used in financing activities was $1.7 million during the six months ended June 30, 2010. This consisted of $308.1 million for repayments of long-term debt and $2.1 million for taxes paid on vested restricted shares, offset by $308.5 million from the issuance of debt, net of issuances costs. In April 2010, we issued $325.0 million aggregate principal amount of 10.5% senior secured notes due on April 1, 2016 at an offering price of 97.857% and received net proceeds of $308.5 million after transaction fees of $9.5 million. We applied the net proceeds to repay indebtedness, including all principal plus accrued and unpaid interest, outstanding under our first lien and second lien senior secured credit facilities and our former revolving credit facility, which were terminated.
Cash provided by financing activities was $26.6 million during the six months ended June 30, 2011. This consisted of a $30.0 million investment by EarthLink, partially offset by $3.4 million for repayments of long-term debt and capital leases. Under the indenture for the Notes, following the consummation of the Acquisition, we were required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 1010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011. Also during the six months ended June 30, 2011, we repaid $3.0 million of debt assumed in the STS Telecom acquisition and made payments on capital leases assumed in the STS Telecom acquisition.
Future Uses of Cash
We believe that to remain competitive with much larger telecommunications companies, we will require significant additional capital expenditures to enhance and operate our fiber network. We expect to incur capital expenditures to maintain and upgrade our network and technology infrastructure. The actual amount of capital expenditures may fluctuate due to a number of factors which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment. We expect to use cash related to our outstanding indebtedness, including payments for interest. We also may use cash to redeem the Notes in accordance with the terms of the related indenture or to repurchase the Notes. We also expect to use cash for required payment of wages and salaries to employees, purchase of network capacity and access under contracts, and payment of fees for other goods and services, including maintenance and commission payments. We are obligated under contracts for network facilities and access that require us to pay a penalty, acquire equipment specific to us or purchase contract specific equipment, as defined by each contract, if we terminate the contract without cause prior to its expiration date. Because these payment obligations are contingent on our termination of the contract, no obligation will exist unless such a termination occurs.
Our cash requirements depend on numerous factors, including the costs required to maintain our network infrastructure, the pricing of our services, and the level of resources used for our sales and marketing activities, among others.
Sources of Cash
Our principal sources of liquidity are our cash and cash equivalents, as well as the cash flow we generate from our operations. During the six months ended June 30, 2010 and 2011, we generated $38.5 million and $17.4 million in cash from operations, respectively. As of June 30, 2011, we had $43.7 million in cash and cash equivalents.
We believe that our cash on hand and the cash flows we expect to generate from operations under our current business plan will provide us with sufficient funds to enable us to fund our planned capital expenditures, satisfy our debt service requirements, and meet our other cash needs under our current business plan for at least the next 12 months. Our ability to meet all of our cash needs during the next 12 months and thereafter could be adversely affected by various circumstances, including an increase in customer attrition, employee turnover, service disruptions and associated customer credits, acceleration of critical operating payables, lower than expected collections of accounts receivable, and other circumstances outside of our immediate and direct control. We may determine that it is necessary or appropriate to obtain additional funding through new debt financing to address such contingencies or changes to our business plan. We cannot provide any assurance as to whether, or as to the terms on which, we would be able to obtain such debt financing, which would be subject to limitations imposed by covenants contained in our Notes and which would be negatively affected by adverse developments in the credit and capital markets.
Indebtedness
Senior Secured Notes. As of June 30, 2011, we had outstanding $324.8 million aggregate principal amount of 10.5% senior secured notes due April 1, 2016. As a result of EarthLinks acquisition of us, the Notes were recorded at acquisition date fair value. The fair value was based on publicly-quoted market prices. The resulting $26.3 million debt premium is being amortized over the remaining life of the Notes.
Compliance With Financial Covenants. We were in compliance with all of financial covenants as of June 30, 2011.
Off-Balance Sheet Arrangements
As of June 30, 2011, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Safe Harbor Statement
The Managements Discussion and Analysis and other portions of this Quarterly Report on Form 10-Q include forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks and uncertainties (1) that we may not be able to execute our business strategy, which could adversely impact our results of operations and cash flows; (2) that adverse economic conditions could harm our business; (3) that if we do not continue to innovate and provide products and services that are useful to customers, we may not remain competitive, and our revenues and operating results could suffer; (4) that we face significant competition that could reduce our profitability; (5) that we may not be able to compete effectively if we are unable to install additional network equipment or convert our network to more advanced technology; (6) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (7) that our business may suffer if third parties used for customer service and technical support and certain billing services are unable to provide these
services or terminate their relationships with us; (8) that decisions by the Federal Communications Commission relieving incumbent telephone companies of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (9) that our wholesale services, including our broadband transport services, continue to be adversely affected by pricing pressure, network overcapacity, service cancellations and other factors; (10) that our financial performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (11) that we have experienced and may continue to experience reductions in switched access and reciprocal compensation revenue; (12) that our inability to maintain and upgrade our network infrastructure, portions of which we do not own, could adversely affect our operating results; (13) that if we are unable to interconnect with AT&T and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (14) that government regulations could adversely affect our business or force us to change our business practices; (15) that we may be unable to retain sufficient qualified personnel, which could adversely affect us; (16) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (17) that our business depends on effective business support systems and processes; (18) that we may not be able to protect our intellectual property; (19) we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (20) that if we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (21) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (22) that we are a wholly-owned subsidiary of EarthLink and therefore subject to strategic decisions of EarthLink and affected by EarthLinks performance; (23) that as a wholly-owned subsidiary of EarthLink, any arrangements or agreements between the two entities may have different terms than would have been negotiated by independent, unrelated parties. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from managements expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the Exchange Act), we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITC^DeltaCom is a party to various legal proceedings that are ordinary and incidental to its business. Management does not expect that any currently pending legal proceedings will have a material adverse effect on ITC^DeltaComs results of operations or financial position.
There were no material updates from the risk factors disclosed in ITC^DeltaComs Annual Report on Form 10-K for the year ended December 31, 2010.
None.
(a) Exhibits. The following exhibits are filed as part of this report:
31 |
.1 |
|
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
31 |
.2 |
|
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32 |
.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32 |
.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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|
|
101 |
.INS |
|
XBRL Instance Document |
|
|
|
|
101 |
.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
101 |
.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
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|
|
101 |
.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
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101 |
.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
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101 |
.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
ITC^DELTACOM, INC. |
|
|
|
|
|
|
|
|
Date: |
August 8, 2011 |
|
/s/ ROLLA P. HUFF |
|
|
|
Rolla P. Huff, Chairman and Chief Executive Officer (principal executive officer) |
|
|
|
|
|
|
|
|
Date: |
August 8, 2011 |
|
/s/ BRADLEY A. FERGUSON |
|
|
|
Bradley A. Ferguson, Chief Financial Officer |
|
|
|
(principal financial and accounting officer) |