UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
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¨ Preliminary Proxy Statement
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x Definitive Proxy Statement
¨ Definitive Additional Materials
¨ Soliciting Material Pursuant to §240.14a-12
ITC^DeltaCom, Inc.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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ITC^DeltaCom, Inc.
7037 Old Madison Pike
Huntsville, Alabama 35806
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 13, 2008
Dear fellow stockholder:
On behalf of the board of directors of ITC^DeltaCom, Inc., it is my pleasure to invite you to ITC^DeltaCom’s 2008 annual meeting of stockholders. The annual meeting will be held on May 13, 2008, at 11:00 a.m., local time, at our principal executive offices located at 7037 Old Madison Pike, Huntsville, Alabama 35806. The annual meeting has been called for the following purposes:
1. | to consider and vote upon a proposal to elect nine directors of ITC^DeltaCom; and |
2. | to transact such other business as may properly come before the annual meeting or any adjournment or postponement thereof. |
Only stockholders of record at the close of business on March 31, 2008 are entitled to notice of, and to vote at, the annual meeting or any adjournment or postponement thereof.
All stockholders are cordially invited to attend this meeting.
Your vote is very important to us. Whether or not you plan to attend the meeting in person, your shares should be represented and voted. To vote, you should complete, sign, date and promptly return the proxy in the postage-paid envelope that we have included for your convenience. Alternatively, you may vote your shares through the Internet or by telephone as indicated on the enclosed proxy card. No postage is required if the proxy is mailed in the United States. Submitting the proxy before the annual meeting will not preclude you from voting in person at the annual meeting if you should decide to attend.
By order of the board of directors, |
J. Thomas Mullis Secretary |
Dated: April 15, 2008
ITC^DELTACOM, INC.
7037 Old Madison Pike
Huntsville, Alabama 35806
Annual Meeting of Stockholders
May 13, 2008
PROXY STATEMENT
GENERAL INFORMATION
ITC^DeltaCom, Inc. is furnishing this proxy statement in connection with the solicitation of proxies by our board of directors for use at the annual meeting of stockholders to be held on May 13, 2008, at 11:00 a.m., local time, at our principal executive offices located at 7037 Old Madison Pike, Huntsville, Alabama 35806.
The annual meeting has been called for stockholders to consider and vote upon a proposal to elect nine directors and to transact such other business, if any, as may properly come before the annual meeting or any adjournment or postponement of the annual meeting.
This proxy statement and the enclosed proxy card are first being mailed to stockholders on or about April 15, 2008.
Proxy Solicitation
We will pay the cost of this proxy solicitation. In addition to the solicitation of proxies by use of the mails, officers and other employees of ITC^DeltaCom and our subsidiaries may solicit proxies by personal interview, telephone, facsimile, e-mail and telegram. None of these individuals will receive compensation for these services, which will be performed in addition to their regular duties. We also have made arrangements with brokerage firms, banks, custodians, nominees and other fiduciaries to forward proxy solicitation materials for shares held of record by them to the beneficial owners of such shares. We will reimburse such persons for their reasonable out-of-pocket expenses in forwarding such materials.
A list of stockholders entitled to vote at the annual meeting will be open for examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of ten days before the meeting at our principal executive offices at 7037 Old Madison Pike, Huntsville, Alabama 35806, and at the time and place of the meeting during the whole time of the meeting.
Voting and Revocability of Proxies
A proxy card for use in connection with the annual meeting and a return postage-paid envelope are enclosed. Stockholders also may vote their shares through the Internet or by telephone by following the instructions provided on the enclosed proxy card.
Shares that are represented by a properly executed proxy, if the proxy is received in time and not revoked, will be voted at the annual meeting according to the instructions indicated in the proxy. If no instructions are indicated, the shares will be voted“FOR” the election of each of the nine nominees to the board of directors.
Discretionary authority is provided in the proxy as to any matters not specifically referred to in the proxy. The board of directors is not aware of any other matters that are likely to be brought before the annual meeting. If any other matter is properly presented at the annual meeting for action, including a proposal to adjourn or postpone the annual meeting to permit us to solicit additional proxies in favor of any proposal, the persons named in the accompanying proxy will vote on the matter in their own discretion.
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A vote through the Internet or by telephone may be revoked by executing a later-dated proxy card, by subsequently voting through the Internet or by telephone, or by attending the annual meeting and voting in person. A stockholder executing a proxy card also may revoke the proxy at any time before it is exercised by giving written notice revoking the proxy to our Secretary, by subsequently executing another proxy bearing a later date or by attending the annual meeting and voting in person. Attending the annual meeting will not automatically revoke a stockholder’s prior Internet or telephone vote or the stockholder’s proxy. All written notices of revocation or other communications with respect to revocation of proxies should be addressed to ITC^DeltaCom, Inc., 7037 Old Madison Pike, Huntsville, Alabama 35806, Attention: Secretary.
Voting Procedure
All holders of record of our common stock at the close of business on March 31, 2008, which is the record date for the annual meeting, will be eligible to vote on all proposals at the annual meeting. Each holder of common stock is entitled to one vote at the annual meeting for each share held by such stockholder as of the record date. As of March 31, 2008, there were 80,723,241 shares of common stock outstanding, which represented a total of 80,723,241 votes entitled to be cast at the annual meeting.
The holders of outstanding shares of common stock representing a majority of the total votes entitled to vote at the annual meeting, present in person or by proxy, will constitute a quorum at the annual meeting. Votes cast in person or by proxy at the annual meeting will be tabulated by the inspector of election appointed for the annual meeting, who will determine whether a quorum is present. Abstentions and any broker non-votes will be counted for purposes of determining the presence of a quorum at the annual meeting.
Under the applicable rules of the exchanges and other self-regulatory organizations of which broker-dealers are members, broker-dealers who hold their customers’ shares in street name may vote the shares of their customers on routine proposals when they have not received instructions from the customers. Under these rules, brokers may not vote shares of their customers on other matters without instructions from their customers. A broker non-vote occurs with respect to any proposal when a broker holds shares of a customer in its name and is not permitted to vote on that proposal without instruction from the beneficial owner of the shares and no instruction is given.
Stockholder Approval of Election of Directors
Assuming a quorum is present at the annual meeting, approval of the nine nominees to the board of directors requires a plurality of the votes cast at the annual meeting by the holders of the common stock. Accordingly, the directorships to be filled at the annual meeting will be filled by the nominees receiving the highest number of votes. In the election of directors, votes may be cast in favor of or withheld with respect to any or all nominees. Votes that are withheld will be excluded entirely from the vote and will have no effect on the outcome of the vote.
As of March 31, 2008, a group of stockholders affiliated with Welsh, Carson, Anderson & Stowe, a private equity firm, who are referred to collectively in this proxy statement as the “WCAS Group,” have reported that they beneficially own a majority of the outstanding shares of our common stock. See “Security Ownership” for information about the common stock owned by the WCAS Group. The members of the WCAS Group and some former and current affiliates and associates of WCAS Group from time to time, who are referred to collectively in this proxy statement as the “WCAS securityholders,” are obligated under the governance agreement described below in this proxy statement to vote and cause to be voted all of their shares of common stock in favor of the election of each of the nominees to the board of directors. Accordingly, if such votes are cast in accordance with the governance agreement, the election of each of the nominees for director is assured.
The board of directors unanimously recommends that the stockholders vote “FOR” the election of each of the nine director nominees to the board of directors.
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Annual Report to Stockholders
A copy of our annual report on Form 10-K for our 2007 fiscal year, as filed with the SEC, accompanies this proxy statement as our annual report to stockholders. Our 2007 annual report on Form 10-K, which we refer to as our “2007 Form 10-K,” is also available through our web site atwww.deltacom.com. The annual report to stockholders and the Form 10-K are not proxy soliciting materials.
Important Notice Regarding Delivery of Stockholder Documents
If you and other residents at your mailing address own common stock in street name, your broker or bank may have sent you a notice that your household will receive only one annual report to stockholders and proxy statement for each company in which you hold shares through that broker or bank. The practice of sending only one copy of an annual report to stockholders and proxy statement is known as “householding.” If you did not respond that you did not want to participate in householding, you were deemed to have consented to the process. If the foregoing procedures apply to you, your broker has sent one copy of our annual report to stockholders and this proxy statement to your address. You may revoke your consent to householding at any time by sending your name, the name of your brokerage firm and your account number to Householding Department, 51 Mercedes Way, Edgewood, New Jersey 11717 (telephone number: 1-800-542-1061). The revocation of your consent to householding will be effective following its receipt. In any event, if you did not receive an individual copy of our annual report to stockholders or this proxy statement, we will send a copy to you upon request if you (1) send a written request to ITC^DeltaCom, Inc., 7037 Old Madison Pike, Huntsville, Alabama 35806, Attention: Secretary, or (2) direct your request by telephone to us at 256-382-5900. If you are receiving multiple copies of our annual report to stockholders and proxy statement, you can request householding by contacting our corporate secretary in the same manner.
We encourage you to participate in this program. Your participation will reduce the volume of duplicate information received at your household, as well as reduce our operating expenses.
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SECURITY OWNERSHIP
The following tables present, as of March 31, 2008, information regarding beneficial ownership of our common stock. This information has been presented in accordance with SEC rules and is not necessarily indicative of beneficial ownership for any other purpose.
Under SEC rules, beneficial ownership of a class of capital stock as of any date includes any shares of such class as to which a person, directly or indirectly, has or shares voting power or investment power and also any shares as to which a person has the right to acquire such voting or investment power as of or within 60 days after such date through the exercise of any stock option, warrant or other right, without regard to whether such right expires before the end of such 60-day period or continues thereafter. If two or more persons share voting power or investment power with respect to specific securities, all of such persons may be deemed to be the beneficial owners of such securities. Information with respect to persons other than the holders listed in the tables below that share beneficial ownership with respect to the securities shown is presented following the applicable table. Except as otherwise indicated below and under applicable community property laws, based on the information available to us, we believe that the beneficial owners of the securities listed below have sole voting and investment power with respect to the shares shown.
As of March 31, 2008, there were 80,723,241 shares of common stock outstanding.
Principal Stockholders
The following table presents, as of March 31, 2008, information based upon our records and filings with the SEC regarding each person, other than a director, director nominee or executive officer of ITC^DeltaCom, known by us to be the beneficial owner of more than 5% of our common stock, which was the only class of our voting capital stock outstanding as of such date.
Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (%) | ||
WCAS Group 320 Park Avenue, Suite 2500 New York, New York 10022 | 40,769,330 | 50.5 | ||
Tennenbaum Capital Partners, LLC and others 2951 28th Street, Suite 1000 Santa Monica, California 90405 | 11,513,716 | 14.3 | ||
Joshua Tree Capital Partners, LP and others One Maritime Plaza, Suite 750 San Francisco, California 94111 | 5,300,219 | 6.6 |
The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power as of or within 60 days after such date, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power as of or within 60 days after such date. Consequently, the denominator for calculating beneficial ownership percentages may be different for each beneficial owner.
The information concerning the WCAS Group is based upon our records and a statement on Schedule 13D/A filed with the SEC on August 10, 2007, which we refer to as the “WCAS Schedule 13D.” The members of the WCAS Group report in the WCAS Schedule 13D that each such member may be deemed to share with the other members of the WCAS Group voting and investment power with respect to all 40,769,330 shares of common stock shown. The reporting persons state that the following entities and individuals constitute the WCAS Group: Welsh, Carson, Anderson & Stowe VIII, L.P.; WCAS VIII Associates, L.L.C.; WCAS Capital Partners III, L.P.; WCAS CP III Associates, L.L.C.; Patrick J. Welsh; Russell L. Carson; Bruce K. Anderson; Thomas E. McInerney; Robert A. Minicucci; Anthony J. de Nicola; Paul B. Queally; Jonathan M. Rather; D. Scott Mackesy; John D. Clark; and Sanjay Swani. The foregoing individuals are the managing members of
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WCAS VIII Associates, L.L.C., which is the sole general partner of Welsh, Carson, Anderson & Stowe VIII, L.P., and the managing members of WCAS CP III Associates, L.L.C., which is the sole general partner of WCAS Capital Partners III, L.P. The shares of common stock shown as beneficially owned by the WCAS Group include the following: 35,203,323 shares of common stock held of record by Welsh, Carson, Anderson & Stowe VIII, L.P.; 4,127,611 shares of common stock held of record by WCAS Capital Partners III, L.P.; and shares owned directly by certain of the managing members identified above. Each managing member of WCAS VIII Associates, L.L.C. and WCAS CP III Associates, L.L.C. disclaims beneficial ownership of all securities other than those he owns directly or in which he possesses an indirect pro rata interest as a managing member of WCAS VIII Associates, L.L.C. or WCAS CP III Associates, L.L.C.
The information concerning Tennenbaum Capital Partners, LLC and others is based upon a statement on Schedule 13D/A filed with the SEC on October 2, 2007. The Schedule 13D/A states that Tennenbaum Capital Partners, LLC, Tennenbaum & Co., LLC and Michael E. Tennenbaum share voting and investment power with respect to all 11,513,716 shares of common stock shown, including 623,648 of such shares with respect to which such persons share voting and investment power with SVAR/MM, LLC. All of the shares of common stock shown are held of record by either Special Value Continuation Partners, LP or Special Value Absolute Return Fund, LLC. Tennenbaum Capital Partners, LLC serves as an investment adviser to such funds.
The information concerning Joshua Tree Capital Partners, LP and others is based upon a statement on Schedule 13G filed with the SEC on February 4, 2008 by Joshua Tree Capital Partners, LP, Joshua Tree Capital Management, LP, Joshua Tree Capital Management, LLC, Vikas Tandon and Yedi Wong. Such persons report that they share voting and investment power with respect to all 5,300,219 shares of common stock shown. All of the shares of common stock shown are held of record by Joshua Tree Capital Partners, LP. Each of the other reporting persons disclaims any beneficial ownership of such shares.
Security Ownership by Directors and Executive Officers
The following table presents, as of March 31, 2008, information regarding the beneficial ownership of our common stock by the following persons:
Ÿ | each current director; |
Ÿ | each director nominee; |
Ÿ | our Chief Executive Officer and the other executive officers named in the 2007 Summary Compensation Table appearing under “Executive Compensation”; and |
Ÿ | all of our directors and executive officers as a group. |
Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (%) | ||
John Almeida, Jr. | 7,440 | * | ||
Randall E. Curran | 10,000 | * | ||
John J. DeLucca | 15,251 | * | ||
Richard E. Fish, Jr. | 7,500 | * | ||
Clyde A. Heintzelman | 24,379 | * | ||
Michael E. Leitner | — | — | ||
R. Gerald McCarley | 29,880 | * | ||
Thomas E. McInerney | 40,769,330 | 50.5 | ||
J. Thomas Mullis | 43,494 | * | ||
Sara L. Plunkett | 50,496 | * | ||
Sanjay Swani | 40,769,330 | 50.5 | ||
Philip M. Tseng | — | — | ||
All directors and executive officers as a group (12 persons) | 40,927,353 | 50.7 |
* | Represents beneficial ownership of less than 1%. |
The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such
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person has the right to acquire voting or investment power as of or within 60 days after such date, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power as of or within 60 days after such date. Consequently, the denominator for calculating beneficial ownership percentages may be different for each beneficial owner.
The shares of common stock shown as beneficially owned by any executive officer or director, other than Randall E. Curran and Richard E. Fish, Jr., include the shares of common stock subject to the portion of restricted stock units held by the executive officer or director that have vested without share delivery or that will vest as of or within 60 days after March 31, 2008. Under SEC rules, Randall E. Curran and Richard E. Fish, Jr. are not deemed to own beneficially any of the shares of common stock subject to restricted stock units held by either such executive officer, including restricted stock units that have vested or will vest as of or within 60 days after March 31, 2008. Those executive officers do not have any rights of a stockholder with respect to the shares subject to their restricted stock units until the shares are delivered. No shares subject to such restricted stock units may be delivered to those executive officers as of or within 60 days after March 31, 2008.
The shares of common stock shown as beneficially owned by John J. DeLucca include 3,334 shares of common stock that Mr. DeLucca has the right to purchase as of or within 60 days after March 31, 2008 pursuant to the exercise of stock options.
The shares of common stock shown as beneficially owned by R. Gerald McCarley include 3,334 shares of common stock that Mr. McCarley has the right to purchase as of or within 60 days after March 31, 2008 pursuant to the exercise of stock options.
The shares of common stock shown as beneficially owned by Mr. McInerney include all shares of common stock owned by the other members of the WCAS Group and 318,959 shares of common stock that Mr. McInerney owns directly. As reported in the WCAS Schedule 13D, Mr. McInerney disclaims beneficial ownership of all securities other than those he owns directly or in which he possesses an indirect pro rata interest as a managing member of WCAS VIII Associates, L.L.C. and WCAS CP III Associates, L.L.C. For additional information concerning the nature of Mr. McInerney’s beneficial ownership of the common stock, see the information above under “Principal Stockholders” with respect to the security ownership of the WCAS Group. Mr. McInerney’s address is c/o Welsh, Carson, Anderson & Stowe, 320 Park Avenue, Suite 2500, New York, New York 10022.
The shares of common stock shown as beneficially owned by J. Thomas Mullis include 21,834 shares of common stock subject to restricted stock units that have vested or will vest as of or within 60 days after March 31, 2008.
The shares of common stock shown as beneficially owned by Sara L. Plunkett consist of 11,412 shares that Ms. Plunkett has the right to purchase as of or within 60 days after March 31, 2008 pursuant to the exercise of stock options and 36,084 shares of common stock subject to restricted stock units that have vested or will vest as of or within 60 days after March 31, 2008.
The shares of common stock shown as beneficially owned by Mr. Swani include all shares of common stock owned by the other members of the WCAS Group and 9,653 shares of common stock that Mr. Swani owns directly. As reported in the WCAS Schedule 13D, Mr. Swani disclaims beneficial ownership of all securities other than those he owns directly or in which he possesses an indirect pro rata interest as a managing member of WCAS VIII Associates, L.L.C. and WCAS CP III Associates, L.L.C. For additional information concerning the nature of Mr. Swani’s beneficial ownership of the common stock, see the information above under “Principal Stockholders” with respect to the security ownership of the WCAS Group. Mr. Swani’s address is c/o Welsh, Carson, Anderson & Stowe, 320 Park Avenue, Suite 2500, New York, New York 10022.
The shares of common stock shown as beneficially owned by all directors and executive officers as a group include a total of 57,918 shares of common stock subject to restricted stock units that have vested or will vest as of or within 60 days after March 31, 2008 and a total of 18,080 shares of common stock that all directors and executive officers as a group have the right to purchase as of or within 60 days after March 31, 2008 pursuant to the exercise of stock options.
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ELECTION OF DIRECTORS
(Proposal 1)
Nominees for Election as Directors
Our board of directors has nominated John Almeida, Jr., Randall E. Curran, John J. DeLucca, Clyde A. Heintzelman, Michael E. Leitner, Thomas E. McInerney, Philip M. Tseng, R. Gerald McCarley and Sanjay Swani for election to the board of directors to serve until their respective successors are elected and qualified. Each of the nine director nominees is an incumbent director. The nine nominees constitute the entire membership of the current board of directors.
All of the director nominees other than R. Gerald McCarley and Sanjay Swani were elected to the board of directors at our 2007 annual meeting of stockholders. Mr. McCarley was last elected to the board of directors in August 2005 by the holders of our former 8% Series A convertible redeemable preferred stock, which we refer to as our “Series A preferred stock,” under the terms of the Series A preferred stock and our governance agreement described below in this proxy statement. Mr. Swani was appointed to our board of directors in October 2003 as a director designee of the holders of our former 8% Series B convertible redeemable preferred stock, which we refer to as our “Series B preferred stock,” under the terms of the Series B preferred stock and our governance agreement. All shares of our Series A preferred stock and Series B preferred stock were converted into common stock or redeemed for cash in connection with the refinancing and recapitalization transactions we completed on July 31, 2007 and which are described below in this proxy statement. As a result of the elimination of our outstanding preferred stock, Messrs. McCarley and Swani participate in the director nomination and election process on the same basis as our other directors.
Approval of the director nominees requires the affirmative vote of a plurality of the votes cast at the annual meeting. Accordingly, the directorships to be filled at the annual meeting will be filled by the nominees receiving the highest number of votes. Votes may be cast in favor of or withheld with respect to any or all nominees.
Unless authority to do so is withheld, it is the intention of the persons named in the proxy to vote such proxy for the election of each of the nominees. If any nominee should become unable or unwilling to serve as a director, the persons named in the proxy intend to vote for the election of such substitute nominee for director as the board of directors may nominate. It is not anticipated that any nominee will be unable or unwilling to serve as a director.
The board of directors unanimously recommends that stockholders vote “FOR” the election of each of the nine director nominees to the board of directors.
Arrangements Relating to the Board of Directors
Composition of Board of Directors. Some of the nominees for election as directors at the annual meeting were nominated in accordance with the governance agreement we originally entered into in connection with our acquisition by merger of BTI Telecom Corp. on October 6, 2003 and amended in connection with refinancing transactions we completed on July 26, 2005.
We completed our acquisition of BTI Telecom and related transactions under a merger agreement dated as of July 2, 2003, as amended, among ITC^DeltaCom, BTI Telecom and the WCAS securityholders, including Welsh, Carson, Anderson & Stowe VIII, L.P., which we refer to as “WCAS VIII,” and WCAS Capital Partners III, L.P., which we refer to as “WCAS Capital Partners.” Effective as of October 6, 2003, as required by the merger agreement, we entered into a governance agreement with the WCAS securityholders and two other stockholders, who subsequently ceased to be parties to this agreement. The governance agreement contained provisions concerning the composition of ITC^DeltaCom’s board of directors and other governance matters, including provisions relating to the acquisition and disposition of our securities held by the WCAS securityholders.
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We amended and restated the governance agreement on July 26, 2005 in connection with a series of related transactions we completed on that date. In those transactions, we issued and sold to institutional investors $30 million principal amount of third lien, senior secured notes and warrants to purchase our capital stock. We and the WCAS securityholders entered into the amended and restated governance agreement with the note purchasers, including Special Value Bond Fund II, LLC and Special Value Absolute Return Fund, LLC, which are investment funds managed by Tennenbaum Capital Partners, LLC, which we refer to as “TCP.” We refer to those TCP-managed investment funds and their permitted transferees that become parties to the governance agreement from time to time as the “TCP fund holders.”
Following the elimination of our outstanding preferred stock, the governance agreement provides that the board of directors is to consist of the following directors:
Ÿ | up to two directors, whom we refer to as the “WCAS designees,” designated for appointment or for nomination for election to the board of directors by WCAS VIII and WCAS Capital Partners, so long as the WCAS securityholders and their affiliates beneficially own voting securities representing a majority of our outstanding “primary voting power,” as described below; |
Ÿ | up to two directors, whom we refer to as the “TCP designees,” designated for appointment or for nomination for election to the board of directors by the TCP fund holders during the applicable board membership periods described below; |
Ÿ | a minimum of three directors who qualify as “independent directors,” as defined in the governance agreement; |
Ÿ | our Chief Executive Officer; and |
Ÿ | the additional directors, if any, nominated for election by the board of directors as a whole. |
For purposes of defining the rights of the WCAS securityholders to designate individuals for appointment or nomination to the board of directors, the governance agreement defines “primary voting power” on any date to mean the total number of votes that may be cast on such date by all holders of our voting securities generally, other than in connection with the election of directors, but excluding any votes that may be cast upon the acquisition by stockholders of voting securities as a result of the conversion, exchange or exercise of any voting security equivalents, which include warrants, options and other rights, beneficially owned by such stockholders on such date. Primary voting power currently means the total number of votes that may be cast by all holders of the common stock. As of the date of this proxy statement, the WCAS securityholders, who include the members of the WCAS Group, beneficially owned common stock representing a majority of the total number of votes that could be cast on that date by all holders of our common stock.
Under the governance agreement, the TCP fund holders are entitled to designate two members of our board of directors until such time as they no longer beneficially own at least 1,333,334 shares of common stock. Thereafter, the TCP fund holders will be entitled to designate one director until such time as they and other parties to the governance agreement identified therein as “TCP securityholders” cease to own beneficially common stock representing at least 1% of our outstanding voting power.
The number of directors constituting the board of directors is currently fixed at nine directors. As of the date of this proxy statement, the board of directors consists of the following directors, each of whom has been nominated for election at the annual meeting:
Ÿ | John Almeida, Jr. and Thomas E. McInerney, who were designated for appointment to the board of directors by WCAS VIII and WCAS Capital Partners and who serve as the WCAS designees; |
Ÿ | Michael E. Leitner, who was designated for appointment to the board of directors by the TCP fund holders and who serves as a TCP designee; |
Ÿ | Randall E. Curran, who serves as our Chief Executive Officer; |
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Ÿ | John J. DeLucca, Clyde A. Heintzelman and R. Gerald McCarley, who qualify as “independent directors” under the governance agreement; and |
Ÿ | Sanjay Swani, who is a member of the WCAS Group, and Philip M. Tseng, who is a Director of TCP. |
The governance agreement provides that the WCAS securityholders may require us at any time to increase the size of the board of directors if at such time WCAS securityholders and their affiliates beneficially own voting securities representing a majority of our outstanding primary voting power, as described above.
The governance agreement generally defines an “independent director” as a director who is not an affiliate or an associate of any WCAS securityholder or an officer or employee of ITC^DeltaCom or any subsidiary of ITC^DeltaCom. For purposes of the governance agreement, the terms “affiliate” and “associate” generally have the meanings set forth in SEC rules, except that portfolio companies of the WCAS securityholders and the TCP securityholders and their respective affiliates are excluded from the affiliate definition. In addition, if our securities are listed on any national securities exchange, such a director must qualify as an “independent director” within the meaning of the rules and regulations of the securities exchange. If our securities are not so listed, such a director may not have any relationship with us which, in the opinion of the board of directors and a determination of the committee of independent directors described below, at the time of such director’s nomination, appointment or election, would interfere with such director’s exercise of independent judgment in carrying out the director’s responsibilities as a director. Our common stock is not currently listed on a national securities exchange.
In addition to the foregoing independence requirements, a director will not qualify as an independent director for purposes of the governance agreement if the director has had, during the fiscal year in which the independence determination is made or during any of our three preceding fiscal years, any disqualifying relationship enumerated in the governance agreement. Such disqualifying relationships include the following:
Ÿ | employment with ITC^DeltaCom or any parent or subsidiary of ITC^DeltaCom; |
Ÿ | subject to specified exceptions, receipt of any annual payments in excess of $60,000 from ITC^DeltaCom or any parent or subsidiary of ITC^DeltaCom; |
Ÿ | employment of any family member as an executive officer of ITC^DeltaCom or any parent or subsidiary of ITC^DeltaCom; |
Ÿ | participation as a partner in, or a controlling stockholder or executive officer of, any organization to which we made, or from which we received, payments (other than payments arising solely from investments in our securities) that exceed the greater of 5% of the recipient’s consolidated gross revenues for that year, or $200,000; |
Ÿ | employment as an executive officer of any entity on whose compensation committee any of our executive officers serves; and |
Ÿ | service as a partner or employee of our independent registered public accounting firm and participation by such director in the audit of our financial statements. |
Vacancies in Board of Directors. The governance agreement provides that, for so long as the WCAS securityholders and their affiliates beneficially own voting securities representing a majority of our outstanding primary voting power, as described above:
Ÿ | one or more of the WCAS designees, acting as a “new directors committee” formed in accordance with our bylaws, will have the right to designate a director to fill any vacancy created by the death, disability, retirement, resignation or removal of any WCAS designee or by an increase in the size of the board of directors implemented pursuant to the direction of the WCAS securityholders; and |
Ÿ | we and the TCP securityholders will not take any action resulting in the removal of any WCAS designee without “cause,” which the governance agreement defines as the willful and continuous failure of a director substantially to perform such director’s duties to us or the willful engaging by a director in gross misconduct materially and demonstrably injurious to us. |
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If a vacancy is created at any time by the death, disability, retirement, resignation or removal of any TCP designee, the TCP fund holders will have the right to designate a replacement to fill the vacancy.
Composition of Board Committees. The governance agreement provides that at least one WCAS designee or one Series B preferred stock designee affiliated with the WCAS securityholders will serve on all committees of the board of directors, other than the audit committee and the committee of independent directors established in accordance with the governance agreement, and that one TCP designee will serve on the compensation committee. The remaining members of each committee, other than the new directors committee established in accordance with our bylaws, are required to qualify as independent directors as defined in the governance agreement.
The board of directors is required to maintain a committee of independent directors in accordance with the governance agreement. This committee is composed exclusively of independent directors, as defined in the governance agreement. In connection with any specific determination of any matter to be made by the committee of independent directors, a director serving on the committee will not be deemed to be an independent director for purposes of participating in such determination, and will not be entitled to participate in such determination, if, in the judgment of the committee (other than such director), such director has an interest in such matter that would interfere with such director’s exercise of independent judgment in carrying out his responsibilities as a director.
Agreement to Vote. We, the WCAS securityholders and the TCP fund holders and the other parties to the governance agreement referred to therein as the “TCP securityholders” have agreed to vote or act by written consent, and to take all other necessary or desirable actions, to implement the foregoing provisions of the governance agreement relating to the board of directors and committees of the board of directors, and to use reasonable best efforts to cause our respective affiliates to take these actions. Consistent with this undertaking, the WCAS securityholders and the TCP securityholders are obligated under the governance agreement to vote their shares of common stock at this annual meeting in favor of each of the nominees for election to the board of directors.
Information About Director Nominees
The following presents information as of March 1, 2008 concerning each of the directors nominated for election at the annual meeting.
Name | Age | Director Since | ||
John Almeida, Jr. | 37 | 2003 | ||
Randall E. Curran | 53 | 2005 | ||
John J. DeLucca | 64 | 2002 | ||
Clyde A. Heintzelman. | 69 | 2005 | ||
Michael E. Leitner. | 40 | 2005 | ||
R. Gerald McCarley | 68 | 2003 | ||
Thomas E. McInerney | 66 | 2003 | ||
Sanjay Swani | 41 | 2003 | ||
Philip M. Tseng | 31 | 2007 |
John Almeida, Jr., has served on the board of directors since October 2003. Mr. Almeida joined Welsh, Carson, Anderson & Stowe, a private equity firm, in 1999 and currently is a General Partner with that firm. Before joining Welsh, Carson, Anderson & Stowe, Mr. Almeida worked at Lehman Brothers, a global financial services firm, in the investment banking department from 1997 to 1999 and at the private equity firm Westbury Capital Partners from 1995 to 1997. Mr. Almeida served as a director of BTI Telecom Corp. from 2001 to 2003 until our acquisition of that company. Mr. Almeida also serves as a director of Local Insight Media, Inc. and Titan Outdoor Holdings, Inc.
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Randall E. Curran has served as our Chief Executive Officer and as a director since February 2005. He previously served as Chairman and Chief Executive Officer of ICG Communications, Inc., a competitive telecommunications company, from September 2000 until December 2003. Before joining ICG Communications, Mr. Curran served as Chairman, President and Chief Executive Officer of Thermadyne Holdings Corporation, a global manufacturer of welding and cutting products. During 2004, he was engaged in management consulting with both FTI Consulting, Inc. and his own firm. Mr. Curran served with Thermadyne and its predecessor companies since 1981 in various positions, including Chief Operating Officer and Senior Vice President-Chief Financial Officer. Early in his career, he worked at Cooper Industries and with the accounting firm of Arthur Andersen & Co.
John J. DeLucca has served on the board of directors since October 2002. Mr. DeLucca has served as Executive Vice President and Chief Financial Officer of REL Consultancy Group, a provider of financial consulting services to businesses, from 2003 until 2004. Mr. DeLucca previously served as Executive Vice President, Finance and Administration, and Chief Financial Officer of Coty Inc., a manufacturer and marketer of personal fragrances, from 1999 to February 2002 and as Senior Vice President and Treasurer of RJR Nabisco Inc., an international consumer products company, from 1993 to 1998. Mr. DeLucca also has served, among other positions, as Managing Director and Chief Financial Officer of Hascoe Associates, President and Chief Financial Officer of the Lexington Group, and Senior Vice President-Finance and Managing Director of The Trump Group. Mr. DeLucca currently serves as a director and deputy chairman of the audit committee, and as a member of the nominating committee, the governance committee and the trading/risk committee of British Energy plc, as a director and as chairman of the audit committee of Endo Pharmaceuticals, Inc., as a director of Tier Technologies, Inc. and as a director of other private companies.
Clyde A. Heintzelman has served on the board of directors since July 2005. Mr. Heintzelman served as the Chairman of the Board of Optelecom, Inc. from February 2000 to June 2003 and as its interim President and Chief Executive Officer from June 2001 to January 2002. From November 1999 to May 2001, he was President of Net2000 Communications, Inc. From December 1998 to November 1999, Mr. Heintzelman served as the President and Chief Executive Officer of SAVVIS, Inc. (formerly SAVVIS Communications Corporation), a networking and Internet solutions company. Mr. Heintzelman currently serves as a director and chairman of the audit committee of SAVVIS, Inc., as a director and a member of the audit committee of Telecommunication Systems, Inc. and as Chairman of the Board of Citel, a company listed on the AIM market of the London Stock Exchange.
Michael E. Leitner has served on the board of directors since August 2005. Mr. Leitner is a Managing Partner of Tennenbaum Capital Partners, LLC, a private investment firm, where he has worked since 2005. Before joining Tennenbaum Capital Partners, he served as a Senior Vice President of Corporate Development for WilTel Communications from 2004 to 2005. From 2000 to 2003, Mr. Leitner served as Vice President of Corporate Development of 360networks and Chief Executive Officer of 360networks’ Latin American-Caribbean long-distance business (GlobeNet Communications). From 1998 to 2000, Mr. Leitner was a Senior Director of Corporate Development for Microsoft Corporation. Mr. Leitner served as a Vice President in the Technology Mergers & Acquisitions group at Merrill Lynch, a global financial services firm, from 1994 to 1998. Mr. Leitner currently serves as a director of Online Resources Corporation and Anacomp, Inc.
R. Gerald McCarley served on the board of directors from January 2002 to October 2002. He was reappointed as a director in January 2003. Mr. McCarley is a retired partner of the accounting firm of Deloitte & Touche LLP. He retired from that firm in June 1999 after having served as an accounting and audit partner since 1980. Mr. McCarley joined a predecessor of Deloitte & Touche in 1967 and served in various positions before he was appointed a partner in 1980.
Thomas E. McInerney has served on the board of directors since October 2003 and as Chairman of the Board since February 2005. Mr. McInerney has been a General Partner of Welsh, Carson, Anderson & Stowe, a private equity firm, since 1986 and is a Managing Member or General Partner of the sole general partners of Welsh, Carson, Anderson & Stowe VIII, L.P. and other associated investment partnerships. Previously,
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Mr. McInerney co-founded and served as President and Chief Executive Officer of Dama Telecommunications Corp., a communications services company. Before co-founding Dama Telecommunications, Mr. McInerney worked in the financial services area at Automatic Data Processing, Inc. and was previously with the American Stock Exchange. Mr. McInerney served as a director of BTI Telecom Corp. from 2001 to 2003 until our acquisition of that company and is currently a director of Centennial Communications Corporation, SAVVIS, Inc., Broadridge Financial Solutions, Inc. and various private companies.
Sanjay Swani has served on the board directors since October 2003. Mr. Swani joined Welsh, Carson, Anderson & Stowe, a private equity firm, in 1999 and has been a General Partner of that firm since 2001. Mr. Swani is a Managing Member or General Partner of the sole general partners of Welsh, Carson, Anderson & Stowe VIII, L.P. and other associated investment partnerships. From 1998 to 1999, Mr. Swani was a Principal at Fox Paine & Company, a San Francisco-based buyout firm. From 1994 to 1998, he served with Morgan Stanley & Co., a global financial services firm, in the mergers and acquisitions area. Mr. Swani is currently a director of various private companies, including Ozburn-Hessey Logistics, LLC, Mobile Storage Group, Inc., Global Knowledge Network, Inc. and Venture Transport Logistics, LLC.
Philip M. Tsenghas served on the board of directors since February 2007. Mr. Tseng is a Director of Tennenbaum Capital Partners, LLC, a private investment firm, where he has worked since July 2004. Immediately before joining Tennenbaum Capital Partners, Mr. Tseng pursued graduate studies at Harvard University. From January 2000 to June 2002, Mr. Tseng was employed with Credit Suisse First Boston, an international investment banking firm, in the technology group and, from August 1998 to January 2000, with Deutsche Bank Alex Brown, an international investment banking firm, in the telecommunications group.
Director Attendance at Meetings
The board of directors held 14 meetings during 2007. During 2007, each director attended at least 75% of the aggregate of the total number of meetings of the board of directors held during the period for which he served as a director and the total number of meetings held by each committee of the board of directors on which he served during the period for which he served.
Of our nine directors, eight directors attended our 2007 annual meeting of stockholders held on May 8, 2007. Our policy is that all directors are encouraged to attend the annual meeting of stockholders.
Director Independence
Our common stock is currently traded on the OTC Bulletin Board. Accordingly, we are not subject to the rules of any national securities exchange which require that a majority of a listed company’s directors and specified committees of the board of directors meet independence standards prescribed by such rules. For purposes of preparing the disclosures in this proxy statement regarding director independence, we have used the definition of “independent director” set forth in the Marketplace Rules of The NASDAQ Stock Market LLC. Our common stock was delisted from the National Market System of the NASDAQ Stock Market in July 2006.
Subject to an exemption available to a “controlled company,” the NASDAQ Marketplace Rules require that a majority of a listed company’s board of directors be composed of “independent directors,” as defined in the NASDAQ Marketplace Rules, and that such independent directors exercise oversight responsibilities with respect to director nominations and executive compensation. If we were subject to such rules, we believe we would qualify as a “controlled company” and would be able to rely on the controlled company exemption from these provisions. NASDAQ Marketplace Rule 4350(c)(5) defines a “controlled company” as “a company of which more than 50% of the voting power is held by an individual, a group or another company.” As described elsewhere in this proxy statement, the WCAS Group has disclosed in a filing with the SEC that its members constitute a group which beneficially owns ITC^DeltaCom common stock representing more than 50% of our voting power. See “Security Ownership” for information about the beneficial ownership of our common stock by the WCAS Group.
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Even though we believe we would be a controlled company for purposes of the NASDAQ Marketplace Rules if our common stock were listed on the NASDAQ Stock Market, we nevertheless would have to comply with the requirements of those rules relating to the membership, qualifications and operations of the audit committee, including the requirement that the audit committee be composed of at least three directors who are independent under the NASDAQ Marketplace Rules. The audit committee currently consists of Mr. DeLucca, Mr. Heintzelman and Mr. McCarley, each of whom has been nominated for re-election to the board of directors at the annual meeting. The board of directors has determined that each current member of the audit committee is an “independent director” eligible for audit committee service under the NASDAQ Marketplace Rules.
Committees of the Board
The board of directors currently maintains among its standing committees an audit committee, a compensation committee, a governance committee, a committee of independent directors and a new directors committee. The members of these committees were appointed in accordance with the provisions of the governance agreement described in this proxy statement.
Audit Committee. The audit committee, which held 13 meetings during 2007, currently consists of Mr. DeLucca, who serves as chairman, Mr. Heintzelman and Mr. McCarley. All of the current members served on the audit committee throughout 2007. The board of directors has determined that each current member of the audit committee is an “audit committee financial expert,” as that term is defined in the SEC’s rules, and is “independent” of management within the meaning of the NASDAQ Marketplace Rules. The audit committee is responsible, among its other duties and responsibilities, for engaging, overseeing, evaluating and replacing our independent registered public accounting firm, pre-approving all audit and non-audit services by the independent registered public accounting firm, reviewing the scope of the audit plan and the results of each audit with management and the independent registered public accounting firm, reviewing the internal audit function, reviewing the adequacy of our system of internal accounting controls and disclosure controls and procedures, reviewing the financial statements and other financial information included in our annual and quarterly reports filed with the SEC, and exercising oversight with respect to our code of conduct and other policies and procedures regarding adherence with legal requirements. The audit committee is authorized to retain its own legal, financial and other advisers without obtaining approval of such retention by the board of directors. The audit committee’s duties and responsibilities are set forth in its charter, which was included as Appendix A to our proxy statement dated April 7, 2006 for our 2006 annual meeting of stockholders. A copy of the charter is not available on our web site.
In addition to their duties and responsibilities set forth in the committee charter, the audit committee has authority under our governance agreement to approve transactions in which we may engage with the WCAS securityholders or any of their affiliates that are not subject to approval by the committee of independent directors. For information about the audit committee’s approval authority under the governance agreement, see “Transactions With Related Persons and Approval Policies—Review, Approval or Ratification of Transactions With Related Persons.”
Compensation Committee.The compensation committee, which held 11 meetings during 2007, currently consists of Mr. McCarley, who serves as chairman, Mr. Leitner and Mr. Swani. All of the current members served on the compensation committee throughout 2007. The compensation committee is responsible for establishing the compensation of our named executive officers and other management employees, monitoring compensation arrangements for management employees for consistency with corporate objectives and stockholders’ interests, and administering our stock incentive plan. The compensation committee does not operate under a charter.
In 2007, the compensation committee engaged Towers Perrin, a human resources services consulting firm, to provide an internal executive compensation analysis. See the Compensation Discussion and Analysis section of this proxy statement for additional information regarding this analysis. The compensation committee generally has not exercised its power to delegate authority to a subcommittee. In 2007, the committee authorized Randall E. Curran, our Chief Executive Officer, to award a specified sum of discretionary bonuses to the other executive officers named in the 2007 Summary Compensation Table appearing under “Executive Compensation.”
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Mr. Curran is actively involved in the executive compensation process. Mr. Curran reviews the performance of each of such other named executive officers and, within the defined plan or program limits, recommends to the compensation committee base salary increases and bonus and long-term incentive awards for these and other executives. He provides the compensation committee with both short-term and long-term recommended financial and non-financial performance goals for ITC^DeltaCom that are used to link pay with performance. Mr. Curran also provides the compensation committee with his views regarding the executive compensation program’s ability to attract, retain and motivate the level of executives necessary to achieve corporate goals. Mr. Curran attends some meetings of the compensation committee, but does not participate in the compensation committee’s executive sessions.
Governance Committee.The governance committee of the board of directors, which was constituted in 2007 and held one meeting during that year, currently consists of Mr. Heintzelman, who serves as chairman, Mr. Almeida and Mr. McCarley. The committee operates under a written charter that is reviewed annually. Pursuant to its charter, the governance committee is responsible, among other matters, for developing and recommending corporate governance guidelines to the board of directors, overseeing the evaluation of the board of directors and its committees, making recommendations to the board of directors concerning the size, structure and composition of the board of directors and its committees, developing criteria for new members of the board of directors and identifying qualified director candidates, and reviewing and recommending director orientation programs. The governance committee has the authority to obtain advice and assistance from internal and external legal, accounting and other advisers as it deems appropriate to assist it in the performance of its duties.
Committee of Independent Directors.In accordance with our governance agreement, the board of directors maintains a committee of independent directors, which has the responsibility to approve transactions between us and the WCAS securityholders and their affiliates. The committee of independent directors has consisted of Mr. DeLucca, Mr. Heintzelman and Mr. McCarley since July 26, 2005. See “Election of Directors—Arrangements Relating to the Board of Directors” for information about the director independence standards set forth in the governance agreement for service on this committee and “Transactions With Related Persons and Approval Policies—Review, Approval or Ratification of Transactions With Related Persons” for a description of the committee’s approval authority. The committee of independent directors is authorized to retain its own legal, financial and other advisers without obtaining approval of such retention by the board of directors.
New Directors Committee. In accordance with our bylaws, the board of directors maintains a new directors committee, which currently consists of Messrs. Almeida and McInerney. For so long as the WCAS securityholders and their affiliates beneficially own voting securities representing a majority of our outstanding primary voting power as described above, and WCAS designees are then serving on the board of directors, the new directors committee, which is composed solely of WCAS designees, will have the exclusive right to designate a director for appointment to fill any vacancy created by the death, resignation, disqualification, removal or other cause of any WCAS designee or by an increase in the size of the board of directors implemented pursuant to the direction of the WCAS securityholders.
Director Nominations Policy
The board of directors does not currently have a nominating committee. Subject to the provisions of our governance agreement described in this proxy statement, and after considering any recommendations by the governance committee, the full board of directors nominates candidates for membership on the board of directors. In view of the existence of the arrangements relating to board composition described in this proxy statement, the board of directors does not consider that the operation of a nominating committee would enhance the director nominations process.
The board of directors has, by resolution, adopted a director nominations policy. The purpose of the nominations policy is to describe the process by which, subject to provisions of our certificate of incorporation and bylaws and the governance agreement, candidates for inclusion in the recommended slate of director nominees are selected. The nominations policy is administered by the board of directors.
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The board of directors has adopted guidelines for qualifications for director candidates. Consistent with those guidelines, and the criteria for the selection of directors approved by the board of directors, the board of directors will take into account our current needs and the qualities needed for board service, including, among other matters, demonstrated leadership and expertise relating to similar companies, experience and achievement in building long-term stockholder value, managing a high-growth services environment and building a regional brand, and experience and expertise in business, finance, technology or other areas relevant to our activities; reputation, ethical character and maturity of judgment; diversity of viewpoints, backgrounds and experiences; absence of conflicts of interest that might impede the proper performance of the responsibilities of a director; independence under SEC rules and rules of any national securities exchange on which our common stock is listed; service on other boards of directors; sufficient time to devote to board matters; and ability to work effectively and collegially with other board members. The board of directors, with the assistance of the governance committee, will conduct appropriate inquiries into the background and qualifications of any potential new director candidates who appear upon first consideration to meet the board’s selection criteria and, depending on the result of such inquiries, arrange for in-person meetings with the potential candidates.
The board of directors will receive recommendations for director candidates from the governance committee and may use multiple sources for identifying director candidates, including its own contacts and referrals from other directors, members of management, our advisers, and executive search firms. The board of directors will consider director candidates recommended by stockholders and will evaluate such director candidates in the same manner in which it evaluates candidates recommended by other sources. In making recommendations for director nominees for the annual meeting of stockholders, the board of directors will consider any written recommendations of director candidates by stockholders received by our Secretary no later than 120 days before the anniversary of the previous year’s annual meeting of stockholders. Recommendations must be mailed to ITC^DeltaCom, Inc., 7037 Old Madison Pike, Huntsville, Alabama 35806, Attention: Secretary, and include (1) the candidate’s name and address, (2) a statement of the candidate’s qualifications to serve on the board of directors, (3) such other information regarding the candidate as would be required to be included in a proxy statement filed pursuant to the SEC’s proxy rules if the candidate were nominated by the board of directors and (4) if applicable, a description of all arrangements or understandings between the candidate and the stockholder submitting the recommendation.
The board of directors may review the nominations policy from time to time to consider whether modifications to the policy are advisable as our needs and circumstances evolve, and as applicable legal or securities listing standards change. The board of directors may amend the nominations policy at any time.
Under our bylaws, a stockholder wishing to nominate candidates for election as directors at any annual or special meeting of stockholders must comply with specific notice requirements. To be timely, the stockholder’s notice must be delivered to or mailed and received by our Secretary not less than 60 days before the meeting, except that if less than 75 days’ notice or prior public disclosure of the date of the meeting is given or made to the stockholders, notice by the stockholder must be received not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure was made. To be in proper form, a stockholder’s notice to the Secretary must set forth the following information:
Ÿ | the name and address of the stockholder who intends to make the nomination and the name and address of the person or persons to be nominated; |
Ÿ | a representation that the stockholder is a holder of record of our capital stock entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; |
Ÿ | if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; |
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Ÿ | such other information regarding each nominee to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the SEC’s proxy rules if the nominee had been nominated, or intended to be nominated, by the board of directors; and |
Ÿ | if applicable, the consent of each nominee to serve as a director if so elected. |
We may require any proposed nominee to furnish such other information as we may reasonably require to determine the eligibility of such proposed nominee to serve as a director. The foregoing requirements do not apply to any nomination of directors made in accordance with the governance agreement.
Communications With the Board of Directors
The board of directors welcomes communications from its stockholders and other interested parties and has adopted a procedure for receiving and addressing those communications. Stockholders and other interested parties may communicate any concerns they may have about us directly either to the full board of directors or to the non-management directors as a group by mailing their communications to us at the following address: ITC^DeltaCom, Inc., 7037 Old Madison Pike, Huntsville, Alabama 35806, Attention: Secretary. The Secretary will review and forward all stockholder communications and other communications from interested parties to the intended recipient, except for those communications that are outside the scope of board matters or duplicative of other communications by the person submitting a communication.
Director Compensation
The following table presents information regarding compensation paid to our non-employee directors for their service in 2007.
2007 Director Compensation Table
Name | Fees Earned or Paid in Cash($) | Stock Awards ($)(1) | Option Awards($) | Non-Equity Incentive Plan Compensation($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings($) | All Other Compensation($) | Total($) | |||||||
John Almeida, Jr. | — | — | — | — | — | — | — | |||||||
John J. DeLucca(2) | 86,500 | 33,518 | — | — | — | — | 120,018 | |||||||
Clyde A. Heintzelman(3) | 88,500 | 28,125 | — | — | — | — | 116,625 | |||||||
Michael E. Leitner | — | — | — | — | — | — | — | |||||||
R. Gerald McCarley(4) | 95,500 | 33,518 | — | — | — | — | 129,018 | |||||||
Thomas E. McInerney | — | — | — | — | — | — | — | |||||||
Sanjay Swani | — | — | — | — | — | — | — | |||||||
Philip M. Tseng | — | — | — | — | — | — | — |
(1) | There were no stock awards granted to directors in 2007. Amounts shown represent the compensation cost of restricted stock unit awards granted before 2007 and recognized by us in 2007 for each director indicated, as computed in accordance with SFAS 123R, without any reduction for risk of forfeiture. The assumptions we used in calculating this amount are set forth in Note 8 to Notes to Consolidated Financial Statements in our 2007 Form 10-K. |
(2) | As of December 31, 2007, Mr. DeLucca held (a) outstanding unvested awards of restricted stock units for 3,750 shares of common stock and (b) outstanding vested options to purchase 3,334 shares of common stock. |
(3) | As of December 31, 2007, Mr. Heintzelman held outstanding unvested awards of restricted stock units for 3,750 shares of common stock. |
(4) | As of December 31, 2007, Mr. McCarley held (a) outstanding unvested awards of restricted stock units for 3,750 shares of common stock and (b) outstanding vested options to purchase 3,334 shares of common stock. |
Non-employee directors of ITC^DeltaCom, Inc. who are not members of or affiliated with the WCAS securityholders or with TCP, whom we refer to as “independent directors,” receive cash fees for their service on
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the board of directors and on committees of the board. All such directors are eligible to receive equity-based fees under the ITC^DeltaCom, Inc. Amended and Restated Stock Incentive Plan for their board and committee service. Of our current directors, Messrs. DeLucca, Heintzelman and McCarley are eligible to receive such fees.
Before January 1, 2008, independent directors received annual fees of $30,000, fees of $1,000 for each board or committee meeting attended in person and fees of $500 for each board or committee meeting attended by conference telephone. The chairman of the audit committee received an additional annual fee of $5,000. Beginning on January 1, 2008, independent directors receive annual fees of $75,000 and the chairman of each of the audit committee, the compensation committee and the governance committee receives an additional annual fee of $10,000. Compensation for meeting attendance was discontinued. All such fees are paid in cash.
Each independent director also will receive annual awards of restricted stock units with a value of $55,000 under the ITC^DeltaCom, Inc. Amended and Restated Stock Incentive Plan. Each such award will vest ratably over a term of approximately two years.
Directors who are employees of ITC^DeltaCom or who are affiliated with the WCAS securityholders or TCP receive no fees for their service on the board of directors or committees of the board. All directors are entitled to reimbursement for their reasonable out-of-pocket expenditures incurred in connection with their board or committee service.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee was an officer of ITC^DeltaCom or any subsidiary of ITC^DeltaCom during 2007. For a description of transactions between ITC^DeltaCom and a member of the compensation committee and entities with which some members of the compensation committee in 2007 are affiliated, see “Transactions With Related Persons and Approval Policies.”
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COMPENSATION COMMITTEE REPORT
The compensation committee of the board of directors has reviewed and discussed with ITC^DeltaCom’s management the Compensation Discussion and Analysis set forth below and, based on such review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into our annual report on Form 10-K for the year ended December 31, 2007.
Respectfully submitted,
Compensation Committee
R. Gerald McCarley
Michael E. Leitner
Sanjay Swani
COMPENSATION DISCUSSION AND ANALYSIS
Guiding Principles and Policies
Our senior executive compensation program is primarily designed to:
Ÿ | motivate our existing executive leadership to enhance stockholder value by successfully completing the ongoing restructuring of our business and fostering strong operating results; |
Ÿ | reward superior short-term and long-term performance; |
Ÿ | align the interests of our senior executives with those of our stockholders; and |
Ÿ | avoid the loss of our senior executives to competitors and other employment opportunities. |
Drawing on internal and external resources to provide necessary background and context, as described in more detail below, the compensation committee of our board of directors applies these guiding principles by using relevant market data and its business judgment to determine the amount and forms of compensation paid to our senior executives, including each of the named executive officers, or “NEOs,” identified in the 2007 Summary Compensation Table following this Compensation Discussion and Analysis.
Compensation Considerations
Each of the named executive officers, together with the other members of our senior management team, is critically important to our efforts to create value for stockholders by promoting and sustaining improved operating performance. During 2007, we had four named executive officers:
Ÿ | Randall E. Curran, who has served as our Chief Executive Officer since February 2005; |
Ÿ | Richard E. Fish, Jr., who has served as our Chief Financial Officer since April 2005, following his service as our Chief Administrative Officer beginning in February 2005; |
Ÿ | J. Thomas Mullis, who serves as our Senior Vice President-Legal and Regulatory; and |
Ÿ | Sara L. Plunkett, who serves as our Senior Vice President-Finance. |
CEO and CFO Compensation. Since 2005, a fundamental objective of our compensation program has been to attract and motivate our senior executives to manage a successful restructuring of our capital structure and business operations. We have sought to promote this objective in part by incorporating significant equity-based compensation elements into the employment agreements we signed with Mr. Curran and Mr. Fish in February 2005 to induce them to accept employment and manage our recapitalization and the implementation of other strategies to enhance our financial condition and operating performance. These negotiated arrangements, which
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were approved by the compensation committee, constitute a part of our compensation program for Messrs. Curran and Fish and distinguish the form and amount of the compensation we pay these executives from the compensation we pay our other two named executive officers.
Competitive Considerations. In making compensation decisions, the compensation committee considers, among other factors, the form and amount of compensation paid to senior executives at other telecommunications companies, consistent with our compensation policies and objectives. In 2007, the committee obtained market comparison information and guidance from a human resource services consulting firm that specializes in executive compensation consulting support. The compensation consultant provided the compensation committee with an internal executive compensation analysis based largely on two sets of data relating to companies which the compensation consultant and the committee considered comparable to ITC^DeltaCom in size and general operating characteristics based on their annual revenue and number of employees.
The first set of data was derived from an analysis of the proxy statements filed by the following 11 publicly-traded companies:
Alaska Communications Systems Group, Inc. XO Holdings, Inc. tw telecom inc. (formerly Time Warner Eschelon Telecom, Inc. Consolidated Communications Holdings, Inc. | Fairpoint Communications, Inc. General Communication, Inc. KNOLOGY, Inc. Ntelos Holdings, Corp. PAETEC Holding Corp. RCN Corp. |
The second set of data related to both publicly-traded and privately-held companies for which compensation data had been pooled and made generally available through published industry surveys. The compensation committee considered the survey data pertaining to companies with $500 million to $1,000 million of annual revenues and 1,000 to 5,000 employees. These companies were generally those that, like ITC^DeltaCom, operate primarily in the services sector of the telecommunications industry. This group included competitive local exchange carriers and regional local exchange carriers, as well as companies that operate in the industry’s equipment sector. In addition, the group included some information technology companies operating outside of the telecommunications industry. Although the committee was aware of the general characteristics of the companies included in the survey data, the committee did not consider the individual companies, but rather focused on the aggregated compensation information.
The compensation committee considers this competitive market information as one factor in evaluating levels of annual compensation, which for this purpose consists of base salaries, annual cash bonuses and equity-based compensation. Although the compensation committee generally reviews most closely the market data for annual cash compensation that falls between the 50th and 75th percentiles as represented by survey information, the committee does not specifically “benchmark” or target payment of compensation within this range. Instead, each named executive officer’s actual compensation is determined taking into consideration the competitive data along with the other factors and considerations described in this Compensation Discussion and Analysis.
Compensation Elements
The compensation program for our named executive officers has three primary elements:
Ÿ | annual compensation, which consists of base salaries and executive benefits; |
Ÿ | incentive compensation payable in the form of annual cash bonuses; and |
Ÿ | incentive compensation payable in the form of long-term equity awards. |
Other than our 401(k) plan generally available to all of our employees, we do not currently provide pension or other retirement compensation programs for our named executive officers.
In negotiating and structuring the compensation packages of Messrs. Curran and Fish in February 2005, the compensation committee sought to ensure that a significant portion of each executive’s total compensation opportunity would be performance-based, reflecting both upside potential and downside risk. The performance elements are incorporated into the performance-based vesting provisions of a portion of the equity awards that
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we granted to Messrs. Curran and Fish upon the commencement of their employment with ITC^DeltaCom and that are described below.
Annual Compensation
Base salaries and executive benefits are intended to afford our executives some degree of compensation certainty by providing them with a reasonable amount of compensation for their services which is not dependent on future performance. Annual cash incentives, equity compensation grants, 401(k) plan contributions and some general employee benefits are determined with reference to annual base pay.
Base Salaries. The compensation committee establishes the base salaries of our named executive officers by evaluating the responsibilities of the position, the executive’s performance over the prior year and recommendations from Mr. Curran (other than with respect to his own compensation) to supplement information the committee considers in making such decisions. The compensation committee generally follows the recommendations of Mr. Curran for the other executives. In 2007, the compensation committee also conducted its own evaluation, with the assistance of its compensation consultant, to determine the market competitiveness of the base salary paid to each of the named executive officers in relation to peer positions within companies in the market group discussed above. In addition to considering the information provided by its consultant, the committee applied individual performance ratings for each named executive officer that took into account such factors as the achievement of specific goals which are defined by reference to ITC^DeltaCom’s strategic plan and the attainment of specific individual objectives. The factors affecting base salary levels are not assigned specific weights, but are subject to adjustment by the compensation committee in its discretion as part of the annual evaluation. For 2007, the strategic objectives by which the company’s performance was measured primarily focused on the ongoing restructuring of our business operations.
In 2007, Mr. Curran’s base salary was increased by $26,250, or 5%. In approving the increase, the compensation committee primarily took into account achievement of 2006 corporate goals, including Mr. Curran’s contributions to improved operating results and executive team performance. The committee also approved base salary increases of $17,063, or 5%, for Mr. Fish, and $10,500, or 5%, for Mr. Mullis.
Executive Benefits. We provide our named executive officers with limited executive benefits that are not generally available to more junior employees. In 2007, the value of these benefits for all of the named executive officers totaled $199,215. The benefits are considered part of the total compensation package and are evaluated in this light as part of the compensation committee’s review of each executive’s annual total compensation.
Executive benefits for 2007 included an automobile allowance, which is generally available to other senior officers and some other employees, and the provision of estate and financial planning services to Messrs. Curran, Fish and Mullis, which are generally available to all senior officers. In addition, in 2007, we reimbursed Messrs. Curran and Fish for federal and state income tax payments related to our payment on their behalf of Medicare tax withholding payments due upon the vesting of their stock units. The compensation committee approved the tax withholding payments because neither executive held any of our securities that could be sold at the vesting date to raise funds to pay the taxes associated with the vesting of his stock units. For additional information about these benefits, see the 2007 Supplemental All Other Compensation Table and related footnotes following this Compensation Discussion and Analysis.
Incentive Compensation—Annual Cash Bonuses
Our compensation philosophy is based, in part, on the conclusion that annual bonuses motivate executives by providing tangible benefits related to the achievement of specific, shorter-term company goals that will lead to enhanced operating performance. Accordingly, we pay annual cash bonuses to our named executive officers based primarily on corporate performance, as measured by reference to factors that reflect objective performance criteria over which management generally has the ability to exert some degree of control.
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Under our annual cash bonus plan, the named executive officers, as well as other senior executives, generally are entitled to receive a cash bonus in an amount up to a specified maximum percentage of the executive’s annual base salary, which we refer to as the “bonus opportunity,” subject to our achievement of tiered financial performance goals. If we achieve the financial performance goals at the highest established tier, the executive will be entitled to receive a cash bonus that is equal to 100% of the executive’s bonus opportunity. If we achieve the financial performance goals at a lower tier, the percentage of the bonus opportunity which the executive will be entitled to receive as a cash bonus will be reduced to the percentage attributed to that tier. For 2007, the bonus opportunities were 100% of base salary as of February 2007 for Messrs. Curran and Fish, as required by their negotiated employment agreements, and 60% of base salary as of February 2007 for each of Mr. Mullis and Ms. Plunkett. The committee set the bonus opportunity at 60% for each of Mr. Mullis and Ms. Plunkett based primarily on achieving internal equity with other similar executive officer positions and competitive market compensation indicators. The financial performance tiers were based on the committee’s desire to continue with a tiered structure consistent with a practice which it believed had worked well in the past.
The payment of annual bonuses under the plan for 2007 was based on our attainment of specified levels of “EBITDA,” so long as we achieved a year-end cash balance, substantiated in our financial statements, of at least $21 million in cash, and so long as our 2007 EBITDA level was at least $75 million. For purposes of the plan, “EBITDA” was defined to mean the sum of net income (or net loss) after eliminating the expense impact of the 2007 bonus accrual, any extraordinary and non-recurring items (to the extent included in net income), interest expense, income tax expense, depreciation expense, amortization expense, and any direct expenses and accounting charges incurred in or related to specified events or arrangements, including sales of our assets. Cash was defined to mean EBITDA less capital expenditures, before changes in working capital. EBITDA as defined for purposes of the plan is not the same as the EBITDA measure we report in our earnings releases and in our other public disclosures.
Under the cash bonus plan, payment of the minimum cash bonus, or 25% of the bonus opportunity, required achievement of an EBITDA level of $75 million and an ending cash balance of at least $21 million. If the 2007 EBITDA achievement was at least $77.1 million and the cash balance increased commensurately with the higher EBITDA, bonus awards would increase by an additional 25% of the bonus opportunity. To the extent that the 2007 EBITDA achievement exceeded $77.1 million and the cash balance increased commensurately with such amount, bonus awards would increase accordingly.Payment of 100% of the bonus opportunity, which was the maximum amount payable to any executive under the plan, required achievement of $82 million in EBITDA, with a commensurate cash balance increase.
Based on the company’s achievement of over $82 million of EBITDA and a cash balance commensurate with EBITDA achievement as defined by the plan, the compensation committee approved the payment of cash bonuses for 2007 performance equal to 100% of each named executive officer’s bonus opportunity. Accordingly, we paid plan-based cash bonuses of $551,250 to Mr. Curran, $358,313 to Mr. Fish, $132,300 to Mr. Mullis and $127,200 to Ms. Plunkett.
Incentive Compensation—Long-Term Equity Awards
The portion of NEO compensation consisting of equity-based compensation is designed to reward longer-term performance, promote executive retention and align the interests of our executives with the interests of our stockholders. All of these goals are intended to support the creation of long-term stockholder value. Consistent with the emphasis on long-term incentives, all of our equity awards to the named executive officers are subject to vesting restrictions, so they are not immediately payable and are at risk of forfeiture based upon the executive’s continued service with us or, in the case of some of the awards made to Messrs. Curran and Fish, achievement of corporate performance objectives.
The compensation committee believes that, in view of industry conditions affecting competitive communications carriers, our company’s capital structure and other factors that have adversely affected prospects
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for meaningful and sustained appreciation in our stock price, stock options have not been as effective as restricted stock units in providing performance incentives for our executives. Market analysis of our industry also confirms that restricted stock units are commonly used to provide long-term incentives and promote retention of executive talent. Accordingly, in recent periods, stock options, which reward the holder only if the stock price increases, have been supplanted by restricted stock unit awards as our preferred form of executive long-term equity compensation. Our named executive officers did not receive any stock option awards in fiscal 2007 or in our two prior fiscal years. The compensation committee has determined that, because the value of restricted stock units to the holder is affected by both increases and decreases in stock price, this type of equity compensation can provide an effective incentive for a multi-year focus on financial and operational performance. In particular, our restricted stock unit awards have been designed to provide long-term incentives for superior performance and management continuity while we pursue the operational restructuring we initiated in 2005. To accomplish these goals, vesting of restricted stock units is subject to the satisfaction of a continuous service requirement of three years and, in the case of some of the awards made to Messrs. Curran and Fish, corporate performance objectives.
We structured the 2005 long-term equity grants to Messrs. Curran and Fish to incorporate both time-based and performance-based vesting requirements. When we retained Messrs. Curran and Fish, we agreed, pursuant to their employment agreements, to grant each officer awards of a specified percentage of each class or series of our equity securities that were outstanding immediately following the completion of a restructuring of our capital structure upon terms approved by the board of directors. We completed the restructuring in transactions that were consummated in March and July 2005. Accordingly, in December 2005, we granted Messrs. Curran and Fish restricted stock units for a total of 1,723,674 shares of common stock, 12,083 shares of Series A preferred stock and 36,326 shares of Series B preferred stock. We also approved the award of 606,469 Series D warrants to purchase shares of our Series C preferred stock or common stock. Consistent with the terms of each employment agreement, these awards represented 5%, in the case of Mr. Curran, and 1.25%, in the case of Mr. Fish, of each class or series of our equity securities outstanding immediately following the 2005 capital restructuring, calculated on a fully-diluted basis.
Subject to acceleration provisions discussed under “Executive Compensation—Termination Payments,” 60% of the restricted stock units and warrants awarded to each executive vested ratably over three years. The vesting of the other 40% of the awards was directly linked to the achievement of operational goals and was not subject to potential acceleration. Under the original grants, 20% of the awards would vest, if at all, upon our achievement of EBITDA of at least $90 million during a period of four consecutive fiscal quarters, and 20% of the awards would vest, if at all, upon our achievement of EBITDA of at least $105 million during a period of four consecutive fiscal quarters. For purposes of the agreement, the definition of “EBITDA” is substantially the same as the definition of EBITDA used for the determination of annual cash bonuses, as described above under “Incentive Compensation—Annual Cash Bonuses.”
On July 31, 2007, we completed refinancing and recapitalization transactions described in our contemporaneous public filings. One effect of our recapitalization was to eliminate each series of our previously authorized preferred stock and substantially all related stock warrants, including the Series D warrants described above. Accordingly, to adjust the original awards to Messrs. Curran and Fish for the recapitalization transactions, our board of directors, upon the recommendation of the compensation committee, approved the conversion of those awards into restricted stock units for a total of 1,086,326 shares of common stock for Mr. Curran and restricted stock units for a total of 271,581 shares of common stock for Mr. Fish.
In addition, on December 21, 2007, upon the recommendation of the compensation committee, the board of directors approved amendments to outstanding restricted stock unit awards for Messrs. Curran and Fish. Under the amendments, each officer agreed to defer, until March 31, 2010, the issuance and delivery to him of 1,479,159 and 369,790 shares of common stock, respectively, under restricted stock unit awards subject to time-based vesting that otherwise would have been issued and delivered to the executives on March 31, 2008. In partial consideration for the two-year extension of the share delivery date, the directors approved additional amendments to the awards that provided for the vesting, as of December 31, 2007, of the 20% of the awards that
were originally to be vested, if at all, upon our achievement of EBITDA of at least $90 million. Accordingly, on
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December 31, 2007, Mr. Curran and Mr. Fish became entitled to receive 493,053 and 123,263 shares of common stock, respectively, under these awards. The vesting of the awards, however, was conditioned upon the deferral of the issuance and delivery of such shares of common stock until March 31, 2010.
The compensation committee approved a restricted stock unit award to Ms. Plunkett for 20,000 shares of common stock in February 2007. This award, which vests in three equal annual installments subject to continued service with us, was made to Ms. Plunkett for her service in 2006.
In early 2008, as a result of our achievement of financial and operational goals in 2007, and based in part on the compensation committee’s review of the compensation market data provided by its compensation consultant, the committee determined to make additional equity awards to each NEO. The market data reviewed by the committee suggested that officers in positions comparable to those of our NEOs commonly received on an annual basis long-term incentive awards consisting of either stock options or restricted stock as part of their total target compensation. Based on our 2007 corporate performance and this review, the compensation committee recommended, and the board of directors approved, a grant of restricted stock units to Mr. Curran for 291,727 shares, to Mr. Fish for 103,431 shares, to Mr. Mullis for 41,126 shares and to Ms. Plunkett for 39,542 shares. The restricted stock units vest in three equal annual installments subject to continued service with us. The compensation committee currently anticipates that it will make annual grants of restricted stock units to the named executive officers, as well as other senior executives of our company, in future fiscal periods.
See the 2007 Grants of Plan-Based Awards Table and the 2007 Outstanding Equity Awards at Fiscal Year-End Table and related footnotes following this Compensation Discussion and Analysis for additional information about our long-term equity awards.
Deferred Compensation Arrangements
As noted above, Messrs. Curran and Fish have elected to defer payment of the common stock subject to their restricted stock units until March 31, 2010 with respect to the 60% of the awards that are subject to time-based vesting and the 20% of the awards that vested on December 31, 2007. The executives further deferred payment of the remaining performance-based incentive awards that vest, if at all, after December 31, 2007 generally until the first anniversary of the vesting date of such performance-vesting awards. For additional information about these arrangements, see the 2007 Nonqualified Deferred Compensation Table and related footnotes following this Compensation Discussion and Analysis.
Termination Payments
Under their employment agreements, Messrs. Curran, Fish and Mullis are entitled to receive payments from us in specified circumstances upon their termination of employment with our company. These provisions were specifically negotiated with each executive in connection with our retention of the executive’s services and were determined based on arms-length negotiations and the business judgment of the compensation committee and the board of directors.See “Executive Compensation—Termination Payments” for a description of the circumstances that would trigger such payments and the estimated amounts that would be payable by us to each such named executive officer if the triggering event took place on December 31, 2007.
Timing of Compensation Review and Awards
The compensation committee delayed most executive compensation decisions in 2007 in favor of adopting a goal of considering all executive compensation review and awards, including annual compensation and incentive compensation, on one annual review date for all executives. The committee’s goal was to review at a single meeting specific individual adjustments to salary, bonus opportunities as a percentage of annual base salary, long-term incentive compensation awards and other benefits. The committee generally defined the timetable for this process in November 2007 and began the annual compensation evaluation and adjustment process and recommendations at its February 2008 meeting. For future fiscal periods, the committee intends to consider for approval, at a meeting held each year, annual salary adjustments and incentive compensation awards for all NEOs and other officers. At the same meeting, committee members will consider approval of bonus awards
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based on the achievement of the bonus plan targets for the previous year. Committee members also will review recommendations for compensation plan adjustments and management incentive bonus plans for the current fiscal year.
We do not have a program, plan or practice to time equity awards, including option grants, if any, to our executive officers or employees in coordination with the release of material non-public information. The grant date of long-term stock awards is timed to coincide with the date of the compensation committee meeting at which the award determinations are made, as discussed above.
Accounting Considerations
The effects that certain types of equity awards have on our financial statements have affected the types of equity incentives we award. Effective January 1, 2006, the first day of our 2006 fiscal year, we adopted the fair value recognition provisions of FAS 123R, “Share-Based Payments,” using the modified prospective transition method. Under this transition method, stock-based compensation costs recognized in the income statement include (1) compensation costs for all unvested stock-based awards that were granted before January 1, 2006 based on the grant date fair value estimated in accordance with the original provisions of FAS No. 123 and (2) compensation expense for all share-based payments granted on or after January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of FAS 123R. In structuring equity-based awards, the compensation committee has considered, and we anticipate will continue to consider, along with other factors, the negative accounting impact of granting such awards after the adoption of FAS 123R.
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EXECUTIVE COMPENSATION
The following table presents information about compensation paid to, or accrued on behalf of, our Chief Executive Officer, our Chief Financial Officer and our other two named executive officers who were serving with us on December 31, 2007 and who earned at least $100,000 in total compensation in 2007. It is important to keep in mind the following when reviewing the table:
Ÿ | The “Salary” column includes the base salary for each named executive officer in 2006 and 2007. |
Ÿ | The amounts shown in the “Stock Awards” and the “Option Awards” columns are based on the amounts accrued by us under applicable accounting rules for all unvested equity compensation awards held by each named executive officer in 2006 and 2007, including equity compensation awarded in years before 2006 and 2007, respectively. |
2007 Summary Compensation Table
Name and Principal Position | Year | Salary($) | Bonus($) | Stock Awards($)(1) | Option Awards($)(2) | Non-Equity Incentive Plan Compensation($)(3) | Change in Pension Value and Nonqualified Deferred Compensation Earnings($)(4) | All Other Compensation ($)(5) | Total($) | |||||||||
Randall E. Curran | 2007 | 548,221 | — | 5,255,645 | 85,565 | 551,250 | — | 121,185 | 6,561,866 | |||||||||
Chief Executive Officer | 2006 | 521,923 | — | 950,651 | 146,683 | 131,250 | 15,325 | 43,490 | 1,809,322 | |||||||||
Richard E. Fish, Jr. | 2007 | 356,344 | — | 1,313,911 | 21,391 | 358,313 | — | 37,230 | 2,087,189 | |||||||||
Executive Vice President and Chief Financial Officer | 2006 | 339,250 | — | 237,663 | 36,671 | 85,313 | 3,601 | 21,596 | 724,094 | |||||||||
J. Thomas Mullis | 2007 | 219,288 | — | 49,429 | — | 132,300 | — | 31,798 | 432,815 | |||||||||
Senior Vice President-Legal and Regulatory | 2006 | 208,769 | — | 50,762 | — | 35,385 | — | 29,849 | 324,765 | |||||||||
Sara L. Plunkett | 2007 | 212,000 | — | 50,657 | — | 127,200 | — | 17,446 | 407,303 | |||||||||
Senior Vice President- Finance | 2006 | 192,596 | — | 36,740 | 12,146 | 31,800 | — | 13,155 | 286,437 |
(1) | Represents the compensation cost of restricted stock unit awards recognized by us for each named executive officer in the year indicated, as computed in accordance with SFAS 123R, without any reduction for risk of forfeiture. The amounts shown for Messrs. Curran and Fish relate to awards of restricted stock units for common stock, Series A preferred stock and Series B preferred stock before the awards were amended to adjust them for the recapitalization transactions we completed on July 31, 2007, which resulted in the elimination of our preferred stock, and to awards of restricted stock units for common stock as in effect following the amendments. For a discussion of compensation cost related to the amendments, see “Award Modifications Resulting From Recapitalization and Acceleration of Vesting” following the 2007 Grants of Plan-Based Awards Table below. The assumptions we used in calculating compensation cost of stock awards are set forth in Note 8 to Notes to Consolidated Financial Statements in our 2007 Form 10-K. |
(2) | Represents the compensation cost of option awards recognized by us for each named executive officer in the year indicated, as computed in accordance with SFAS 123R, without any reduction for risk of forfeiture. The amounts shown for Messrs. Curran and Fish relate to awards of Series D warrants exercisable for Series C preferred stock or common stock before the awards were amended to adjust them for the recapitalization transactions we completed on July 31, 2007, which eliminated the Series D warrants, as discussed under “Award Modifications Resulting From Recapitalization and Acceleration of Vesting” following the 2007 Grants of Plan-Based Awards Table below. The assumptions we used in calculating compensation cost of option awards are set forth in Note 8 to Notes to Consolidated Financial Statements in our 2007 Form 10-K. During 2006, Mr. Mullis and Ms. Plunkett surrendered for cancellation, without consideration, options to purchase, respectively, 22,500 shares and 8,890 shares of common stock. At the date of surrender, the exercise price of the options was greater than the market price of the common stock. |
(3) | Represents the amounts earned and paid under our annual cash bonus plan in the year indicated. For additional information about the 2007 awards, see the Compensation Discussion and Analysis section of this proxy statement and the 2007 Grants of Plan-Based Awards Table below. |
(4) | Represents the value of payment-in-kind dividends accrued (at an annual rate of 8%) on the 20% of the restricted stock units for Series A preferred stock and Series B preferred stock which vested and were deferred on February 3, 2006, with respect to Mr. Curran, and on February 21, 2006, with respect to Mr. Fish. See the 2007 Nonqualified Deferred Compensation Table below for additional information about these awards. For a discussion of the amendment of outstanding awards of restricted stock units for Series A preferred stock and Series B preferred stock to adjust them for the recapitalization transactions we completed on July 31, 2007, see “Award Modifications Resulting From Recapitalization and Acceleration of Vesting” following the 2007 Grants of Plan-Based Awards Table below. |
(5) | Additional information about the amounts set forth in the “All Other Compensation” column for 2007 is set forth below in the 2007 Supplemental All Other Compensation Table. |
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The following table presents information concerning perquisites and other personal benefits and all other compensation items paid to or earned by the named executive officers in 2007.
2007 Supplemental All Other Compensation Table
Name | Perquisites and Other Personal Benefits(1) | Tax Reimbursements(2) | Contributions to 401(k) Plan(3) | Life Insurance Premiums | |||||
Randall E. Curran | 30,042 | 85,350 | 4,500 | 1,293 | (4) | ||||
Richard E. Fish, Jr. | 12,000 | 21,539 | 3,100 | 591 | (4) | ||||
J. Thomas Mullis | 11,000 | — | — | 20,798 | (5) | ||||
Sara L. Plunkett | 11,561 | — | 4,100 | 1,785 | (4) |
(1) | Reflects the aggregate incremental cost to us of providing personal benefits to the named executive officers in the year indicated. The amounts shown include the following perquisites and other personal benefits in 2007: (a) for Mr. Curran, $24,000 in automobile allowance, $3,107 for airfare, lodging and meal expenses paid to a third-party vendor for Mr. Curran’s spouse to attend a company event and $2,935 for estate and financial planning services; (b) for Mr. Fish, $12,000 in automobile allowance; (c) for Mr. Mullis, $9,000 in automobile allowance and $2,000 for estate and financial planning services; and (d) for Ms. Plunkett, $11,951 in automobile allowance. |
(2) | Represents reimbursements for taxes due on income imputed to the named executive officer (as required by the Internal Revenue Code) with respect to our payment, on the officer’s behalf, of Medicare withholding payments upon the vesting of restricted stock units, with respect to our payment for estate and financial planning services, and, for Mr. Curran, with respect to our payment of the expenses incurred on behalf of his spouse referred to in note (1) to this table. |
(3) | Represents company contributions to our 401(k) retirement savings plan. |
(4) | Represents term life insurance premiums. |
(5) | Represents $3,298 in term life insurance premiums and $17,500 in split-dollar life insurance premiums. |
Grants of Plan-Based Awards
The following table presents information about the cash and equity incentive compensation awarded to the named executive officers in 2007. It is important to keep in mind the following when reviewing the table:
Ÿ | The actual amounts paid to our NEOs under our annual bonus plan with respect to 2007, which is a Non-Equity Incentive Plan as that term is used in this table, are set forth in the Summary Compensation Table in the column entitled “Non-Equity Incentive Plan Compensation.” A discussion of the performance factors associated with these awards is set forth in the Compensation Discussion and Analysis section of this proxy statement. |
Ÿ | The shares listed under “All Other Stock Awards: Number of Shares of Stock or Units” represent shares of common stock subject to grants of restricted stock units. |
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2007 Grants of Plan-Based Awards Table
Name | Grant Date | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#)(2) | All Other Option Awards: Number of Securities Underlying Options(#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($)(3) | |||||||||||||||
Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||
Randall E. Curran | — | 137,813 | — | 551,250 | — | — | — | — | — | — | — | |||||||||||
Richard E. Fish, Jr. | — | 89,578 | — | 358,313 | — | — | — | — | — | — | — | |||||||||||
J. Thomas Mullis | — | 33,075 | — | 132,300 | — | — | — | — | — | — | — | |||||||||||
Sara L. Plunkett | 2/06/07 | 31,800 | — | 127,200 | — | — | — | 20,000 | �� | — | — | 48,000 |
(1) | Represents possible cash payouts under our annual bonus plan with respect to 2007. The target payouts were the same as the maximum payouts shown in the table. |
(2) | Represents awards of restricted stock units under our stock incentive plan that vest in three equal installments beginning on February 6, 2008. |
(3) | Represents the grant date fair value of the awards calculated in accordance with FAS 123R. The assumptions we used in calculating this amount are set forth in Note 8 to Notes to Consolidated Financial Statements in our 2007 Form 10-K. |
As discussed in the Compensation Discussion and Analysis section of this proxy statement, we have entered into employment agreements with each of Mr. Curran, Mr. Fish and Mr. Mullis.
Employment Agreements With Messrs. Curran and Fish. On March 28, 2005, the board of directors approved employment agreements with Messrs. Curran and Fish. Each agreement is dated as of the effective date of the executive’s employment with us, which was February 3, 2005 for Mr. Curran and February 21, 2005 for Mr. Fish. Each employment agreement was amended as of December 20, 2005.
Each agreement had an initial term of two years, which was and will be automatically extended for successive one-year periods unless ITC^DeltaCom or the executive provides notice of non-renewal at least one year prior to the next scheduled renewal date, unless the executive is otherwise terminated by us, or unless the executive resigns from his employment.
Under the agreements, Mr. Curran is entitled to an initial base salary payable at an annual rate of $500,000 and Mr. Fish is entitled to an initial base salary payable at an annual rate of $325,000. These base salaries are subject to increase in accordance with our normal business practices and, if increased, may not subsequently be reduced unless there is a proportionate reduction of the salaries of all other senior executives. Each executive is eligible to earn an annual cash bonus (non-equity incentive plan compensation) for 2007 and subsequent years of up to 100% of his annual base salary then in effect, based upon the achievement of performance goals determined by the board of directors or compensation committee. In the discretion of the compensation committee, each executive also may receive an additional annual cash bonus in an amount not to exceed 25% of the executive’s annual base salary then in effect. Each executive also is entitled to reimbursement for reasonable out-of-pocket business expenses and, upon relocation, if any, of his principal residence, to reimbursement for reasonable relocation expenses not to exceed $250,000, before any tax gross-up. All reimbursed expenses that are subject to income tax will be grossed up so that the state and federal tax effect to the executive is zero.
Under the terms of his employment agreement, each officer received in 2005, following completion of a restructuring of our capital structure in that year upon terms that were approved by the board of directors, an award representing approximately 5%, in the case of Mr. Curran, and 1.25%, in the case of Mr. Fish, of each class or series of our equity securities outstanding immediately following the capital restructuring, calculated on a fully-diluted basis. These equity awards are discussed in the Compensation Discussion and Analysis section of this proxy statement.
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Each employment agreement provides that the executive will be entitled to participate in any offerings by us of our equity securities in capital-raising transactions exempt from registration under the Securities Act of 1933 on substantially the same terms as other offering participants.
For a discussion of the severance provisions of these agreements, see “Termination Payments” below.
Employment Agreement With J. Thomas Mullis. We entered into our employment agreement with Mr. Mullis as of August 13, 2004. The agreement with Mr. Mullis has an indefinite term, which will continue until his employment terminates because Mr. Mullis dies or becomes disabled, is terminated by us, or resigns from his employment. Under the agreement, Mr. Mullis is entitled to receive a base salary in an amount which is not less than $184,000, which was his base salary immediately prior to the date of effectiveness of the agreement. The agreement further provides that, in addition to Mr. Mullis’s annual base salary, Mr. Mullis may earn an annual bonus in cash and stock-based incentives in an amount to be established from time to time by us. Mr. Mullis’s base salary and annual bonus may be reduced, but not by more than 10% in the aggregate during Mr. Mullis’s term of employment, as a result of a general reduction of the compensation of our senior management in connection with a financial restructuring or other company-wide plan to reduce materially our costs of operations or improve materially our financial condition.
For a discussion of the severance provisions of this agreement, see “Termination Payments” below.
Award Modifications Resulting From Recapitalization and Acceleration of Vesting
On July 31, 2007, the board of directors approved amendments to outstanding equity awards granted to Mr. Curran and Mr. Fish in 2005 in order to adjust the awards for the recapitalization transactions that we completed on July 31, 2007 and that are discussed below in this proxy statement. For Mr. Curran, outstanding stock unit awards for 9,666 shares of Series A preferred stock and 29,061 shares of Series B preferred stock and outstanding awards for 485,175 Series D stock warrants were converted into awards of common stock units for a total of 1,086,326 shares of common stock. For Mr. Fish, outstanding stock unit awards for 2,417 shares of Series A preferred stock and 7,265 shares of Series B preferred stock and outstanding awards for 121,294 Series D stock warrants were converted into awards of common stock units for a total of 271,581 shares of common stock. The vesting provisions applicable to the amended awards are the same as the vesting provisions of the awards that were amended. Common stock units for 651,794 shares for Mr. Curran and 162,948 shares for Mr. Fish represent the 60% of the amended awards that vest over a period of 36 months beginning in the quarter ended March 31, 2005. Common stock units for 434,532 shares for Mr. Curran and 108,633 shares for Mr. Fish represent the 40% of the amended awards that were subject to vesting based on future achievement of performance objectives before the modifications discussed below. We applied provisions of SFAS 123R regarding exchanges of share instruments and accounted for the amendments to the outstanding stock unit awards as a modification of the stock incentives. We determined the incremental compensation cost as the difference in the fair value of the awards immediately after the recapitalization transactions compared to the fair value of the awards immediately before such transactions, and recognized compensation cost attributable to the portion of the awards that were already vested as of July 31, 2007, in the amount of $1,685,076 for awards granted to Mr. Curran and in the amount of $421,269 for awards granted to Mr. Fish. Following July 31, 2007, in connection with the modification of the awards, we recognized additional compensation cost in 2007 of $290,531 with respect to the awards granted to Mr. Curran and $72,633 with respect to the awards granted to Mr. Fish. The foregoing compensation cost related to award modifications is reflected in the “Stock Awards” column in the 2007 Summary Compensation Table above.
On December 21, 2007, the board of directors approved amendments to the vesting provisions of stock units for 493,053 shares of common stock for Mr. Curran and 123,263 shares of common stock for Mr. Fish which provided that such stock units would vest as of December 31, 2007. Before the amendments, those awards had been subject to vesting based on our attainment of a target of at least $90 million of “EBITDA,” or earnings before interest, taxes, depreciation, amortization and other specified items, during a period of four consecutive quarters, and represented one-half of the 40% of the awards that had been subject to performance-based
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achievement. At the date of the amendments to the vesting provisions, achievement of that performance objective was not expected to be satisfied. Consistent with the provisions of SFAS 123R, we accounted for such amendments as a modification of the awards. SFAS 123R provides that when the original performance vesting condition is not probable of achievement at the date of modification, the cumulative compensation cost related to the modified award if vesting occurs is the award’s fair value at the date of the modification. We recognized as compensation cost the fair value of the awards at December 31, 2007 of $2,465,265 for Mr. Curran and $616,315 for Mr. Fish. We determined the fair value of the awards at December 31, 2007 based on the closing sale price of our common stock as reported on the OTC Bulletin Board. The foregoing compensation cost related to accelerated vesting is reflected in the “Stock Awards” column in the 2007 Summary Compensation Table above.
Following the award amendments on December 21, 2007, stock units for 493,053 shares of common stock for Mr. Curran and stock units for 123,263 shares of common stock for Mr. Fish are subject to future vesting based on our attainment of at least $105 million of “EBITDA,” or earnings before interest, taxes, depreciation, amortization and other specified items, during a period of four consecutive quarters during the remaining terms of our employment agreements with Messrs. Curran and Fish. The terms of those agreements are automatically extended for successive one-year periods in February of each year unless otherwise terminated.
For a discussion of the terms of the equity awards granted to Mr. Curran and Mr. Fish in 2005, see the Compensation Discussion and Analysis section of this proxy statement.
Outstanding Equity Awards at Fiscal Year-End
The following table presents information about equity awards that were outstanding and held by the named executive officers as of December 31, 2007. The market value of the equity awards is determined by multiplying the closing price of the common stock as reported on the OTC Bulletin Board on December 31, 2007, or $5.00 per share, by the number of shares of common stock subject to the awards.
2007 Outstanding Equity Awards at Fiscal Year-End Table
Option Awards | Stock Awards | |||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options(#) Exercisable | Number of Securities Underlying Unexercised Options(#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(#) | Option Exercise Price($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested(#) | Market Value of Shares or Units of Stock That Have Not Vested($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested($) | |||||||||||
Randall E. Curran | — | — | — | — | — | 493,053 | (1) | 2,465,265 | 493,053 | (2) | 2,465,265 | |||||||||
Richard E. Fish, Jr. | — | — | — | — | — | 123,263 | (1) | 616,315 | 123,263 | (2) | 616,315 | |||||||||
J. Thomas Mullis | — | — | — | — | — | 32,333 | (3) | 161,665 | — | — | ||||||||||
Sara L. Plunkett | 4,445 | — | — | 15.84 | 11/20/2012 | 48,500 | (4) | 242,500 | — | — | ||||||||||
6,667 | — | — | 7.80 | 11/20/2012 | — | — | — | — |
(1) | Represents the shares underlying 20% of the restricted stock units for common stock held by the NEO that are subject to time-based vesting. These units vested on February 3, 2008, in the case of Mr. Curran, and on February 21, 2008, in the case of Mr. Fish. |
(2) | Represents the shares underlying 20% of the restricted stock units for common stock held by the NEO that are subject to performance-based vesting. These units will vest, if at all, upon our achievement of a target of at least $105 million of “EBITDA,” or earnings before interest, taxes, depreciation, amortization and other specified items, during a period of four consecutive fiscal quarters. |
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(3) | Of the awards shown, restricted stock units for 11,334 shares awarded on May 10, 2005 vest with respect to 25% of the shares subject to each such award on each of the first four anniversaries of the grant date and restricted stock units for 40,000 shares awarded on November 7, 2006 vest with respect to one-third of the shares subject to each such award on each of the first three anniversaries of the grant date. |
(4) | Of the awards shown, restricted stock units for 30,334 shares awarded on May 10, 2005 vest with respect to 25% of the shares subject to each such award on each of the first four anniversaries of the grant date, restricted stock units for 20,000 shares awarded on November 7, 2006 vest with respect to one-third of the shares subject to each such award on each of the first three anniversaries of the grant date and restricted stock units for 20,000 shares awarded on February 6, 2007 vest with respect to one-third of the shares subject to each such award on each of the first three anniversaries of the grant date. |
Option Exercises and Stock Vested
The following table presents information about NEO stock awards that vested in 2007.
2007 Option Exercises and Stock Vested Table
Option Awards | Stock Awards | |||||||||
Name | Number of Shares Acquired on Exercise(#) | Value Realized on Exercise($) | Number of Shares Acquired on Vesting(#) | Value Realized on Vesting($)(1) | ||||||
Randall E. Curran | — | — | 351,644 | (2) | 843,946 | (3) | ||||
— | — | 493,053 | (4) | 2,465,265 | (3) | |||||
Richard E. Fish, Jr. | — | — | 87,911 | (5) | 246,151 | (3) | ||||
— | — | 123,263 | (4) | 616,315 | (3) | |||||
J. Thomas Mullis | — | — | 17,502 | 112,345 | ||||||
Sara L. Plunkett | — | — | 15,001 | 81,401 |
(1) | The value realized on vesting is determined by multiplying the closing price of the common stock as reported on the OTC Bulletin Board on the vesting date by the number of shares of common stock acquired on vesting. |
(2) | Represents vesting of 20% of the restricted stock units for common stock held by Mr. Curran on February 3, 2007. |
(3) | Messrs. Curran and Fish elected to defer receipt of the amounts shown until March 31, 2010. See the Compensation Discussion and Analysis section of this proxy statement and the 2007 Nonqualified Deferred Compensation Table below for additional information about the deferrals. |
(4) | Represents vesting of 20% of the restricted stock units for common stock held by the NEO on December 31, 2007. See “Award Modifications Resulting From Recapitalization and Acceleration of Vesting” following the 2007 Grants of Plan-Based Awards Table above for additional information about this accelerated vesting. |
(5) | Represents vesting of 20% of the restricted stock units for common stock held by Mr. Fish on February 21, 2007. |
Nonqualified Deferred Compensation
The following table presents information about compensation deferred by the named executive officers in 2007 and the aggregate balance as of December 31, 2007.
2007 Nonqualified Deferred Compensation Table
Name | Executive Contributions in Last FY($) | Registrant Contributions in Last FY($) | Aggregate Earnings in Last FY($) | Aggregate Withdrawals/ Distributions($) | Aggregate Balance at Last FYE($) | ||||||
Randall E. Curran | 3,309,211 | (1) | — | — | — | 3,309,211 | |||||
Richard E. Fish, Jr. | 862,466 | (2) | — | — | — | 862,466 | |||||
J. Thomas Mullis | — | — | — | — | — | ||||||
Sara L. Plunkett | — | — | — | — | — |
(1) | Represents the value upon vesting of awards of restricted stock units deferred by Mr. Curran. Awards representing 351,644 shares vested on February 3, 2007 and 493,053 shares vested on December 31, 2007. The market price of our common stock was $2.40 on February 2, 2007 and $5.00 on December 31, 2007. Mr. Curran elected to defer receipt of the amounts shown until March 31, 2010. See the Compensation Discussion and Analysis section of this proxy statement for additional information about Mr. Curran’s deferrals. |
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(2) | Represents the value upon vesting of awards of restricted stock units deferred by Mr. Fish. Awards representing 87,911 shares vested on February 21, 2007 and 123,263 shares vested on December 31, 2007. The market price of our common stock was $2.80 on February 21, 2007 and $5.00 on December 31, 2007. Mr. Fish elected to defer receipt of the amounts shown until March 31, 2010. See the Compensation Discussion and Analysis section of this proxy statement for additional information about Mr. Fish’s deferrals. |
Termination Payments
Messrs. Curran, Fish and Mullis are entitled to receive payments from ITC^DeltaCom under special circumstances, which generally relate to termination of the NEO’s employment.
This section describes the circumstances that would trigger such payments and quantifies the estimated amount of such payments. In accordance with SEC rules, the quantitative disclosures in this section assume that the triggering event took place on December 31, 2007. In fact, no NEO’s employment terminated on that date. If a triggering event were to occur in the future, actual payments likely would be different from the payments presented below.
The market value of the equity awards we show below is determined by multiplying the closing price of the common stock reported on the OTC Bulletin Board on December 31, 2007, or $5.00 per share, by the number of shares of common stock subject to the awards. This valuation does not take into account the diminution in value attributable to the restrictions applicable to the common stock subject to the restricted stock units.
The amounts shown in the tables below exclude obligations due from us to the named executive officer following a triggering event for (1) any earned and vested but unpaid base salary, annual incentive compensation and long-term incentive compensation through the date of termination, (2) vested benefits under the employee 401(k) plan and all other benefit plans applicable to all of our employees in accordance with their terms and conditions, (3) accrued vacation pay, (4) reimbursement of reasonable business expenses incurred and unpaid before the date of termination and (5) any other compensation or benefits to which the named executive officer may be entitled under and in accordance with our generally applicable non-discriminatory plans or employee benefit programs.
Employment Agreements With Mr. Curran and Mr. Fish. We have agreed to provide specified severance benefits to Messrs. Curran and Fish under their employment agreements.
Each employment agreement provides for the payment of severance benefits to the executive if we terminate the executive’s employment without “cause,” if the executive resigns for “good reason” or if we provide notice of non-renewal of the agreement. Upon such a termination, the executive will be entitled to receive an amount equal to 18 months of the executive’s annual base salary at the rate then in effect and a pro rata portion of any bonus payable in respect of the fiscal year in which the termination date occurs. The executive also will be entitled to continued participation in all health and welfare plans generally with no increase in cost to the executive for 18 months following the termination date if the executive complies with post-termination non-competition, non-solicitation, confidentiality and non-disparagement covenants in his employment agreement.
Each employment agreement defines “cause” to mean (1) the executive’s willful and continued failure substantially to perform his duties under the agreement, other than any such failure arising from his disability, so long as the executive first receives notice from the board of directors specifying in reasonable detail the alleged failures and providing the executive a reasonable opportunity to cure such alleged failures, (2) the executive’s conviction of, or plea of guilty ornolo contendere to, a misdemeanor involving theft or moral turpitude or any felony, or (3) any act of intentional dishonesty or intentional misconduct resulting in demonstrable harm to us. Under each employment agreement, “good reason” includes any material adverse change in the executive’s duties or responsibilities, any reduction of the executive’s base salary (unless there is a proportionate reduction of the salaries of all other senior executives) or bonus opportunities, the failure, in the case of Mr. Curran, to be appointed or nominated for election to serve as a member of the board of directors, or any directive by us requiring the executive to relocate more than 50 miles from our headquarters, provided that the executive notifies us of the occurrence of such an event and we fail to remedy the event within ten days.
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Assuming a December 31, 2007 termination event as described above, we estimate that the total payments to Messrs. Curran and Fish would be as follows:
Name | Salary Due | Bonus Due | Benefits and Health Programs(1) | Total Due | ||||||||
Randall E. Curran | $ | 826,875 | $ | 551,250 | $ | 19,719 | $ | 1,397,844 | ||||
Richard E. Fish, Jr. | $ | 537,000 | $ | 358,000 | $ | 19,719 | $ | 914,719 |
(1) | The value of the continued health and benefit programs is based on the cost to us, as of December 31, 2007, of the premiums for the programs for 18 additional months. |
In addition, the unvested restricted common stock unit awards granted to Messrs. Curran and Fish before December 31, 2007 that are subject to time-based vesting would vest upon such termination to the extent not previously vested. As of December 31, 2007, one-third of such time-vested awards, representing 20% of the NEO’s total awards, had not vested. Assuming a December 31, 2007 termination event, the number and value of awards of restricted common stock units that would vest would be as follows:
Restricted Stock Units | |||||
Name | Number | Value(1) | |||
Randall E. Curran | 493,053 | $ | 2,465,265 | ||
Richard E. Fish, Jr. | 123,263 | $ | 616,315 |
(1) | Value of restricted stock units is based on the number of stock units subject to accelerated vesting multiplied by our stock price on December 31, 2007, or $5.00 per share. All restricted stock units shown vested in accordance with their terms in February 2008. |
Employment Agreement With Mr. Mullis. Our agreement with Mr. Mullis provides for the payment of severance benefits to Mr. Mullis if we terminate his employment without “cause” or if Mr. Mullis resigns for “good reason.” Upon such a termination, Mr. Mullis will be entitled to receive the following:
Ÿ | a lump-sum cash payment for accrued obligations equal to the sum of (1) Mr. Mullis’s annual base salary through the termination date to the extent not previously paid, (2) an amount equal to the higher of the last annual cash bonus paid to Mr. Mullis (annualized in the case of any partial year) and Mr. Mullis’s target annual cash bonus opportunity then in effect, which we refer to as the “higher annual bonus,” pro-rated to the termination date, and (3) any compensation previously deferred by Mr. Mullis and any accrued vacation pay to the extent not previously paid; |
Ÿ | a lump-sum cash payment equal to the sum of (1) Mr. Mullis’s annual base salary as in effect at the termination date and (2) the higher annual bonus; and |
Ÿ | continued medical, prescription, dental and life insurance benefits for a minimum of one year, unless, in the case of medical benefits, Mr. Mullis is eligible to receive such benefits from a new employer. |
Mr. Mullis’s employment agreement defines “cause” to mean (1) Mr. Mullis’s willful and continued failure to perform substantially his duties after a written demand for substantial performance is delivered to Mr. Mullis by the board of directors which specifically identifies such failure, (2) Mr. Mullis’s conviction of, or Mr. Mullis’s a plea ofnolo contendere to, a felony or to any criminal violation involving dishonesty, fraud or breach of trust or (3) willful misconduct by Mr. Mullis which causes harm to, or which could reasonably be expected to diminish the value of, our assets or property or violate our value system or code of conduct. Under Mr. Mullis’s employment agreement, “good reason” includes a material reduction in Mr. Mullis’s position, authority, duties or responsibilities, a reduction in Mr. Mullis’s compensation in violation of the agreement, and notification to Mr. Mullis that his employment will be terminated other than as permitted by the agreement.
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Assuming a December 31, 2007 termination event as described above, we estimate that the total payments to Mr. Mullis would be as follows:
Salary Due | Bonus Due | Benefits and Health Programs(1) | Total Due | ||||||
$221,000 | $ | 221,000 | $ | 9,750 | $ | 451,750 |
(1) | The value of the continued health and benefit programs is based on the cost of these premiums to us, as of December 31, 2007, for one additional year. |
In addition, upon such termination, any stock options, stock appreciation rights, awards of restricted stock and restricted stock units, and other equity-based awards granted to Mr. Mullis will vest and become exercisable, and all restrictions and conditions applicable to such awards will be deemed to have lapsed or been fully satisfied. As of December 31, 2007, all equity-based awards held by Mr. Mullis were restricted stock units.
Assuming a December 31, 2007 termination event, the number and value of awards of restricted stock units that would vest would be as follows:
Restricted Stock Units | |||
Number | Value(1) | ||
32,333 | $ | 161,665 |
(1) | Value of restricted stock units is based on the number of stock units subject to accelerated vesting multiplied by our stock price on December 31, 2007, or $5.00 per share. |
Conditions to Receipt of Payments and Benefits Under Employment Agreements. Our obligation to pay any form of severance to Messrs. Curran, Fish and Mullis is subject to the executive’s execution of a full and unconditional release in favor of us and our directors, officers and other affiliates of all obligations, other than those set forth in the employment agreement.
Equity Compensation Plan Information
The following table provides information as of December 31, 2007 with respect to (1) all equity compensation plans previously approved by our stockholders and (2) all equity compensation plans not previously approved by our stockholders. As of December 31, 2007, the ITC^DeltaCom, Inc. Amended and Restated Stock Incentive Plan, which we refer to as the “stock incentive plan,” and the ITC^DeltaCom, Inc. Amended and Restated Executive Stock Incentive Plan, which we refer to as the “executive incentive plan,” represented our two equity compensation plans.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||
Equity compensation plans approved by security holders(1): | ||||||||||
Common stock | 1,269,925 | (2) | $ | 0.62 | (3) | 96,264 | (4) | |||
Equity compensation plans not approved by security holders(5): | ||||||||||
Common stock | 4,002,802 | (6) | $ | 1.51 | (3) | 572,000 | ||||
Totals: | ||||||||||
Common stock | 5,272,727 | (7) | $ | 1.30 | (3) | 668,264 | (8) |
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(1) | The board of directors adopted the stock incentive plan effective on October 29, 2002. The stock incentive plan was amended and restated in October 2003 and approved as amended and restated by the stockholders on December 18, 2003. Information shown relates to awards made under the amended and restated stock incentive plan following stockholder approval of the plan on December 18, 2003 to the extent of the number of authorized plan shares covered by the stockholder approval. |
(2) | Consists of (a) 1,162,141 shares of common stock subject to issuance pursuant to restricted common stock units and (b) 107,784 shares of common stock subject to issuance pursuant to stock options outstanding under the stock incentive plan as of December 31, 2007. |
(3) | Assumes a weighted-average exercise price of $0 with respect to each restricted stock unit for common stock outstanding as of December 31, 2007. |
(4) | Shows the shares of common stock remaining available for issuance pursuant to future awards under the stock incentive plan as of December 31, 2007. Any or all of such shares of common stock may be issued pursuant to awards other than upon the exercise of an option, warrant or right. |
(5) | Information shown relates to (a) awards made under the stock incentive plan before stockholder approval of the plan on December 18, 2003 or in excess of the number of authorized plan shares covered by the stockholder approval and (b) awards made pursuant to the executive stock incentive plan, which has not been approved by our stockholders. |
(6) | Consists of (a) 428,169 shares of common stock subject to stock options outstanding under the stock incentive plan as of December 31, 2007 and (b) 3,574,633 shares of common stock subject to issuance pursuant to restricted common stock units outstanding under the executive incentive plan as of December 31, 2007. |
(7) | Includes shares of common stock subject to issuance, directly and indirectly, pursuant to restricted common stock units. See notes (2) and (6) to this table. |
(8) | Any or all of such shares of common stock may be issued pursuant to awards other than upon the exercise of an option, warrant or right. See note (4) to this table. |
Stock Incentive Plan. The purpose of the stock incentive plan is to enable us to recruit, reward, retain and motivate officers, employees, directors and other plan participants who are providing services to us or our affiliates. On November 7, 2006, the board of directors adopted an amendment to the stock incentive plan. The amendment, which was not approved by stockholders, increased the total number of shares of common stock authorized for issuance pursuant to awards under the stock incentive plan by 572,000 shares from 2,433,334 shares to 3,005,334 shares. Shares subject to awards which are forfeited or canceled, or which expire or are settled in cash, will become eligible for issuance under future awards under the plan. If options are exercised by tendering shares in payment of the exercise price, the number of shares issued net of the shares tendered will be deemed issued for purposes of determining the number of shares available for future issuance under the plan.
Awards under the stock incentive plan may be made in the form of stock options, restricted stock, restricted stock units, unrestricted stock, stock appreciation rights, performance awards, annual incentive awards and any combination of the foregoing.
As of December 31, 2007, 535,953 shares of common stock were subject to issuance upon the exercise of stock options outstanding under the stock incentive plan and 1,162,141 shares of common stock were subject to issuance pursuant to restricted stock units outstanding under the plan.
The compensation committee of the board of directors administers the stock incentive plan and has the authority to designate eligible participants and determine the types of awards to be granted and the conditions and limitations applicable to those awards. The board of directors may authorize amendments to the stock incentive plan without stockholder approval except in circumstances prescribed by applicable law or regulation. Pursuant to an amendment to the stock incentive plan adopted on February 6, 2008, as described below, the stock incentive plan will terminate on February 6, 2018.
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On February 6, 2008, following the date as of which information is provided in the foregoing table, the board of directors adopted an amendment to the stock incentive plan that increased the total number of shares of common stock authorized for issuance pursuant to awards under the plan by 3,300,000 shares to a total of 6,305,334 shares. We do not intend to seek stockholder approval of this amendment.
For additional information about the stock incentive plan, see Note 8 to Notes to Consolidated Financial Statements in our 2007 Form 10-K.
Executive Incentive Plan.The board of directors approved the executive incentive plan on May 10, 2005 and approved the plan, as amended and restated, on December 16, 2005. The executive incentive plan, which is administered by the board of directors, initially provided for the award of restricted stock units for common stock, Series A preferred stock and Series B preferred stock to Mr. Curran, Mr. Fish and a third officer pursuant to our employment agreements with those officers. The restricted stock units awarded under the plan are the securities the foregoing executives were entitled to receive for their services in connection with the restructuring and refinancing of our secured indebtedness that we completed on March 29, 2005 and July 26, 2005. We adopted the executive incentive plan so that we could grant stock units as an inducement material to the foregoing executives entering into employment with us within the meaning of the Marketplace Rules of the NASDAQ Stock Market, on which our common stock was listed on the plan adoption date. As permitted by this rule, the executive incentive plan was not approved by our stockholders.
Effective as of July 31, 2007, to adjust the awards granted to the foregoing officers for the recapitalization transactions we completed on that date and which are described below in this proxy statement, the board of directors approved amendments to the executive incentive plan to eliminate plan awards of restricted stock units for Series A preferred stock and Series B preferred stock and to increase from 2,000,000 shares to 4,000,000 shares the maximum number of shares of common stock issuable pursuant to common stock units awarded under the plan. We did not obtain stockholder approval of these amendments. For additional information about awards under the executive incentive plan, including modifications to the awards approved on December 21, 2007, see the Compensation Discussion and Analysis section of this proxy statement and “Award Modifications Resulting From Recapitalization and Acceleration of Vesting” following the 2007 Grants of Plan-Based Awards Table above.
For additional information about the executive incentive plan, see Note 8 to Notes to Consolidated Financial Statements in our 2007 Form 10-K.
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TRANSACTIONS WITH RELATED PERSONS
AND APPROVAL POLICIES
Transactions With Related Persons
The following is a summary of certain transactions during 2006 and 2007 in which we engaged with our directors, director nominees, beneficial owners of more than 5% of our common stock, Series A preferred stock or Series B preferred stock, and entities with which the foregoing persons are affiliated. We refer to all such persons as “related persons.”
Refinancing and Recapitalization Transactions
On July 31, 2007, we completed transactions, which we refer to collectively as the “2007 refinancing and recapitalization,” in which we refinanced or retired substantially all of our previously outstanding funded debt, eliminated all series of our previously authorized preferred stock and substantially all related stock purchase warrants principally in exchange for common stock, and raised additional funds from sales of our capital stock.
In connection with the 2007 refinancing and capitalization, we entered into agreements with various holders of our Series A preferred stock, Series B preferred stock, stock purchase warrants and third lien, senior secured notes, pursuant to which we issued shares of common stock upon the conversion or exchange of those securities. Concurrently with the completion of these conversion and exchange transactions, we sold for cash shares of common stock and a new issue of our 6% Series H convertible redeemable preferred stock. Also in connection with the 2007 refinancing and recapitalization, we entered into a first lien credit facility in an aggregate principal amount of $240 million and a second lien credit facility in an aggregate principal amount of $75 million, and used the proceeds of these facilities to repay our first lien, senior secured notes and other indebtednesses.
Transactions With WCAS Group and Other Related Persons
The WCAS Group currently beneficially holds, and at the time of the transactions in 2006 and 2007 beneficially held, securities representing a majority of the voting power represented by all of our outstanding voting securities. Four of our directors during 2006 and 2007, John Almeida, Jr., Thomas E. McInerney, Sanjay Swani and Anthony J. de Nicola, are General Partners of Welsh, Carson, Anderson & Stowe. In addition, Messrs. McInerney, Swani and de Nicola are members of the WCAS Group. Messrs. Almeida, McInerney and Swani currently serve as directors and have been nominated for election to the board of directors at the annual meeting. Mr. de Nicola resigned from the board of directors on July 25, 2006. For additional information about the WCAS Group and Messrs. Almeida, McInerney and Swani, see “Security Ownership” and “Election of Directors.” The information presented below about shares we issued and payments we made to or received from the WCAS Group includes shares that we issued or amounts we paid to or received from each of Messrs. McInerney, Swani and de Nicola as members of the WCAS Group, which we also separately show below.
Payment and Exchange of Third Lien Notes.In 2006 and 2007, members of the WCAS Group, including Messrs. McInerney, Swani and de Nicola, and Mr. Almeida held our third lien, senior secured notes due 2009, which we refer to as “third lien notes.” The third lien notes accrued interest, payable quarterly, at an annual rate equal to the specified London interbank offered rate, or “LIBOR,” plus 7.5%, with the portion of any interest in excess of a 12% annual rate payable in-kind at our option, and accrued additional payment-in-kind interest, payable on a quarterly basis, at an annual rate of 4.5%. No scheduled principal payments were due on the third lien notes before the maturity date of September 26, 2009.
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The following table presents information about the third lien notes held by the WCAS Group and each of Messrs. Almeida, McInerney and Swani during 2007 and about the shares of common stock and cash prepayment penalty we issued and paid to each of them in exchange for these notes in connection with the 2007 refinancing and recapitalization:
Holder | Interest Paid During 2007($) | Largest Principal Amount Outstanding During 2007($) | Shares of Common Stock | Cash Prepayment Penalty Paid($) | ||||
WCAS Group | 2,281,584 | 22,895,697 | 7,710,594 | 221,680 | ||||
John Almeida, Jr. | 230 | 2,304, | 775 | 22 | ||||
Thomas E. McInerney | 17,560 | 176,218 | 59,345 | 1,706 | ||||
Sanjay Swani | 459 | 4,607 | 1,551 | 45 |
The interest amounts presented in the first column of the table above include both cash and in-kind interest. For the shares of common stock they received, the WCAS Group and Messrs. Almeida, McInerney and Swani exchanged third lien notes with outstanding principal balances in the amounts shown in the second column above. We issued a total of 7,757,524 shares of common stock to the WCAS Group and the other WCAS securityholders in exchange for $22.9 million aggregate principal amount of third lien notes (consisting of $19.7 million net of debt discount) and paid in cash a prepayment penalty expense of 2% of the principal prepaid, or approximately $223,000. For financial reporting purposes, we valued the shares of common stock exchanged for such third lien notes at approximately $65.9 million, or $8.50 per share based on the closing price of our common stock on July 31, 2007 as reported on the OTC Bulletin Board.
The following table presents information about the third lien notes held by the WCAS Group and each of Messrs. Almeida, McInerney, Swani and de Nicola during 2006:
Holder | Interest Paid During 2006($) | Largest Principal Amount Outstanding During 2006($) | ||
WCAS Group | 3,742,624 | 22,189,883 | ||
John Almeida, Jr. | 377 | 2,232 | ||
Thomas E. McInerney | 28,805 | 170,786 | ||
Sanjay Swani | 753 | 4,465 | ||
Anthony J. de Nicola | 3,201 | 18,976 |
The interest amounts presented in the first column of the table above include both cash and in-kind interest.
Exchange of Series B Warrants.In connection with the 2007 refinancing and recapitalization, we issued a total of 5,789 shares of common stock in exchange for all 3,000,000 of our outstanding Series B warrants to purchase approximately 1,000,000 shares of common stock at an exercise price of $25.50 per share. In this transaction, we issued 5,276 shares to the WCAS Group in exchange for 2,731,995 warrants, 32 shares to Mr. McInerney in exchange for 17,014 warrants and one share to Mr. Swani in exchange for 791 warrants. For financial reporting purposes, we recognized the exchange of all Series B warrants for common stock at the book value of $4.8 million.
Exchange of Series C Warrants.In connection with the 2007 refinancing and recapitalization, we issued a total of 4,902,557 shares of common stock in exchange for all 20,000,000 of our outstanding Series C warrants to purchase approximately 6,600,000 shares of common stock at an exercise price of $1.80 per share. In this transaction, we issued 4,872,898 shares to the WCAS Group in exchange for 19,879,000 warrants, 490 shares to Mr. Almeida in exchange for 2,000 warrants, 37,504 shares to Mr. McInerney in exchange for 153,000 warrants and 980 shares to Mr. Swani in exchange for 4,000 warrants. For financial reporting purposes, we recognized the exchange of all Series C warrants for common stock at the book value of $7.6 million.
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Conversion of Series B Preferred Stock.In connection with the 2007 refinancing and recapitalization, we issued a total of 11,735,080 shares of common stock upon the conversion of all 607,087 outstanding shares of our Series B preferred stock, which were convertible into approximately 6,700,000 shares of common stock at a conversion price of $9.00 per share. In this transaction, we issued 11,660,331 shares to the WCAS Group, 942 shares to Mr. Almeida, 79,897 shares to Mr. McInerney and 2,605 shares to Mr. Swani upon the conversion of approximately 579,750, 49, 4,133 and 135 shares of Series B preferred stock, respectively, held by them. For financial reporting purposes, we valued the shares of common stock issued upon conversion of all Series B preferred stock at approximately $99.7 million, or $8.50 per share based on the closing price of our common stock on July 30, 2007 as reported on the OTC Bulletin Board.
Sale of Common Stock.In connection with the 2007 refinancing and recapitalization, we received gross cash proceeds of $21 million from the sale of a total of 6,937,724 shares of common stock at a purchase price of $3.03 per share. In this transaction, we sold and issued 6,888,825 shares to the WCAS Group at a purchase price of $20,851,982, 808 shares to Mr. Almeida at a purchase price of $2,446, 62,020 shares to Mr. McInerney at a purchase price of $187,730 and 1,616 shares to Mr. Swani at a purchase price of $4,892.
Transactions With TCP and Other Related Persons
Immediately before the completion of the 2007 refinancing and recapitalization, Tennenbaum Capital Partners, LLC, or “TCP,” was the beneficial owner of more than 5% of our common stock based on its beneficial ownership of Series D warrants for the purchase our common stock or 8% Series C convertible redeemable preferred stock, which we refer to as our “Series C preferred stock.” The Series D warrants first became exercisable on June 30, 2007. Following the 2007 refinancing and recapitalization, in which, among other transactions, the Series D warrants were exchanged for common stock, TCP remains the beneficial owner of more that 5% of our common stock. For additional information about TCP’s ownership of our common stock, see “Security Ownership.” During 2006 and 2007, TCP served as investment adviser to, or managing member of, or was otherwise affiliated with, the TCP fund holders, which consisted of Special Value Bond Fund II, LLC and Special Value Absolute Return Fund, LLC, and other investment funds, including Special Value Continuation Partners, LP, Special Value Expansion Fund, Special Value Opportunities Fund, Tennenbaum Opportunities Partnership and Tennenbaum Multi-Strategy Master Fund. Such other investment funds, which, together with the TCP fund holders, we refer to as the “TCP lenders,” participated in the transactions described below.
During 2006 and 2007, Michael E. Leitner, who is a Managing Partner of TCP, served on our board of directors. Philip M. Tseng, who is a Director of TCP, has served on our board of directors since February 2007. Messrs. Leitner and Tseng have been nominated for election to the board of directors at the annual meeting. For additional information about Messrs. Leitner and Tseng, see “Election of Directors.”
Payment of First Lien Notes.Various of the TCP lenders held in 2006 and 2007 our first lien, senior secured notes due 2009, which we refer to as “first lien notes,” that we issued in connection with the refinancing we completed in July 2005. In connection with the 2007 refinancing and recapitalization, we paid all $236.2 million aggregate principal amount outstanding under the first lien notes, of which we paid $51.3 million to the TCP lenders, and a prepayment penalty of $7.1 million, of which we paid $1.6 million to the TCP lenders. The first lien notes accrued interest, payable quarterly, at an annual rate equal to LIBOR plus 8%, with the portion of any interest in excess of a 12% annual rate payable in-kind at our option, and accrued payment-in-kind interest, payable on a quarterly basis, at an annual rate of 0.5%. No scheduled principal payments were due on the first lien notes before the maturity date of July 26, 2009.
The TCP lenders received total interest payments on their first lien notes of approximately $3.4 million during 2007 and approximately $3.0 million during 2006. The largest aggregate principal amount of the first lien notes collectively held by the TCP lenders was approximately $51.3 million in 2007 and approximately $45.0 million in 2006. In addition, as holders of the first lien notes, the TCP lenders received a fee of $170,000 in 2006 for consenting to amendments to the first lien note agreement made in connection with our sale of $21 million principal amount of first lien notes to other investors.
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Payment and Exchange of Third Lien Notes.Various of the TCP lenders held in 2006 and 2007 our third lien notes described above. The TCP lenders received total interest payments on their third lien notes of approximately $2.1 million during 2007 and approximately $2.8 million during 2006. The largest aggregate principal amount of the third lien notes collectively held by the TCP lenders was approximately $25.1 million in 2007 and approximately $23.7 million in 2006. In connection with the 2007 refinancing and recapitalization, we issued 8,259,193 shares of common stock in exchange for $25.0 million aggregate principal amount of third lien notes (consisting of $19.7 million net of debt discount) held by the TCP lenders, and paid in cash a prepayment penalty expense of 2% of the principal prepaid, or approximately $500,000. For financial reporting purposes, we valued the shares of common stock exchanged for such third lien notes at approximately $70.2 million, or $8.50 per share based on the closing price of our common stock on July 30, 2007 as reported on the OTC Bulletin Board.
New Second Lien Credit Facility.In connection with the 2007 refinancing and recapitalization, various of the TCP lenders provided us with a new $75 million second lien credit facility. The TCP lenders received total interest payments of $4.1 million on this facility during 2007. The largest aggregate principal amount of the second lien credit facility collectively held by the TCP lenders in 2007 was approximately $75 million.
The second lien credit facility will mature on July 31, 2014. There will be no scheduled principal payments before maturity under the second lien credit facility. Prepayment of borrowings outstanding under this facility before July 31, 2009 will require payment of a premium of approximately $1.5 million if the borrowings are prepaid prior to July 31, 2008, or approximately $750,000 if the borrowings are prepaid on or after July 31, 2008 and before July 31, 2009. Borrowings outstanding under the second lien credit facility bear interest, at our option, at an annual rate equal to either a specified base rate plus 6.50% or LIBOR plus 7.50%. For interest payments covering any interest period ending on or before July 31, 2009, we may elect to pay interest under the facility either entirely in cash or as payment-in-kind interest by adding to the principal of outstanding borrowings an amount equal to the amount of interest accrued at an annual rate of up to 4.00% and by paying the balance of the accrued interest in cash.
New First Lien Credit Facility.Various of the TCP lenders acquired through syndication a portion of a new first lien term loan facility due July 31, 2013 that we obtained in connection with the 2007 refinancing and recapitalization. The TCP lenders received total interest payments of $2.5 million on this facility during 2007. The largest aggregate principal amount of the first lien credit facility collectively held by the TCP lenders in 2007 was approximately $70 million.
The first lien term loan facility and the revolving credit facility will mature on July 31, 2013 and on July 31, 2012, respectively. Scheduled quarterly principal payments of $575,000 under the first lien term loan facility began in the first quarter of 2008. Borrowings outstanding under the first lien credit facility bear interest, at our option, at an annual rate equal to either a specified base rate plus 3.00% or LIBOR plus 4.00%. Borrowings under the revolving credit facility bear interest, at our option, at an annual rate equal to either a specified base rate plus a margin of 2.50% to 3.00% or LIBOR plus a margin of 3.50% to 4.00%. The applicable margin is determined based upon our consolidated leverage ratio at the specified measurement date.
Series D Warrants.In connection with the 2007 refinancing and recapitalization, we issued 4,242,717 shares of common stock to the TCP lenders in exchange for 6,820,293 outstanding Series D warrants held by them. Each Series D warrant entitled the holder to purchase one share of a new issue our Series C preferred stock and a portion of an additional share equal to the cumulative amount of payment-in-kind dividends that would have accrued with respect to one share from the warrant issue date of July 26, 2005 through the warrant exercise date if such share had been outstanding. Each share of Series C preferred stock was convertible into .4445 of one share of common stock. Each warrant also entitled the holder to purchase the number of shares of common stock into which the shares of Series C preferred stock otherwise issuable under the warrant would have been convertible as of the warrant exercise date. For financial reporting purposes, we recognized the exchange of all 9,000,000 Series D warrants for common stock at the book value of $13 million.
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Transaction With H Partners, LP
On July 24, 2007, H Partners Capital, LLC, H Partners Management, LLC, H Partners, LP and Rehan Jaffer reported in a statement on Schedule 13G filed with the SEC that they beneficially owned more than 5% of our common stock. In connection with the 2007 refinancing and recapitalization, we sold to H. Partners, LP 237,215 shares of a new issue of our 6% Series H convertible redeemable preferred stock at $100 per share for a total purchase price of $23.7 million.
Other Transactions
Transactions With Affiliates of Campbell B. Lanier, III. Campbell B. Lanier, III was the beneficial owner of more than 5% of our Series A preferred stock until we redeemed and converted such preferred stock on July 31, 2007 in connection with the 2007 refinancing and recapitalization. Mr. Lanier also was an executive officer and significant stockholder of PRE Solutions, Inc. before he disposed of his interest in that company in May 2006. For fiscal 2006, we recorded revenues of $274,000 for telecommunications services we furnished to PRE Solutions, Inc. during the period in which Mr. Lanier was affiliated with the company.
In May 2006, we sold at a price of $1.5 million our former headquarters building in West Point, Georgia to ITC Holding Company, LLC, which is a single-member limited liability company managed and wholly owned by Mr. Lanier. We recognized a net gain of $518,000 on the sale of the building.
Transactions With KNOLOGY, Inc. and Subsidiaries.We entered into the transactions with KNOLOGY, Inc. and its subsidiaries described below. Campbell B. Lanier, III has served as chairman of KNOLOGY and Donald W. Burton, who was the beneficial owner of more than 5% of our Series A preferred stock until we redeemed and converted such preferred stock on July 31, 2007 in connection with the 2007 refinancing and recapitalization, has served as a director of KNOLOGY.
We sell capacity on our fiber optic network and provide long distance and carrier-switched long distance service to KNOLOGY and its subsidiaries. We also provide directory assistance and operator services to KNOLOGY and its subsidiaries. We recorded revenues for all of these services of approximately $2.8 million for 2007 and approximately $2.8 million for 2006.
We purchased feature group access and other services from KNOLOGY and its subsidiaries totaling approximately $689,000 for 2007 and approximately $670,000 for 2006.
Transactions With J. Smith Lanier, II and Affiliates. J. Smith Lanier, II was the beneficial owner of more than 5% of our Series A preferred stock until we redeemed and converted such preferred stock on July 31, 2007 in connection with the 2007 refinancing and recapitalization. Mr. Lanier also is the chairman and a significant stockholder of J. Smith Lanier & Co., an insurance placement company. J. Smith Lanier & Co. provides us with insurance brokerage services, including the negotiation and acquisition on our behalf of various insurance policies with third-party insurers. The gross premium for policies obtained by J. Smith Lanier & Co. on our behalf totaled $1.7 million for 2007 and $2.1 million for 2006, and included a payment in each of 2007 and 2006 of $125,000 for risk management services provided by J. Smith Lanier & Co.
We provide retail services, including local and long distance telephone services and data and Internet services, to J. Smith Lanier & Co. Revenues attributable to J. Smith Lanier & Co. for our provision of these services totaled approximately $715,000 for 2007 and approximately $628,000 for 2006.
Transactions With CT Communications, Inc.CT Communications, Inc. was the beneficial owner of more than 5% of our Series A preferred stock until we redeemed and converted such preferred stock on July 31, 2007 in connection with the 2007 refinancing and recapitalization. CT Communications purchases operator services from us. For these services, we billed CT Communications approximately $464,000 for 2007 and approximately $598,000 for 2006.
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Review, Approval or Ratification of Transactions With Related Persons
Two committees of the board of directors are responsible for reviewing and approving our transactions with related persons. All of the transactions described above under “Transactions With Related Persons” were reviewed and approved by the applicable committee by pre-approval or ratification.
Audit Committee.Under its charter, the audit committee has the responsibility for conducting an appropriate review of all transactions with related persons on an ongoing basis and to approve all such transactions. The charter specifies that the transactions subject to review and approval by the audit committee are those that would be required to be disclosed pursuant to Item 404 of the SEC’s Regulation S-K. Accordingly, the audit committee does not review and approve transactions involving the compensation of our executive officers and directors to the extent that such transactions are not required to be disclosed under Item 404. In exercising its authority under the charter, the audit committee generally will approve or ratify a transaction between us and a related person only if it determines that the transaction is on terms that are no less favorable to us than the terms we reasonably could have obtained on an arm’s-length basis with an unrelated person.
In addition to their duties and responsibilities set forth in the committee charter, the audit committee has specified approval rights under our governance agreement. The governance agreement provides that, except as contemplated by the BTI Telecom merger agreement or our certificate of incorporation or bylaws, any transactions between ITC^DeltaCom or any subsidiary of ITC^DeltaCom and the WCAS securityholders or any of their affiliates that are not subject to approval by the committee of independent directors, as described below, generally must be approved by the audit committee, unless the WCAS securityholders and their affiliates have no interest in any such transaction other than as beneficial owners of our common stock and are treated in the same manner as all other holders of the common stock.
Committee of Independent Directors.In accordance with our governance agreement, the board of directors maintains a committee of independent directors, which has the responsibility to approve transactions between us and specified persons who may be deemed to be related persons. See “Election of Directors—Arrangements Relating to the Board of Directors” for information about the director independence standards set forth in the governance agreement for service on the committee. The governance agreement provides that the following transactions must be approved by a determination of the committee:
Ÿ | any “squeeze-out transaction,” as defined in the governance agreement, merger or other business combination between us and any affiliate of the WCAS securityholders; |
Ÿ | except as contemplated by the BTI Telecom merger agreement, the certificate of designation of the Series B preferred stock or the Series B warrant agreement, any issuances of shares of capital stock by ITC^DeltaCom or any subsidiary of ITC^DeltaCom to the WCAS securityholders or any of their affiliates; |
Ÿ | any sale of assets by ITC^DeltaCom or any subsidiary of ITC^DeltaCom to the WCAS securityholders or any of their affiliates; |
Ÿ | any action by the WCAS securityholders or their affiliates to amend our certificate of incorporation or bylaws during the term of the governance agreement in a manner that would modify the rights of the parties under the governance agreement; |
Ÿ | any enforcement or modification, amendment or waiver of any provision of the governance agreement, the BTI Telecom merger agreement or our registration rights agreement with the WCAS securityholders; and |
Ÿ | any acquisition by the WCAS securityholders or their affiliates of our voting securities in excess of limits specified in the governance agreement. |
In exercising its authority under the governance agreement, the committee of independent directors generally will take into account, among other factors that it deems appropriate, whether the transaction between us and the foregoing related persons is on terms that are no less favorable to us than the terms we reasonably could have obtained on an arm’s-length basis with an unrelated person.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. The reporting persons are required by rules of the SEC to furnish us with copies of all Section 16(a) reports they file. Based solely upon a review of Section 16(a) reports furnished to us for 2007 or written representations that no other reports were required, we believe that our Section 16(a) reporting persons complied with all filing requirements for 2007.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BDO Seidman, LLP served as our independent registered public accounting firm for 2006 and 2007 and has been appointed by our audit committee to serve as our independent registered public accounting firm for 2008. Representatives of BDO Seidman are expected to be present at the annual meeting and will be afforded the opportunity to make a statement if they so desire and to respond to appropriate questions.
Fees
The following table sets forth the aggregate fees billed by BDO Seidman to us for services rendered for 2006 and 2007:
2007 | 2006 | |||||
Audit services | $ | 423,975 | $ | 316,635 | ||
Audit-related services | 18,393 | 23,144 | ||||
Tax services | — | — | ||||
All other fees | — | — | ||||
Total | $ | 442,368 | $ | 339,779 | ||
The audit committee of the board of directors considered whether the provision by BDO Seidman of services for the fees identified above under “Audit-related services” was compatible with maintaining the independence of such firm.
Audit Services. Audit services include services performed by BDO Seidman to comply with generally accepted auditing standards related to the audit and review of our financial statements. The audit fees shown above for 2006 and 2007 were incurred principally for services rendered in connection with the audit of our consolidated financial statements and associated filings with the SEC.
Audit-Related Services. Audit-related services include assurance and related services that are traditionally performed by independent registered public accounting firms. The audit-related fees shown above for 2006 and 2007 were incurred in connection with audits of our employee benefit plans and general non-audit accounting consultation concerning financial reporting, disclosure matters and new accounting pronouncements.
Pre-Approval Policy
The audit committee generally pre-approves on an engagement-by-engagement basis all audit and permissible non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Our independent registered public accounting firm and management are required to report periodically to the audit committee regarding the services provided by, and fees payable to, such firm in accordance with this pre-approval.
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REPORT OF THE AUDIT COMMITTEE
During 2007, the audit committee of the board of directors of ITC^DeltaCom, Inc. (“ITC^DeltaCom”) reviewed with ITC^DeltaCom’s management, financial managers, internal auditors, and independent registered public accounting firm, BDO Seidman, LLP (“BDO Seidman”), the scope of the annual audit and audit plans, the results of internal and external audit examinations, the quality of ITC^DeltaCom’s financial reporting and system of internal control, ITC^DeltaCom’s process for legal and regulatory compliance, and the audited financial statements of ITC^DeltaCom for the year ended December 31, 2007 included in ITC^DeltaCom’s annual report on Form 10-K for the year ended December 31, 2007.
Management is responsible for ITC^DeltaCom’s system of internal control, the financial statements and the financial reporting process. BDO Seidman is responsible for expressing an opinion on the conformity of ITC^DeltaCom’s audited financial statements with accounting principles generally accepted in the United States. As provided in its charter, the audit committee’s responsibilities include monitoring and overseeing these processes.
Consistent with this oversight responsibility, BDO Seidman reports directly to the audit committee. The audit committee appointed BDO Seidman as ITC^DeltaCom’s independent registered public accounting firm and approved the firm’s compensation.
The audit committee discussed with BDO Seidman the matters required to be discussed by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, including the American Institute of Certified Public Accountants’ Statement on Auditing Matters No. 61,Communication with Audit Committee, as amended, as adopted by the Public Company Accounting Oversight Board.In addition, the audit committee has received from BDO Seidman the written disclosures and the letter required by Independence Standards Board Standard No. 1,Independence Discussions with Audit Committees, as adopted by the Public Company Accounting Oversight Board, and discussed with BDO Seidman the firm’s independence from ITC^DeltaCom and its management.
Based on the review and discussions referred to above, the audit committee recommended to the board of directors, and the board of directors has approved, the inclusion of the audited financial statements of ITC^DeltaCom for the year ended December 31, 2007 in ITC^DeltaCom’s annual report on Form 10-K for the year ended December 31, 2007, for filing with the Securities and Exchange Commission.
Respectfully submitted, |
Audit Committee |
John J. DeLucca |
Clyde A. Heintzelman |
R. Gerald McCarley |
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STOCKHOLDER PROPOSALS FOR 2009 ANNUAL MEETING
Pursuant to Rule 14a-8 under the Securities Exchange Act, stockholder proposals to be presented at our annual meeting of stockholders in 2009 must be received by our Secretary at our offices at 7037 Old Madison Pike, Huntsville, Alabama 35806 no later than December 16, 2008. The submission by a stockholder of a proposal for inclusion in the proxy statement is subject to regulation by the SEC pursuant to Rule 14a-8 under the Securities Exchange Act.
Under our bylaws, a stockholder wishing to bring business before the stockholders at any meeting of stockholders must comply with specific notice requirements. To be timely, the stockholder’s notice must be delivered to or mailed and received by our Secretary not less than 60 days before the meeting, except that if less than 75 days’ notice or prior public disclosure of the date of the meeting is given or made to the stockholders, notice by the stockholder must be received not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure was made. To be in proper form, a stockholder’s notice to the Secretary must set forth the following information:
Ÿ | the name and address of the stockholder who intends to propose the business and the nature of the business to be proposed; |
Ÿ | a representation that the stockholder is a holder of record of our capital stock entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to introduce the business specified in the notice; and |
Ÿ | such other information regarding each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the SEC’s proxy rules if the matter had been proposed, or intended to be proposed, by the board of directors. |
The foregoing provisions of our bylaws concerning notice of proposals by stockholders are not intended to affect any rights of stockholders to request inclusion of proposals in our proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act.
OTHER MATTERS
The board of directors is not aware of any matters not referred to in the proxy that may be brought before the annual meeting. If any other matter is properly brought before the meeting for action, the persons named in the accompanying proxy will vote on the matter in their own discretion.
By order of the board of directors,
|
Randall E. Curran Chief Executive Officer |
Dated: April 15, 2008
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Please Mark Here for Address Change or Comments
SEE REVERSE SIDE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
1. To elect seven directors
01 John Almeida, Jr. FOR WITHHOLD
02 Philip M. Tseng all nominees listed AUTHORITY except as indicated to vote for all nominees
03 Randall E. Curran
04 John J. DeLucca
05 Clyde A. Heintzelman
06 Michael E. Leitner
07 Thomas E. McInerney
08 R. Gerald McCarley
09 Sanjay Swani
(INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee’s name in the space provided below.)
2. In their discretion, upon such other matters as may properly come before the annual meeting or any adjournment or postponement thereof.
PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
Signature Signature Date
The signature on this Proxy should correspond exactly with stockholder’s name as printed above. In the case of joint tenants, co-executors or co-trustees, both should sign. Persons signing as Attorney, Executor Administrator, Trustee or Guardian should give their full title.
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ITC^DELTACOM, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 13, 2008
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned HOLDER OF COMMON STOCK OF IT C^DELTACOM, INC. (the “Company”) hereby appoints Richard E. Fish, Jr. and J. Thomas Mullis, or either of them, with full power of substitution, as proxies to cast all votes, as designated on the reverse side of this proxy card, which the undersigned is entitled to cast as a holder of Common Stock at the 2008 annual meeting of stockholders of the Company (the “Annual Meeting”) to be held on May 13, 2008 at 11:0 0 a.m., local time, at the Company’s principal executive offices at 7037 Old Madison Pike, Huntsville, Alabama 35806, and at any adjournment or postponement thereof, upon the following matter and any other matters that may properly come before the Annual Meeting or any adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on reverse side)
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