FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
From the transition period from ________ to ________
Commission file number 333-41723
BTI Telecom Corp.
(Exact name of registrant as specified in its charter)
North Carolina 56-2047220
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4300 Six Forks Road, Suite 500, Raleigh, North Carolina 27609
(Address of principal executive offices) (Zip Code)
(800)849-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No_____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
No Par Value Common Stock 100,000,000 shares as of August 14, 1998
<PAGE>
BTI Telecom Corp.
Form 10-Q
Index
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three
months ended and for the six months ended June 30, 1998
and June 30, 1997 3
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 4
Consolidated Statements of Cash Flows for the three
months ended and for the six months ended June 30, 1998
and June 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Index to Exhibits 18
<PAGE>
BTI Telecom Corp.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
(In thousands, except per share data) Ended June 30, Ended June 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 50,721 $ 47,675 $ 105,806 $ 94,447
Cost of services 36,740 32,849 77,848 65,227
--------- --------- --------- ---------
Gross profit 13,981 14,826 27,958 29,220
Selling, general and
administrative expenses 16,524 12,077 32,104 24,071
Depreciation and amortization 2,395 1,500 4,649 3,090
--------- --------- --------- ---------
Income (loss) from operations (4,938) 1,249 (8,795) 2,059
Other income (expense):
Interest expense (6,355) (408) (12,751) (913)
Interest income 1,587 26 3,469 26
--------- --------- --------- ---------
Income (loss) before income taxes (9,706) 867 (18,077) 1,172
Income taxes -- -- -- --
Net income (loss) $ (9,706) $ 867 $ (18,077) $ 1,172
========= ========= ========= =========
Basic and diluted earnings (loss) per share $ (0.10) $ 0.00 $ (0.18) $ 0.01
========= ========= ========= =========
Weighted average shares outstanding 100,000 200,000 100,000 200,000
========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
BTI Telecom Corp.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, 1998 December 31,
(Unaudited) 1997
------------ -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 44,067 $ 67,009
Restricted cash 25,084 25,016
Accounts receivable, less allowance of $5,259
and $4,825, respectively 27,548 22,710
Other current assets 4,259 2,296
--------- ---------
Total current assets 100,958 117,031
Equipment, furniture and fixtures:
Equipment, furniture and fixtures 73,993 53,744
Construction in progress 17,683 10,154
Less: accumulated depreciation (23,607) (19,321)
--------- ---------
Total equipment, furniture and fixtures 68,069 44,577
Other assets, net 12,293 11,916
Restricted cash, non-current 37,047 50,026
--------- ---------
Total assets $ 218,367 $ 223,550
========= =========
Liabilities and shareholder's deficit:
Current liabilities:
Accounts payable and accrued expenses $ 44,423 $ 30,055
Accrued interest 7,743 7,232
Other liabilities 3,295 2,902
--------- ---------
Total current liabilities 55,461 40,189
Long-term debt 250,000 250,000
Other long-term liabilities 2,005 2,935
--------- ---------
Total liabilities 307,466 293,124
Shareholder's deficit:
Common stock, no par value, authorized 37 37
500,000,000 shares, issued and outstanding
100,000,000 in 1998 and 200,000,000 in 1997
Additional paid-in capital 762 738
Accumulated deficit (89,898) (70,349)
--------- ---------
Total shareholder's deficit (89,099) (69,574)
--------- ---------
Total liabilities & shareholder's deficit $ 218,367 $ 223,550
========= =========
</TABLE>
See accompanying notes.
<PAGE>
BTI Telecom Corp.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months
(In thousands) Ended June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(18,077) $ 1,172
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 4,649 3,090
Non-cash compensation related to stock options 24 --
Deferred interest expense on shareholder note -- (15)
Changes in operating assets and liabilities:
Accounts receivable, net (4,838) (1,459)
Other assets (390) (161)
Accounts payable and accrued expenses 15,193 2,349
Accrued interest (1,333) 13
Other liabilities (24) (94)
-------- --------
Net cash (used in) provided by operating activities (4,796) 4,895
INVESTING ACTIVITIES:
Change in restricted cash 12,911 (749)
Purchases of equipment, furniture and fixtures, net (27,518) (4,472)
Line access fees (226) (410)
Settlement of stock and option repurchase obligations (2,300) --
-------- --------
Net cash used in investing activities (17,133) (5,631)
FINANCING ACTIVITIES:
Net proceeds of long-term debt -- 2,360
Decrease in other long-term liabilities (513) (338)
Increase in deferred financing costs and other assets (500) --
Dividends paid -- (1,125)
-------- --------
Net cash (used in) provided by financing activities (1,013) 897
-------- --------
(Decrease) increase in cash and cash equivalents (22,942) 161
Cash and cash equivalents at beginning of period 67,009 504
-------- --------
Cash and cash equivalents at end of period $ 44,067 $ 665
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,895 $ 901
======== ========
Supplemental schedule of non-cash investing and financing activities:
Transfer of paging equipment from inventory $ 273 $ 134
======== ========
</TABLE>
See accompanying notes.
<PAGE>
Note 1: The Company and Significant Accounting Policies
Basis of Presentation
The "Company" refers to BTI Telecom Corp. ("BTITC") and its wholly owned
subsidiary, Business Telecom, Inc. ("BTI"). The consolidated interim financial
statements of BTITC included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. The results for any interim
period are not necessarily indicative of the results for any other period. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment, Furniture and Fixtures
During the fourth quarter of 1997, the Company commenced construction on
certain capital projects, including its longhaul fiber optic network. Interest
costs associated with the construction of capital assets are capitalized. The
total amount capitalized for the three and six month periods ended June 30, 1998
was $0.4 million and $0.7 million, respectively. Interest costs were not
capitalized in prior periods because the amounts were not material to the
Company's results of operations, cash flows or financial position.
Costs associated with the longhaul fiber optic network are classified as
"Construction in Progress" in the accompanying consolidated balance sheets. Upon
completion of network segments, the associated costs will be transferred into
service and depreciated over their useful lives.
Note 2: Long-Term Debt
Effective June 30, 1998, the Company amended and restated its $60.0 million
revolving credit facility to provide a $30.0 million revolving credit facility
and a $30.0 million capital expenditure facility (the "Facilities"). The
Facilities are secured by substantially all of the Company's assets and bear
interest, at the Company's option, at
<PAGE>
either the 30, 60 or 90 day LIBOR rate or the prime rate, plus an applicable
margin which varies based on the Company's financial position. The Company is
also required to pay a fee of 0.375% per annum on the unused commitment. As of
June 30, 1998, there were no amounts outstanding under the Facilities. The
Facilities contain various financial covenants with which the Company must
comply on a quarterly basis. As of June 30, 1998, the Company was in compliance
with all such covenants.
Note 3: New Accounting Pronouncement
As of January 1, 1998, the Company implemented Financial Accounting
Standards Board ("FASB") Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or shareholder's
equity. SFAS 130 requires unrealized gains or losses on available-for-sale
securities, which prior to adoption were reported separately in shareholder's
equity, to be included in comprehensive income. There are no material
differences between net income and comprehensive income as defined by SFAS 130
for the periods presented.
The FASB has issued SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), effective for financial statements for
fiscal years beginning after December 15, 1997. This statement requires that
public companies report certain information about operating segments in complete
sets of financial statements of the company and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public companies report certain information about their products and services,
the geographic areas in which they operate, and their major customers. In the
initial year of application, comparative information for earlier years is to be
restated. The Company is currently evaluating the additional disclosure
requirements, if any, that will result from the adoption of SFAS 131.
Note 4: Commitments and Contingencies
During 1997, the Company signed a contract for the irrevocable right to use
certain optical fibers in a communication system. Commitments under this
contract will total approximately $50.0 million over the next 18 month period,
$16.7 million of which was fulfilled through June 30, 1998. Payments under the
agreement have been capitalized and are included in the "Construction in
Progress" caption in the consolidated balance sheets. In addition, certain other
commitments have been made for the purchase of equipment in connection with the
Company's capital program.
<PAGE>
Note 5: Shareholder's Equity
Stock Split - In April 1998, the Board of Directors and the sole
shareholder of the Company approved and the Company effected a 10-for-1 split of
the outstanding Common Stock of the Company in the form of a stock dividend with
no change in the par value of Common Stock authorized and outstanding, and
increased the number of shares of common stock authorized from 100 million to
500 million. Historical share and per share data have been retroactively
adjusted to reflect these changes.
Stock Option Repurchase- In 1994, the Company entered into agreements with
certain former employees to repurchase stock options that had been granted under
the Company's 1994 Stock Plan. The measurement date for compensation relating to
the stock options did not occur until September 1997, at which time an estimate
for this liability was recorded. In addition, the Company assumed certain stock
repurchase obligations in connection with its acquisition of the fiber optic
assets of FiberSouth, Inc. ("FiberSouth") in 1997. In May 1998, the Company
satisfied these obligations to a former employee in accordance with the
repurchase agreements. As a result of this transaction, the Company recorded a
$1.5 million adjustment to equity in the second quarter of 1998 which decreased
equity by the difference between the estimated liability and the actual
settlement amount. This adjustment represents a reallocation of the original
FiberSouth purchase price.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The matters discussed throughout this Form 10-Q, except for historical
facts, may be forward-looking in nature, or "forward-looking
statements." Actual results may differ materially from the forecasts or
projections presented. Forward-looking statements are identified by such words
as "expects," "anticipates," "believes," "intends," "plans" and variations of
such words and similar expressions. The Company believes that its primary risk
factors include but are not limited to: high leverage; the ability to service
debt; significant capital requirements; ability to manage growth; business
development and expansion risks; competition; and changes in laws and regulatory
policies. Any forward-looking statements in the June 30, 1998 Form 10-Q should
be evaluated in light of these important risk factors. For additional disclosure
regarding risk factors refer to the Company's Registration Statement on Form S-4
as filed with the Securities and Exchange Commission (File No. 333-41723).
Business of the Company
The Company ("BTITC"), which began operations in 1984 as Business Telecom,
Inc. ("BTI"), provides integrated telecommunications services to approximately
60,000 customers, primarily small-to-medium sized business customers,
concentrated in the southeastern United States. During 1997, BTI was reorganized
into a new corporate structure comprised of BTI Telecom Corp. as the parent
company and Business Telecom, Inc. as a wholly owned subsidiary. The Company
provides a broad array of services, including local, long distance, Internet
access, frame relay, high-speed data transmission, data network management and
paging.
Results of Operations
Revenue
Revenue for the second quarter of 1998 and on a year-to-date basis was
$50.7 million and $105.8 million, respectively, representing increases of 6.4%
and 12.0%, respectively, as compared to the same periods in 1997. The increase
in revenue of $3.0 million during the three months ended June 30, 1998 as
compared to the same period in 1997 is attributable to a $2.7 million increase
in integrated services revenue and a $1.9 million increase in revenue from local
services, partially offset by a decrease in wholesale revenue of $1.6 million.
The increase in integrated services revenue includes $1.6 million from the
business of FiberSouth, Inc. ("FiberSouth"), the fiber optic assets of which
were acquired by BTITC in September 1997. Also contributing to the overall
growth in integrated services revenue was the impact of certain changes in
access charges during 1998 that have been reflected in customer billings, as
well as continued improvement in new integrated services sales. For the three
months ended June 30, 1998 and 1997, wholesale revenue represented 35.3% and
40.9%, respectively, of total revenue. The decrease in wholesale revenue during
the second quarter of 1998 as
<PAGE>
compared to the same period in the prior year is primarily due to competitive
pricing pressures heightened by the effect of access charge reform.
On a year-to-date basis, the $11.4 million increase in revenue as compared
to the same period in 1997 was primarily driven by the Company's wholesale
business. Wholesale revenue increased $6.3 million in the six months ended June
30, 1998 as compared to 1997, comprising 40.4% and 38.5% of total revenue in
1998 and 1997, respectively. Also contributing to the increase was $3.2 million
in revenue from the previously discussed acquisition of FiberSouth assets. In
addition, the Company recognized revenue of $2.5 million from local services for
the six month period ended June 30, 1998. These increases in revenue were
partially offset by a decline in integrated services revenue on a year-to-date
basis, due primarily to retail long distance rate decreases and increasing
competitive pressures.
Cost of Services
Cost of services represented 72.4% and 73.6% of revenue for the three and
six month periods ended June 30, 1998, respectively, as compared to 68.9% and
69.1%, respectively, for the same periods in 1997. The higher cost of services
percentage for the six month period ended June 30, 1998 as compared to the same
period in the prior year reflects the changes in the Company's revenue mix to a
higher proportion of wholesale traffic. In addition, a larger percentage of the
Company's wholesale revenue was from international traffic, which yields a lower
margin percentage than domestic wholesale traffic. For the three month period
ended June 30, 1998 as compared to the same period in the prior year, the higher
cost of services percentage is driven by the previously discussed effects of
competitive pricing and access charge reform. The effect of spreading fixed
network costs over a smaller integrated services revenue base also contributed
to the increase in cost of services as a percentage of revenue in 1998. In
addition, the introduction of Competitive Local Exchange Carrier ("CLEC")
services contributed to lower gross margins as these services are initially
being offered primarily on a resale basis. However, as the Company completes the
installation of its local switches, a significant portion of this service will
be provided via company owned facilities, which will have the effect of reducing
costs of services for this product offering.
Costs of services has also been adversely impacted by regulatory matters,
including increased costs related to the public payphone compensation order. A
Federal Communications Commission ("FCC") ruling established, effective October
1997, a "per call compensation plan" that provides payphone service providers
with compensation for calls completed using their payphones. During the first
quarter of 1998, the Company began assessing a surcharge to these payphone users
in order to recover the amount of compensation and related costs ordered by the
FCC.
Construction of the longhaul fiber optic network and the continuing effect
of access charge reform is expected to reduce the Company's network costs in the
future. Management anticipates that its longhaul fiber optic network will be
substantially operational by mid-1999.
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses in the second quarter
of 1998 were $16.5 million, or 32.6% of revenue as compared to $12.1 million, or
25.3% of revenue in the same period in 1997. On a year-to-date basis, SG&A
expenses were $32.1 million, or 30.3% of revenue in 1998 as compared $24.1
million, or 25.5% of revenue in 1997. The increase in SG&A expenses during 1998
is largely attributable to the significant investments in human resources and
increased marketing and advertising efforts associated with the introduction of
the Company's CLEC services. These investments are intended to provide the
Company with the ability to continue to expand into new markets, maximize
customer retention and provide for growth in 1998 and beyond. In addition, the
Company is expending resources to facilitate the deployment of its fiber optic
network.
Depreciation and amortization was $2.4 million and $4.6 million in the
three and six months ending June 30, 1998, respectively, representing increases
of 59.7% and 50.5%, respectively, over the same periods in the prior year. The
increase in depreciation and amortization is primarily due to capital
expenditures related to the expansion of the Company's existing operations
centers and support infrastructure to accommodate increased traffic volume and
expanded service offerings.
Other Income (Expense)
Interest expense was $6.4 million in the three months ended June 30, 1998
as compared to $0.4 million in the same period in the prior year. On a
year-to-date basis, interest expense was $12.8 million and $0.9 million in 1998
and 1997, respectively. The increase in interest expense during 1998 is
primarily attributable to the Company's issuance in September 1997 of $250.0
million 10 1/2% Senior Notes due in 2007 (the "Senior Notes") to finance capital
expenditures and the Company's introduction of CLEC services.
Interest income increased to $1.6 million and $3.5 million in the three and
six months ended June 30, 1998, respectively, due to the investment of a portion
of the proceeds of the September 1997 Senior Note offering.
Income Taxes
The Company generated a net loss for the year ended December 31, 1997 and
during the three and six month periods ended June 30, 1998. Based upon
management's plans to expand the business through the construction and expansion
of its networks, customer base and product offerings, this trend is expected to
continue for the foreseeable future. Given these circumstances and the level of
taxable income expected to be generated from reversing temporary differences,
the Company has established a
<PAGE>
valuation allowance for the deferred tax assets associated with these net
operating losses. The Company will reduce the valuation allowance when, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax assets will be realized.
Prior to the Company's reorganization during 1997, BTI elected to be taxed
for federal and state income tax purposes as an S Corporation under the
provisions of the Internal Revenue Code. Accordingly, income, losses and credits
were passed through directly to the shareholders rather than being taxed at the
corporate level. Throughout the period of time that BTI was an S Corporation,
shareholders were provided, in the form of dividends, with the funds necessary
to meet tax obligations arising from income earned by BTI. The Company will
continue to reimburse shareholders for any tax obligations arising from the
income earned by BTI while it was an S Corporation. The Company believes that
any such reimbursements will not have a material effect on the Company's
financial condition or results of operations.
EBITDA
Earnings before interest, taxes, depreciation and amortization and other
non-cash charges (EBITDA) is a common measurement of a company's ability to
generate cash flow from operations. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to cash
flows as a measure of liquidity. The Company experienced negative EBITDA of $2.5
million and $4.1 million for the three and six month periods ended June 30,
1998, respectively, and positive EBITDA of $2.7 million and $5.1 million for the
three and six month periods ended June 30, 1997, respectively. The Company
expects to generate negative EBITDA in the remainder of 1998 as it expands its
CLEC offerings and deploys its fiber optic network. The decrease in EBITDA
experienced by the Company throughout 1998 is primarily attributable to the
increase in cost of services resulting from the change in revenue composition
and additional SG&A associated with the Company's introduction of CLEC services.
Liquidity and Capital Resources
The Company has funded its operations and growth primarily from operating
cash flows and borrowings. During the first six months of 1998 the Company used
$4.8 million for operating activities as compared to generating $4.9 million of
cash from operations during the same period in 1997. The primary driver of this
change is the net loss of $18.1 million experienced during the first six months
of 1998, of which $12.8 million is attributable to interest expense related to
the issuance of the Senior Notes.
<PAGE>
Cash used for investing activities during the first six months of 1998 and
1997 amounted to $17.1 million and $5.6 million, respectively. The primary
investment for both periods was capital expenditures. The increase in net
capital expenditures from $4.5 million in the first six months of 1997 to $27.5
million in the first six months of 1998 was primarily due to the deployment of
the longhaul fiber optic network and purchases of equipment for the development
of the Company's facilities-based local service business. Cash used for
investing activities also includes the capitalization of line access fees, which
represent installation charges paid primarily to the incumbent local exchange
carriers ("ILECs") for securing additional leased fiber optic facilities. In May
1998, the Company satisfied stock and option repurchase obligations which arose
as a result of the assumption of stock repurchase obligations in connection with
the September 1997 acquisition of the fiber optic assets of FiberSouth and as a
result of the 1994 Stock Plan. The Company settled these obligations with a $2.3
million cash payment. The difference between the liability estimated for the
stock repurchase obligation that was recorded in conjunction with the FiberSouth
acquisition and the actual settlement amount is reflected as an adjustment to
equity and represents a reallocation of the original FiberSouth purchase price.
Cash used for investments was offset in part by the provision of $12.9 million
of cash from the restricted cash accounts. This results from the Company's
utilization of its restricted cash to fund the March 1998 interest obligation on
the Senior Notes. The restricted cash balance as of June 30, 1998 includes
proceeds from the Senior Note offering placed in escrow to secure the next five
scheduled interest payments.
Cash used for financing was $1.0 million for the first six months of 1998
due to payments made on the note payable to a shareholder and certain
capitalized costs associated with financing. During the first six months of
1997, financing activities provided the Company with $0.9 million of cash,
primarily as a result of net borrowings on long-term credit facilities. The
dividends paid during the first six months of 1997 were in accordance with the
terms of a shareholders' agreement that terminated in September 1997 in
conjunction with the Company's reorganization. A portion of the dividends paid
during 1997 was to provide funds for tax obligations owed by BTI's shareholders
as a result of net income during the period in which BTI was an S Corporation
for income tax purposes.
In September 1997, the Company issued $250.0 million 10 1/2% Senior Notes
due 2007. The Indenture governing the Senior Notes requires the Company to
comply with certain financial covenants, including restrictions on the Company's
ability to pay dividends. As of June 30, 1998, the Company was in compliance
with all such covenants.
Effective June 30, 1998, the Company amended and restated its $60.0 million
revolving credit facility to provide a $30.0 million revolving credit facility
and a $30.0 million capital expenditure facility (the "Facilities"). Borrowings
under the Facilities bear interest at the Company's option, at the 30, 60 or 90
day London Interbank Offered Rate ("LIBOR") or prime rate, plus an applicable
spread which varies based upon the Company's financial position. At June 30,
1998, no amounts were outstanding under the Facilities. The Company settled
these obligations with a $2.3 million cash payment.
<PAGE>
The Facilities require the Company's compliance with various financial,
administrative and affirmative covenants. As of June 30, 1998, the Company was
in compliance with these covenants.
During the second quarter of 1998, Moody's adjusted the Company's long-term
credit rating from B2 to B3, citing concern that integrated services revenue and
operating cashflow are unlikely to grow as rapidly as Moody's had initially
expected when the Company's $250.0 million Senior Notes were originally rated.
Moody's indicated that the trend in operating results has the effect of
weakening BTI's anticipated debt protection measurements for the intermediate
term. However, Moody's indicated that the Company's strategy to improve
operating margins and cash flow through the migration of its long distance and
local traffic over more of its own switches and network facilities continues to
be a sound business plan. Moody's also affirmed the Company's rating of B1 on
the $60.0 million secured credit facility.
Capital Spending
Through June 30, 1998, capital expenditures were approximately $28.0
million as compared to $4.9 million in the prior year. Capital expenditures
during the first six months of 1998 included $10.5 million related to the
longhaul fiber optic network and $13.9 million in switching and related
equipment primarily for the Company's CLEC operations. The Company expects to
require significant capital for its future capital expenditures and working
capital requirements. The Company plans to spend a total of approximately $200
million (with respect to which it has commitments for $50 million) on its
capital program over the period 1998 through 2002. A substantial portion of
these planned capital expenditures will be related to the longhaul fiber optic
network and purchases of switches and related equipment to facilitate the
offering of local services. The actual amount and timing of the Company's
capital requirements may differ materially from the foregoing estimate as a
result of regulatory, technological or competitive developments (including
market developments and new opportunities) in the Company's industry. Although
there can be no assurance, management believes that cash on hand, borrowings
expected to be available under the Facilities and cash flow from operations will
be sufficient to expand the Company's business as currently planned for the next
12 months. The Company also may require additional capital in the future (or
sooner than currently anticipated) for new business activities related to its
current and planned businesses, or in the event it decides to make additional
acquisitions or enter into joint ventures and strategic alliances. Sources of
additional capital may include cash flow from operations and public and private
debt and equity offerings, which would be subject to provisions in the Indenture
requiring the Company to maintain certain financial ratios in order to incur
additional indebtedness.
<PAGE>
Year 2000 Issues
The Company has developed a plan designed to ensure that its key computer
systems will be Year 2000 compliant in advance of December 31, 1999. The plan
includes review and revision, where necessary, of computer applications that
directly connect elements of the Company's business with customers, major
suppliers and third party network service providers. Any failure by such vendors
or third party network service providers to resolve Year 2000 issues on a timely
basis, or in a manner that is compatible with the Company's systems, could have
a material adverse effect on the Company.
Implementation of the plan began in 1997 and will continue through 1999. It
involves capital expenditures for new software and hardware and modification of
existing software. In most cases these modifications will not only provide for
Year 2000 compliance, but will also otherwise enhance the Company's operations.
In many cases, these changes will merely be an acceleration of previously
planned improvements.
Based upon its initial evaluation, the Company does not expect it will
encounter Year 2000 systems problems or compliance costs that could materially
impact operations or financial results. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of changes as the program progresses. Failure to implement such
changes could have an adverse effect on future results of operations.
New Accounting Standards
As of January 1, 1998, the Company implemented Financial Accounting
Standards Board ("FASB") Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or shareholder's
equity. SFAS 130 requires unrealized gains or losses on available-for-sale
securities, which prior to adoption were reported separately in shareholder's
equity, to be included in comprehensive income. There are no material
differences between net income and comprehensive income as defined by SFAS 130
for the periods presented.
The FASB has issued Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information," effective for financial
statements for periods beginning after December 15, 1997. This statement
requires that public companies report certain information about operating
segments in complete sets of financial statements of the company and in
condensed financial statements of interim periods issued to shareholders. It
also requires that public companies report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. In the initial year of application, comparative information for
earlier years is to be restated. The Company is currently evaluating the
<PAGE>
additional disclosure requirements, if any, that will result from the adoption
of SFAS 131.
<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K filed during the quarter: None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BTI Telecom Corp.
----------------------------------------
(Registrant)
Dated: August 14, 1998
By:
------------------------------
Brian Branson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 44,067
<SECURITIES> 0
<RECEIVABLES> 32,807
<ALLOWANCES> 5,259
<INVENTORY> 24
<CURRENT-ASSETS> 100,958
<PP&E> 91,676
<DEPRECIATION> (23,607)
<TOTAL-ASSETS> 218,367
<CURRENT-LIABILITIES> 55,461
<BONDS> 250,000
0
0
<COMMON> 37
<OTHER-SE> (89,136)
<TOTAL-LIABILITY-AND-EQUITY> 218,367
<SALES> 0
<TOTAL-REVENUES> 105,806
<CGS> 0
<TOTAL-COSTS> 114,601
<OTHER-EXPENSES> (3,469)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,751
<INCOME-PRETAX> (18,077)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,077)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,077)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
