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 March 31, 1999
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 May 14, 1999
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BTI TELECOM CORP.
FORM 10-Q
INDEX
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and March
31, 1999
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1999
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
Index to Exhibits
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BTI TELECOM CORP.
CONSOLIDATED BALANCE SHEETS
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December 31, 1998 March 31, 1999
(In thousands, except share data) (Unaudited)
------------------------ ------------------------
Assets
Current assets:
Cash and cash equivalents $ 12,767 $ 5,253
Restricted cash 27,282 27,781
Accounts receivable, less allowance of $5,271 in 1998 and $5,821 in 1999 25,840 27,628
Accounts and notes receivable from related parties 344 356
Other current assets 1,551 1,764
------------------------ ------------------------
Total current assets 67,784 62,782
Equipment, furniture and fixtures:
Equipment, furniture and fixtures 103,416 114,208
Construction in progress 27,052 39,186
Less: accumulated depreciation (28,508) (31,903)
---------------------- ------------------------
Total equipment, furniture and fixtures 101,960 121,491
Other assets, net 13,929 14,135
Restricted cash, non-current 25,498 12,751
------------------------ ------------------------
Total assets $ 209,171 $ 211,159
======================== ========================
Liabilities and shareholder's deficit
Current liabilities:
Accounts payable $ 46,376 $ 48,533
Accrued expenses 3,461 4,309
Accrued interest 7,772 1,330
Shareholder note payable, current portion 763 514
Other liabilities 4,813 4,495
------------------------ ------------------------
Total current liabilities 63,185 59,181
Long-term debt 254,119 270,282
Other long-term liabilities 1,709 1,618
------------------------ ------------------------
Total liabilities 319,013 331,081
Shareholder's deficit:
Common stock, no par value, authorized 500,000,000 shares, issued and
outstanding 100,000,000 in 1998 and 1999 37 37
Additional paid-in capital 785 797
Accumulated deficit (110,664) (120,756)
------------------------ ------------------------
Total shareholder's deficit (109,842) (119,922)
------------------------ ------------------------
Total liabilities and shareholder's deficit $ 209,171 $ 211,159
======================== ========================
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See accompanying notes to consolidated financial statements.
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BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months
(In thousands, except per share data) Ended March 31,
--------------------------------------------
1998 1999
-------------------- --------------------
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Revenue $ 55,085 $ 56,116
Cost of services 41,108 37,248
-------------------- --------------------
Gross profit 13,977 18,868
Selling, general and administrative expenses 15,580 19,020
Depreciation and amortization 2,254 4,099
-------------------- --------------------
Loss from operations (3,857) (4,251)
Other income (expense):
Interest expense (6,396) (6,632)
Interest income 1,882 791
-------------------- --------------------
Loss before taxes (8,371) (10,092)
Income taxes - -
Net loss $ (8,371) $ (10,092)
==================== ====================
Basic and diluted loss per share $ (0.08) $ (0.10)
==================== ====================
Basic and diluted weighted average shares outstanding 100,000 100,000
==================== ====================
See accompanying notes to consolidated financial statements.
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BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Three Months Ended March 31,
------------------------------------------------
1998 1999
--------------------- ----------------------
Operating Activities:
Net loss $ (8,371) $ (10,092)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,254 4,099
Non-cash compensation related to stock options 12 12
Changes in operating assets & liabilities:
Accounts and notes receivable (5,881) (1,788)
Accounts and notes receivable from related parties 39 (12)
Other assets 338 (275)
Accounts payable and accrued expenses 8,112 3,005
Accrued interest expense (6,052) (6,442)
Other liabilities 334 (409)
--------------------- ----------------------
Net cash used in operating activities (9,215) (11,902)
Investing Activities:
Change in restricted cash 11,403 12,248
Purchases of equipment , furniture and fixtures, net (9,826) (22,927)
Purchase of other assets (102) (847)
--------------------- ----------------------
Net cash provided by (used in) investing activities 1,475 (11,526)
Financing Activities:
Net proceeds from long term borrowings - 16,163
Decrease in shareholder note payable (254) (249)
Increase in deferred financing costs and other assets (135) -
Dividends paid - -
--------------------- ----------------------
Net cash (used in) provided by financing activities (389) 15,914
--------------------- ----------------------
Decrease in cash and cash equivalents (8,129) (7,514)
Cash and cash equivalents at beginning of period 67,009 12,767
--------------------- ----------------------
Cash and cash equivalents at end of period $ 58,880 $ 5,253
===================== ======================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,733 $ 13,539
===================== ======================
See accompanying notes to consolidated financial statements.
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BTI TELECOM CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 (Unaudited)
NOTE 1: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial information includes the accounts of BTI
Telecom Corp. and its wholly owned subsidiaries (the "Company" or "BTITC") after
elimination of intercompany transactions. 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 in accordance with Securities and Exchange Commission
rules and 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, 1998.
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.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use" ("SOP 98-1"),
which requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal-use. The Company adopted the
provisions of SOP 98-1 in its financial statements as of January 1, 1999.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities" ("SOP 98-5"), which requires that costs related to
start-up activities be expensed as incurred. The Company adopted the provisions
of SOP 98-5 in its financial statements as of January 1, 1999. Prior to 1999,
the Company expensed start-up costs and therefore, the adoption of SOP 98-05
will have no impact on the Financial Statements.
EQUIPMENT, FURNITURE AND FIXTURES
During the fourth quarter of 1997, the Company commenced construction on
certain capital projects, including its fiber optic network. Interest costs
associated with the construction of capital assets are capitalized. The total
amount capitalized for the three-month periods ended March 31, 1999 and 1998 was
$0.5 million and $0.3 million, respectively.
Costs associated with the fiber optic network are classified as
"Construction in Progress" in the accompanying consolidated balance sheets. Upon
completion of network segments, these costs will be transferred into service and
depreciated over their useful lives.
<PAGE>
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").
Borrowings under the Facilities are limited to a percentage of eligible accounts
receivable and eligible capital expenditures, respectively, as defined in the
loan agreement. The Facilities are secured by substantially all of the Company's
assets and bear interest, at the Company's option, at either the 30, 60 or 90
day LIBOR rate or the prime rate, plus an applicable margin. This margin varies,
based on the Company's financial position, from 0.00% - 2.25% for borrowings
under the prime rate option and from 1.50% - 3.75% for borrowings under the
LIBOR option. The Company is also required to pay a fee of 0.375% per year on
the unused commitment. As of March 31, 1999, there was a total of $20.3 million
outstanding under the Facilities, in addition to $0.2 million in outstanding
letters of credit. The Facilities contain various financial covenants with which
the Company must comply on a monthly and quarterly basis. As of March 31, 1999,
the Company was in compliance with all such covenants.
<PAGE>
NOTE 3: INCOME TAXES
In connection with the September 1997 Reorganization, the Company
converted from S corporation to C corporation status for federal and state
income tax purposes. As a result, the Company became fully subject to federal
and state income taxes. For the three-month periods ended March 31, 1999 and
1998, the Company generated net losses. The Company has established a valuation
allowance for the net deferred tax assets associated with these net operating
losses. As such, there was no impact on the results from operations for net
operating losses generated during the three-month periods ended March 31, 1999
and 1998. 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.
NOTE 4: RELATED PARTY TRANSACTION
Effective July 15, 1998, the Company purchased a multi-media franchise
from FiberSouth, a company affiliated through common ownership, for $1.5
million, subject to approval by the City of Raleigh. As a result, the Company
has the right to offer multi-media services in Raleigh. This transaction was
approved by the City of Raleigh during the first quarter of 1999.
NOTE 5: COMMITMENTS
During 1997, the Company signed a contract for the indefeasible right to
use certain optical fibers in a communication system. Commitments to purchase
optical fibers under this contract total approximately $50.0 million, $32.5
million of which was fulfilled through March 31, 1999. The remaining commitments
extend through the end of 1999. In addition, the Company has made certain other
commitments for the purchase of equipment in connection with its capital
program.
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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 contained herein, 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. BTI Telecom Corp. and its wholly owned
susidiaries (the "Company" or "BTITC") 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 March 31, 1999 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
Overview
The Company, which began operations in 1984 as Business Telecom, Inc.
("BTI"), is a provider of telecommunications services in the Southeastern United
States. The Company currently offers integrated telecommunications services,
including long distance, local, data, Internet access and other enhanced
services, primarily to small and medium-sized business customers. In addition,
the Company offers wholesale telecommunications services, including switched,
dedicated access, special access and prepaid calling card services, primarily to
telecommunications carriers. The Company also markets high bandwidth services on
its fiber optic network. The Company currently has sales offices in 18 markets
primarily located in the Southeastern United States.
The Company operates long distance switching centers in Atlanta, Dallas,
New York, Orlando and Raleigh. The Company began offering local exchange
services in November 1997. This service has initially been offered primarily on
a resale basis. However, the Company has installed Lucent 5E 2000 local switches
in Raleigh, Charlotte, Greensboro NC, Columbia, Greenville SC, Orlando and
Atlanta. In addition to these local switches, the Company has co-located digital
loop carriers in 45 incumbent local exchange carrier central offices in order to
provide more cost effective local services to its smaller business customers.
These co-locations will also facilitate the Company's future data service
product offerings. As of March 31, the Company had sold over 63,000 access
lines, 57,700 of which were in service. Approximately 15% of these lines in
service were facilities-based. The Company also has two additional local
switches and related digital loop carriers under construction in Wilmington, NC
and Jacksonville, FL.
The company operates a fiber optic network, consisting of leased and owned
transmission capacity, concentrated in the Southeastern United States. During
October 1997, the Company entered into an agreement with Qwest Communications to
lease, through an indefeasible right to use, approximately 3,250 route miles of
fiber optic network from New York to Miami and Atlanta to Nashville. As of March
31, 1999 the Company had over 500 route miles of this network in service and
expects the network to be substantially complete during the third quarter of
1999. In addition to carrying it's own traffic, this network allows the Company
to market fiber capacity to other telecommunication companies. The Company has
also installed six frames relay switches within its network to enhance its
current and future data service offerings.
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUE
Revenue for the first quarter of 1999 was $56.1 million, representing a
$1.0 million or 1.9% increase over the first quarter of 1998. This growth in
revenue was primarily driven by an increase of $5.9 million in integrated
services revenue, partially offset by a $4.9 million decrease in wholesale
services revenue. The increase in integrated services revenue is primarily due
to the increase in local service revenue of $6.3 million from $0.6 million in
the first quarter of 1998 to $6.9 million in the first quarter of 1999. This
increase was partially offset by a decrease of $0.4 million in the Company's
traditional long distance service revenues. This $0.4 million decrease was
brought on by competitive pricing pressure which exceeded the 9% increase in
related minutes of use. The decrease in wholesale revenue during the first
quarter of 1999 as compared to the same period in the prior year is primarily
due to the continuing volume decrease resulting from strategic pricing decisions
made by the Company to ensure that it maintains acceptable wholesale margins. In
addition, wholesale revenue has been impacted by competitive pricing pressures
heightened by the effect of access charge reform and the effects of mergers and
acquisitions within the telecommunications industry.
COST OF SERVICES
Cost of services was $37.2 million and $41.1 million in the first three
months of 1999 and 1998, respectively. As a percentage of revenue, costs of
services decreased from 74.6% in the first quarter of 1998 to 66.4% in the first
quarter of 1999. The decrease in this percentage resulted partially from a shift
in the Company's revenue mix to a higher proportion of integrated services
revenue. In addition, a smaller percentage of the Company's wholesale revenue
was from international traffic, which yields a lower
<PAGE>
margin percentage than domestic wholesale traffic. Improved network efficiencies
and the migrating of certain fixed costs onto the Company's own fiber optic
network have also improved the Company's cost structure. As of March 31, 1999
the Company had deployed approximately 15% of its fiber network currently under
construction by Qwest Communications. Management anticipates that substantially
all of the fiber optic network will be operational by the end of the third
quarter of 1999. In addition, the Company continues to evaluate strategies to
reduce its cost of services and improve the reliability and efficiency of its
network.
Initially, the Company has provided local service to its customers primarily on
a resale basis. Resold service has higher associated costs than service provided
to customers over the Company's own switching facilities. The percentage of
local service access lines provided via the Company's facilities increased from
less than 1% in the first quarter of 1998 to approximately 15% by the end of the
first quarter of 1999. This percentage increase also had a positive impact on
total cost of services. The Company continues to migrate customers from resold
lines to facilities-based services where appropriate, thereby improving gross
margin on these services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $19.0 million or
33.9% of revenue in the first quarter of 1999 as compared to $15.6 million or
28.3% in the same period in 1998. The increase in SG&A both in total amount and
as a percentage of revenue is largely attributable to the increase in the
Company's integrated competitive local exchange carrier ("CLEC") services. These
expenses are incurred prior to the realization of significant revenue from these
services, and therefore have increased the Company's SG&A as a percentage of
revenue. These expenses include significant investments in human resources and
increased marketing and advertising efforts relating to these new 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 1999 and beyond. In addition, the Company is investing resources to
facilitate the deployment of its fiber optic network.
Depreciation and amortization increased $1.8 million from $2.3 million
or 4.1% of revenue in the first quarter of 1998 to $4.1 million or 7.3% of
revenue in the first quarter of 1999. This increase is primarily due to capital
expenditures which are related to the expansion of the Company's operations
centers and support infrastructure to handle increased traffic volume and
expanded service offerings.
OTHER INCOME (EXPENSE)
Interest expense was $6.6 million for the three months ended March 31, 1999
as compared to $6.4 million for the same period in the prior year. This increase
in interest expense is a result of increased borrowings outstanding under the
Facilities (See "-Debt"). Interest income was $0.8 million in the three months
ended March 31, 1999 compared to $1.9 million in the same period in the prior
year. The decrease in interest income follows the reduction in the Company's
cash balances that are available to be reinvested.
<PAGE>
INCOME TAXES
For the three-month periods ended March 31, 1998 and 1999, the Company
generated net losses. 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. Given these
circumstances, the Company has established a valuation allowance for the net
deferred tax assets associated with these net operating losses. As such, there
was no impact on the results from operations for net operating losses generated
during the three-month periods ended March 31, 1998 and 1999. 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.
Throughout the period of time that BTI was an S Corporation, income,
losses and credits were passed through directly to shareholders and the
shareholders were provided, in the form of dividends, 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's EBTTDA losses improved from $1.6
million for the three months ended March 31, 1998 to $0.1 million for the three
months ended March 31, 1999. The EBITDA losses the Company has experienced over
recent quarters is primarily attributable to additional SG&A expenses associated
with its introduction of CLEC services. However, the Company anticipates that it
will generate positive EBITDA in the future as it deploys its fiber network and
increases its facilities-based CLEC service offerings.
LIQUIDITY AND CAPITAL RESOURCES
REVIEW OF CASH FLOW ACTIVITY
The Company has funded its operations and growth primarily from operating
cash flows and borrowings. During the first three months of 1999 the Company
used $11.9
<PAGE>
million for operating activities as compared to the $9.2 million used in the
same period in 1998. The primary driver of this change is the net loss of $10.1
million experienced during the first three months of 1999 compared to the net
loss of $8.4 million in the first quarter of 1998. In addition to this change,
cash used in operating activities was adversely impacted by the net changes in
accounts receivable and accounts payable during the three months ended March 31,
1999.
Cash used for investing activities during the first three months of 1999
was $11.5 million compared to net cash provided by investing activities of $1.5
million in the first three months of 1998. The cash provided by investing
activities in the three months ended March 1998 resulted from the Company's use
of its restricted cash to fund the March 1998 interest obligation on the Senior
Notes. The payment of the interest on the Senior Notes was not completely offset
by capital expenditures of $9.8 million during the period. The primary
investments in the three-month periods both in 1998 and 1999 were capital
expenditures, primarily related to the Company's introduction of the CLEC
services and the deployment of its fiber optic network. In 1999, the payment of
the interest on the Senior Notes was more than offset by capital expenditures of
$22.9 million. The restricted cash balance as of March 31, 1999 includes
proceeds from the Senior Note offering placed in escrow to secure the next three
scheduled interest payments.
Cash provided by financing activities in the first three months of 1999 was
$15.9 million compared to cash used in financing activities of $0.4 million in
the first three months of 1998. During both periods cash used in financing
resulted from payments made on the shareholder note payable. During the
three-month period ended March 31, 1999, the Company received net proceeds of
$16.1 million from borrowings under the Facilities. (See "-Debt")
DEBT
- ----
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 certain restrictions on the
Company's ability to pay dividends. As of March 31, 1999, 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 are limited to a percentage of eligible accounts receivable
and eligible capital expenditures, respectively, as defined in the loan
agreement. Proceeds from the Facilities can be used to fund capital
expenditures, working capital, or other purposes. Borrowings under the
Facilities are secured by substantially all of the Company's assets and 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 margin. This margin
varies based on the Company's financial position from 0.00% - 2.25% for
borrowings under the prime rate option and from 1.50% -3.75% for borrowings
under the LIBOR option. The Company is also required to pay a fee of 0.375% per
<PAGE>
year on the unused commitment. At March 31, 1999, the Company had approximately
$52.0 million available under the Facilities, of which $20.3 million in
borrowings and $0.2 million in letters of credit were outstanding. The
Facilities require the Company's compliance with various financial,
administrative and affirmative covenants. As of March 31, 1999, the Company was
in compliance with all such covenants.
CAPITAL SPENDING
Through March 31, 1999, capital expenditures were $22.9 million as
compared to $9.8 million in the same period in the prior year. Capital
expenditures during the first three months of 1999 included $15.1 million
related to the fiber optic network and $5.4 million in switching and related
equipment primarily for the Company's CLEC operations. The Company currently
has remaining commitments of approximately $18 million on the construction of
its fiber network. The Company continues to experience delays in the delivery
of this network by Qwest Communications, which will impact the timing of these
commitments. Management believes that cash on hand, borrowings expected to be
available under the Facilities and cash flow from operations will be sufficient
to fund these existing commitments. The Company plans to spend approximately
$45 to $59 million in total capital expenditures during 1999, subject to the
aforementioned fiber network construction delays. The Company may need to raise
additional capital to fund these expenditures, the sources of which may include
public and private debt and equity offerings, subject to compliance with its
current debt agreements. In addition, the Company maintains the flexibility in
its business plan to adjust the timing of certain capital expenditures as
necessary.
The Company expects to require significant capital for its future capital
expenditures and working capital requirements. The actual amount and timing of
the Company's capital requirements may differ materially from the foregoing
estimates as a result of regulatory, technological or competitive developments
(including market developments and new opportunities) in the Company's industry.
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 compliance with the Company's
current debt agreements.
YEAR 2000
Beginning in 1996, the Company conducted a thorough review of its
information technology and operating systems and non-information technology
systems, as well as the systems of its major customers, suppliers and third
party network service providers, to ensure that the systems would properly
recognize the Year 2000 and continue to process data. This review also included
the evaluation of internally developed software. As a result of this assessment,
the Company has developed a plan to address the Year 2000 issue ("Year 2000
Plan"). The Year 2000 Plan has strong executive management support and requires
frequent updates to senior management. In addition, a project manager and
significant other programming and operational staff are dedicated to the Year
2000 Plan's implementation. The Year 2000 Plan includes the wide-ranging
assessment of the Year 2000 problems that may affect the Company, the
development of remedies to address the problems discovered in the assessment
phase, testing of the remedies and the preparation of contingency plans.
Implementation of the Plan began in 1997 and will continue through 1999.
The Company has completed the evaluation phase for its systems and is in the
remediation and testing phases of the Year 2000 Plan. The Company anticipates
that all major business-critical systems will be tested and Year 2000 compliant
by June 30, 1999. In that regard, the Company has received assurances or has
secured contractual stipulations from certain significant vendors that their
systems are either already Year 2000 compliant or will be by June 30, 1999.
These vendors include the Company's major suppliers of switching equipment,
fiber optic electronics, and billing and customer care systems. The Company
believes that these systems represent its most critical business systems. All
other systems are targeted for compliance by the end of the third quarter 1999.
The Company is currently testing the systems and applications that have been
corrected or reprogrammed.
<PAGE>
As part of the Year 2000 Plan, the Company continues to seek information
from many of its other significant hardware, software and other equipment
vendors, third party network providers, other material service providers and
material customers regarding their development and implementation of plans to
become Year 2000 compliant. Responses from the Company's vendors, service
providers and customers have indicated that such respondents are in the process
of implementing remediation procedures to ensure that their computer systems
will be Year 2000 compliant by December 31, 1999.
The Company has substantially completed development of initial contingency
plans to deal with potential Year 2000 related business interruptions that may
occur. These initial contingency plans are designed to address worst-case
scenarios. Models of such worst-case scenarios have been developed based upon
the responses of the Company's vendors, service providers and customers to the
Company's requests for Year 2000 compliance information.
Through March 31, 1999, the Company had spent approximately $0.8 million on
Year 2000 projects and activities. The estimated total cost for Year 2000
projects and activities is $2.0 million, excluding capital expenditures. Most of
these capital expenditures, which include both equipment and software, will not
only provide for Year 2000 compliance, but also will otherwise enhance the
Company's operations. In most cases, the expenditures for system modifications
will be merely an acceleration of previously planned improvements. Year 2000
project costs are being funded through operations and existing credit facilities
and are not expected to have a material effect on the Company's financial
condition or results from operations.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, it is not possible to
anticipate all possible future outcomes, especially when third parties are
involved. Failure by the Company and/or its major vendors, third party network
service providers and other material service providers and customers to
adequately address their respective Year 2000 issues in a timely manner could
have a material adverse effect on the Company's business, results of operations
and financial condition.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company does
not expect any significant additional disclosure requirements or other financial
statement impacts to result from the adoption of the statement.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use" ("SOP 98-1"),
which requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal-use. The Company adopted the
provisions of SOP 98-1 in its financial statements as of January 1, 1999.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities" ("SOP 98-5"), which requires that costs related to
start-up activities be expensed as incurred. The Company adopted the provisions
of SOP 98-5 in its financial statements as of January 1, 1999. Prior to 1999,
the Company expensed start-up costs and therefore, the adoption of SOP 98-05
will have no impact on the Financial Statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The majority of the Company's debt, which consists of $250 million of the 10
1/2% Notes, bears interest at a fixed rate. Although the actual service
requirements of this debt are fixed, changes in interest rates generally could
put the Company in a position of paying interest that differs from then existing
market rates. The remainder of the Company's debt consists of the Facilities,
which bear interest at variable rates based upon market conditions and the
financial position of the Company. As of March 31, 1999, borrowings under this
facility were $20.3 million. Management believes that this debt does not
currently create a significant amount of interest rate risk, and as such has not
engaged in any related hedging transactions. However, as market conditions and
outstanding borrowings under this debt change, management intends to continue to
evaluate the Company's risk, and it may enter hedging transactions if conditions
warrant.
<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: May 17, 1999
By: /s/ Brian Branson
------------------
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> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 45,785
<SECURITIES> 0
<RECEIVABLES> 33,449
<ALLOWANCES> 5,821
<INVENTORY> 0
<CURRENT-ASSETS> 62,782
<PP&E> 121,491
<DEPRECIATION> 31,903
<TOTAL-ASSETS> 211,159
<CURRENT-LIABILITIES> 59,181
<BONDS> 270,282
0
0
<COMMON> 37
<OTHER-SE> (119,959)
<TOTAL-LIABILITY-AND-EQUITY> 211,159
<SALES> 0
<TOTAL-REVENUES> 56,907
<CGS> 0
<TOTAL-COSTS> 37,248
<OTHER-EXPENSES> 23,119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,632
<INCOME-PRETAX> (10,092)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,092)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
