As filed with the Securities and Exchange Commission on July 16, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BTI Telecom Corp.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
North Carolina 4813 56-2047220
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
BTI Corporate Center
4300 Six Forks Road
Raleigh, North Carolina 27609
(800) 849-9100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Peter T. Loftin
Chairman and Chief Executive Officer
Anthony M. Copeland
Executive Vice President and General Counsel
BTI Telecom Corp.
BTI Corporate Center
4300 Six Forks Road
Raleigh, North Carolina 27609
(800) 849-9100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Please send copies to:
Larry E. Robbins, Esq. Andrew R. Schleider, Esq.
Donald R. Reynolds, Esq. Shearman & Sterling
Wyrick Robbins Yates & Ponton LLP 599 Lexington Avenue
4101 Lake Boone Trail, Suite 300 New York, New York 10022
Raleigh, North Carolina 27607 (212) 848-4000
(919) 781-4000 Fax (212) 848-7179
Fax (919) 781-4865
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of these securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
of the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
of the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price (2) Registration Fee
Common Stock, no par value (1) ......... $125,000,000 $34,750
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(1) In accordance with Rule 457(o) under the Securities Act of 1933, as
amended, the number of shares being registered and the proposed maximum
offering price per share are not included in this table.
(2) Estimated solely for purposes of calculating the registration fee.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, nor are we soliciting offers to buy these
securities, in any state where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued July 16, 1999
SHARES
[BTI LOGO APPEARS HERE]
BTI Telecom Corp.
COMMON STOCK
----------------
BTI Telecom Corp. is offering shares of its common stock. This is our
initial public offering of common stock and no public market currently exists
for our shares. We anticipate that the initial public offering price will be
between $ and $ per share.
----------------
Application has been made for quotation of our common stock on the Nasdaq
National Market under the symbol "BTIX."
----------------
Investing in the common stock involves risks. See "Risk Factors" beginning
on page 9.
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PRICE $ A SHARE
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions BTI Telecom Corp.
---------- --------------- ------------------
<S> <C> <C> <C>
Per Share ......... $ $ $
Total ............. $ $ $
</TABLE>
BTI Telecom Corp. has granted the U.S. underwriters the right to purchase
up to an additional shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to
purchasers on , 1999.
----------------
Joint Book-Running Managers
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY
----------------
BANC OF AMERICA SECURITIES LLC BEAR, STEARNS & CO. INC.
, 1999
<PAGE>
Fiber Network &
Sales Offices
[Map of southeastern United States, showing facilities listed in key.]
[key]
Sales Office (Existing)
Sales Office (Planned)
In Service
Under Construction
3rd Q '99 / 4th Q '99
Planned 2000
Fiber POP Sites
[Logo]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary .......................... 4
Risk Factors ................................ 9
Forward-Looking Statements .................. 19
Use of Proceeds ............................. 20
Dividend Policy ............................. 20
Capitalization .............................. 21
Dilution .................................... 22
Selected Financial
Data .................................... 23
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ............... 25
Business .................................... 38
</TABLE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Management .................................. 61
Certain Transactions ........................ 68
Principal Shareholders ...................... 69
Description of Capital Stock ................ 70
United States Federal Tax Consequences
to Non-U.S. Holders of Common Stock...... 73
Shares Eligible for Future Sale ............. 77
Underwriters ................................ 78
Legal Matters ............................... 82
Experts ..................................... 82
Where You Can Find More Information ......... 82
Index to Consolidated Financial
Statements .............................. F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, "BTI Telecom," "we," "us" and "our" refer to BTI Telecom Corp. and
its subsidiaries, including Business Telecom, Inc. ("BTI"), unless the context
indicates otherwise.
We have not taken any action to permit a public offering of the shares of
common stock outside the United States or to permit the possession or
distribution of this prospectus outside the United States. Persons outside the
United States who come into possession of this prospectus must inform
themselves about and observe any restrictions relating to the offering of the
shares of common stock and the distribution of this prospectus outside of the
United States.
Unless otherwise specifically stated, the information throughout this
prospectus does not take into account the possible issuance of additional
shares of common stock to the U.S. underwriters pursuant to their rights to
purchase additional shares to cover over-allotments.
Our logo and certain titles and logos of our services mentioned in this
prospectus are our trademarks. Each trademark, trade name or service mark of
any other company appearing in this prospectus belongs to its holder.
This prospectus includes statistical data, including FCC, U.S. Department
of Commerce, Woods & Poole Economics, Inc., International Data Corporation and
Forrester Research data, concerning the telecommunications industry. Although
we believe that these sources are reliable, we have not independently verified
their data.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and our consolidated financial statements appearing elsewhere in
this prospectus before you decide to purchase our common stock.
BTI Telecom
We are a leading facilities-based integrated communications provider, or
ICP, in the southeastern United States. Since we began operations in 1983 as a
long distance provider, we have continually leveraged our infrastructure and
presence throughout the Southeast to add new services. Most notably, we
introduced local services in November 1997, and by June 30, 1999, we had sold
75,000 local access lines. Our successful local service offering has enhanced
our ability to cross-sell other services to both new and existing customers. We
currently offer a full suite of integrated retail service offerings, including
local, long distance, data, Internet access, paging and other enhanced
services, to small and medium-sized business customers, and we are in the
process of rolling out DSL high-speed data services. We also offer wholesale
services, including switched, private line, special access and prepaid calling
card services, to other telecommunications carriers and end-user customers. We
are continuing to expand our facilities-based network, which we expect will
include a total of approximately 3,900 route miles of fiber across the eastern
United States and 19 local switches by the end of 2001. As of June 30, 1999, we
had approximately 30,000 small and medium-sized business customers. In 1998 and
the six months ended June 30, 1999, we had total revenue of $212.6 million and
$117.8 million.
Our Network
We believe that owning our own network facilities is a key factor for us
to continue to grow our customer base and service offerings. Owning our own
network allows us to:
o offer higher margin services, such as data and private line services;
o improve our margins by transitioning large portions of our traffic onto
our facilities-based network; and
o control the quality of service and improve the delivery of services to
our customers.
As of July 15, 1999, we had:
o approximately 1,100 route miles of fiber optic network in operation,
equipped with Nortel OC-48 and DWDM, or dense wavelength division
multiplexing, technology, with an additional 2,200 miles expected to
become operational in phases through the end of 1999, and plans to build
another 530 miles by the end of the third quarter of 2000;
o a 95-mile local fiber optic network equipped with Nortel optronics,
operating in the Raleigh and Research Triangle Park area of North
Carolina;
o nine Lucent 5ESS 2000 local switches in Raleigh, Charlotte, Greensboro
and Wilmington, North Carolina; Columbia and Greenville, South Carolina;
Atlanta, Georgia; and Orlando and Jacksonville, Florida, with plans to
install 10 more local switches by the end of 2001;
o five long distance switching centers equipped with Alcatel 600 Series
switching systems in Atlanta, Dallas, New York, Orlando and Raleigh;
o Alcatel network equipment co-located in 48 incumbent local exchange
carrier central offices, with plans to add approximately 50 more
co-locations by the end of 2001; and
o seven Lucent/Ascend frame relay switches, in Raleigh, Charlotte, Orlando,
Jacksonville, New York, Atlanta and Columbia, South Carolina, with plans
to install an additional 22 frame relay switches in strategic locations
by the end of 2001.
4
<PAGE>
Market Opportunity
We believe that the opening of the local telecommunications market to
competition, demands for faster data transmission requiring greater bandwidth,
and our small and medium-sized business customers' desire to purchase all of
their telecommunications services from one provider present us with a
significant market opportunity. In addition, we believe the southeastern United
States has attractive demographics that will continue to drive growth in
telecommunications services in the future.
Our Strategy
Our objective is to be the telecommunications provider of choice for small
and medium-sized businesses in the southeastern United States. To achieve this
objective we intend to:
o Focus on the southeastern United States. We intend to continue to focus
on the high-growth southeastern United States in order to leverage our
existing market presence, brand name and telecommunications network
facilities.
o Offer an integrated suite of retail services targeted to small and
medium-sized business customers. We currently offer our customers a
bundled suite of telecommunications services including local, long
distance, data services, Internet access, paging and other enhanced
services.
o Rapidly penetrate the local exchange market. We began deploying our own
local switches in the first quarter of 1998 and as of July 15, 1999
offered service over our owned facilities in nine markets. We intend to
continue deploying our own infrastructure in key southeastern markets and
expect to be offering local service in 10 additional markets by the end of
2001.
o Accelerate the deployment of our data services. To take advantage of the
growing demand for high-speed data services we are in the process of
deploying frame relay, DSL and ATM technologies to meet the needs of
existing and new business customers.
o Build market share through personalized sales, marketing and customer
service. We provide our customers with personalized contact for sales,
marketing and customer service, which we believe increases customer
acquisition and retention.
o Build a capital-efficient network. Since we began operations in 1983, our
strategy has generally been to build and/or acquire additional network
capacity as we add customers. We believe that our network expansion will
result in higher operating margins as a greater percentage of our traffic
is carried over our own network.
o Leverage our network infrastructure to service the wholesale marketplace.
We plan to continue leveraging our network capacity to provide a full
complement of services to wholesale customers which allows us to more
efficiently use our network facilities.
o Expand through strategic acquisitions and alliances. As part of our
expansion strategy we plan to consider strategic acquisitions of, and
alliances with, related or complementary businesses.
Our principal executive offices are located at BTI Corporate Center, 4300
Six Forks Road, Raleigh, North Carolina 27609 and our telephone number is (800)
849-9100. Our web site address is www.btitele.com. The information on this web
site is not incorporated by reference into this prospectus.
5
<PAGE>
THE OFFERING
We are offering shares of common stock initially in the United
States and Canada and shares of common stock initially outside the United
States and Canada. The closing of each of these offerings is conditioned on the
closing of the other.
Common stock offered:
U.S. offering................... shares
International offering.......... shares
Total....................... shares
Common stock to be outstanding
after this offering............. shares, based on the number of shares
of common stock outstanding on June 30,
1999. This does not include 3,276,461
shares of common stock issuable upon the
exercise of outstanding options at a
weighted average exercise price of $1.33
per share.
Over-allotment option............ shares
Use of proceeds.................... We will receive net proceeds from this
offering of approximately $ million
(approximately $ million if the U.S.
underwriters exercise their over-allotment
option in full). We intend to use the net
proceeds to fund the expansion of our
fiber optic network, the purchase and
installation of additional voice and data
switches and related equipment and
facilities, the opening of new sales
offices and for working capital and
general corporate purposes.
Dividend policy.................... We do not intend to pay dividends on our
common stock for the foreseeable future.
Risk factors....................... For a discussion of certain risks
relating to our company, our business and
an investment in our common stock, you
should read "Risk Factors" starting on
page 9.
Proposed Nasdaq National Market
symbol.............................."BTIX"
6
<PAGE>
Summary Financial Data
The following summary historical financial data for the five years ended
December 31, 1998 were derived from our audited financial statements. The
financial data for the six months ended June 30, 1998 and 1999 were derived
from our unaudited financial statements and in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of financial position and results of
operations for these periods. Operating results for the six months ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the entire year.
The summary data should be read together with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and other financial data
presented elsewhere in this prospectus.
EBITDA consists of income (loss) before interest, income taxes,
depreciation, amortization and non-cash compensation expense. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA is not a
measurement 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 flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------- -------------
(in thousands, except per share amounts)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 91,470 $ 114,493 $148,777 $ 194,949 $ 212,554
Operating expenses:
Cost of services ......................... 54,425 68,199 90,820 139,030 150,901
Selling, general and administrative
expenses ............................... 30,922 41,659 49,320 53,518 68,554
Depreciation and amortization ............ 2,749 3,073 4,471 6,613 11,457
-------- --------- -------- ---------- ---------
Total operating expenses ............... 88,096 112,931 144,611 199,161 230,912
-------- --------- -------- ---------- ---------
Income (loss) from operations ............. 3,374 1,562 4,166 (4,212) (18,358)
Interest expense .......................... (750) (1,297) (1,695) (8,806) (25,430)
Other income .............................. 77 106 135 2,379 5,555
-------- --------- -------- ---------- ---------
Income (loss) before income taxes ......... 2,701 371 2,606 (10,639) (38,233)
Income taxes .............................. -- -- -- -- --
-------- --------- -------- ---------- ---------
Net income (loss) ......................... 2,701 371 2,606 $ (10,639) $ (38,233)
========== =========
Pro forma income taxes(a) ................. 1,135 156 1,094
-------- --------- --------
Pro forma net income (loss)(a) ............ $ 1,566 $ 215 $ 1,512
======== ========= ========
Basic and diluted earnings (loss)
per share (a) ............................ $ .01 $ -- $ .01 $ (.06) $ (.38)
======== ========= ======== ========== =========
Weighted average shares outstanding ....... 200,000 200,000 200,000 172,603 100,000
Other Financial Data:
Capital expenditures ...................... $ 3,627 $ 9,711 $ 7,812 $ 22,792 $ 66,311
Net cash provided by (used in)
operating activities ..................... 6,231 9,446 283 8,211 (6,418)
Net cash used in investing activities ..... (4,530) (10,721) (8,681) (133,248) (49,466)
Net cash provided by (used in)
financing activities ..................... (1,805) 1,581 8,589 191,542 1,649
Non-cash compensation expense ............. -- -- -- 738 47
EBITDA .................................... 6,123 4,635 8,637 3,139 (6,854)
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1999
------------- --------------
(in thousands, except per
share amounts)
Statement of Operations Data:
<S> <C> <C>
Revenues .................................. $ 105,806 $117,762
Operating expenses:
Cost of services ......................... 77,848 77,313
Selling, general and administrative
expenses ............................... 32,104 40,005
Depreciation and amortization ............ 4,649 8,838
--------- --------
Total operating expenses ............... 114,601 126,156
--------- --------
Income (loss) from operations ............. (8,795) (8,394)
Interest expense .......................... (12,751) (13,474)
Other income .............................. 3,469 1,417
--------- --------
Income (loss) before income taxes ......... (18,077) (20,451)
Income taxes .............................. -- (5)
--------- -----------
Net income (loss) ......................... $ (18,077) $(20,446)
========= ==========
Pro forma income taxes(a) .................
Pro forma net income (loss)(a) ............
Basic and diluted earnings (loss)
per share (a) ............................ $ (.18) $ (.20)
========= ==========
Weighted average shares outstanding ....... 100,000 100,000
Other Financial Data:
Capital expenditures ...................... $ 27,518 $ 45,605
Net cash provided by (used in)
operating activities ..................... (4,796) 958
Net cash used in investing activities ..... (17,136) (35,559)
Net cash provided by (used in)
financing activities ..................... (1,013) 27,183
Non-cash compensation expense ............. 24 320
EBITDA .................................... (4,122) 764
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999
---------------------------
Actual As adjusted
------------ ------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and restricted cash (b) ......... $ 46,249 $
Working capital (deficit) (c) ............................. (13,780)
Property and equipment, net ............................... 140,184
Total assets .............................................. 233,364
Debt ...................................................... 282,123
Shareholders' equity (deficit) ............................ (130,018)
</TABLE>
- --------
(a) Historical financial information for the three years in the period ended
December 31, 1996 does not include a provision for income taxes because,
prior to September 1997, BTI was an S corporation not subject to income
taxes. Net income and the basic and diluted earnings (loss) per share
amounts have been adjusted on a pro forma basis to reflect the tax that
would have been paid by BTI if it had been subject to income tax for the
full period. Net loss for the years ended December 31, 1997 and 1998 and
the six months ended June 30, 1998 and 1999 does not include a credit for
income taxes because realization of the deferred tax asset resulting from
losses in those periods is not assured.
(b) Includes $40.9 million of total restricted cash. Restricted cash consists
of pledged securities being held as security for scheduled interest
payments through September 2000 due on our 10 1/2% Senior Notes.
(c) Includes $28.0 million of current restricted cash.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
We have a history of operating losses and negative cash flow
Since 1997 we have incurred losses from operations and negative cash flow.
For the years ended December 31, 1997 and 1998, and for the six months ended
June 30, 1999, we had operating losses of $4.2 million, $18.4 million and $8.4
million. We had negative EBITDA for the year ended December 31, 1998 of $6.9
million, and positive EBITDA for the six months ended June 30, 1999 of $.8
million. We might never operate at profitable levels or sustain positive EBITDA
or be able to repay principal and interest on money that we have borrowed.
We expect to experience operating losses and negative free cash flow for the
foreseeable future
We expect to continue to incur operating losses and negative cash flow
after capital expenditures as we expand our telecommunications service
offerings, expand our fiber optic network and enter new markets. This will
reduce our ability to meet our working capital needs and increase our need for
external financing.
The development of our business requires substantial capital expenditures.
A substantial part of these expenditures are incurred before any related
revenues are realized. Capital expenditures and other operating expenditures
will result in negative cash flow and operating losses until and unless we
develop an adequate customer base and revenue stream. In addition, if we do not
develop an adequate customer base, we would not achieve profitability or
generate sufficient cash flow to meet our working capital, capital expenditure
and debt service requirements.
Our significant indebtedness may impair our financial and operating flexibility
We have a significant amount of debt outstanding. As of June 30, 1999, we
had total consolidated indebtedness of $282.1 million and a shareholder's
deficit of $130.0 million. The amount of our debt could:
o limit our ability to react to changing market conditions, changes in our
industry or economic downturns;
o place us at a competitive disadvantage if we are not able to borrow money
on acceptable terms for working capital, capital expenditures, debt
service requirements or other purposes; and
o increase the losses we will need to fund and require us to dedicate a
substantial portion of the cash flow from our operations, if any, to pay
our interest expense, which would make it more difficult to fund our other
needs.
We are subject to restrictions under our indebtedness that may limit our
flexibility
Our credit facilities and the indenture for the 10 1/2% Senior Notes limit
or prohibit our ability to:
o incur additional debt;
o pay dividends;
o make investments or other restricted payments;
9
<PAGE>
o engage in transactions with stockholders and affiliates;
o create liens;
o sell assets;
o issue or sell capital stock of subsidiaries; and
o engage in mergers, acquisitions, consolidations and joint ventures.
These restrictions, and other restrictions applicable under credit
facilities that we enter into the future, might limit our financial and
operating flexibility. In addition, our credit facilities require us to
maintain certain financial ratios. The failure to maintain these ratios would
be a default under the credit facilities, even if we could service our
indebtedness.
We might not be able to service our debt
We are highly leveraged, and we intend to seek additional debt financing
in the future. We might not be able to meet our debt service obligations. For
the year ended December 31, 1998 and the six months ended June 30, 1999, our
earnings were insufficient to cover our fixed charges by $38.2 million and
$20.4 million.
We are a holding company and our assets consist of the stock of our
subsidiaries. As a holding company, we rely on funds from our subsidiaries to
service our debt. Our ability to obtain these funds might be limited by
restrictions in the terms of our subsidiaries' debt.
In order to repay our debt, we must successfully implement our business
strategy. If we are unable to generate or raise sufficient funds to meet our
strategic objectives, it may cause us to abandon or delay some or all of our
future expansion plans or expenditures, which could have a material adverse
effect on our ability to service our debt. If we are unable to generate
sufficient cash flows from operations to pay principal and interest on our
indebtedness, we might be required to refinance some or all of it. If we are
not able to refinance our indebtedness on acceptable terms or to borrow
additional money, we could be forced to default on our indebtedness. A default
would permit the holders of the debt to require payment before the scheduled
due date, resulting in further financial strain on us and causing additional
defaults under our other indebtedness.
We might be unable to implement our expansion plans, which involve many risks
To successfully implement our goal of expanding and enhancing our business
operations, we will need to:
o successfully implement our marketing strategies;
o continue the development, expansion and integration of our network;
o obtain satisfactory and cost-effective ownership interests and lease
rights from, and establish interconnection arrangements with, competitors
that own transmission lines;
o hire, retain and motivate highly productive sales personnel and
independent sales agents;
o continue to expand and develop our billing systems, order provisioning
processes, technical support, customer service and other back-office
capacity;
o enhance and expand our service features and offerings; and
o continue to attract and hire experienced corporate professionals.
Our ability to attract and retain customers also requires us to provide
reliable, high-quality telecommunications services at competitive prices and
personalized customer support. If we fail to
10
<PAGE>
successfully implement our expansion plans, we might have to reduce or delay
our planned capital expenditures, sell assets, sell additional equity or debt
securities or refinance or restructure our debt. Any sale of assets to raise
money to meet our financial obligations could also occur on unfavorable terms.
As a result, our business and the price of our common stock would be materially
adversely affected.
We might not have, or be able to obtain, the significant amounts of capital
that we need to expand our business
We expect to incur significant costs as we attempt to expand our business.
These costs generally will be incurred in advance of anticipated related
revenues.
To increase our customer base and enhance our support of our customers, we
intend to:
o substantially increase our sales and marketing and customer care
expenses, especially in our newer geographic markets;
o conduct new sales and marketing campaigns;
o hire additional internal sales personnel; and
o make significant investments to continue to expand and enhance our
customer support, billing, order provisioning and other information
processing capabilities.
These initiatives will be costly and will affect our operating results. If we
are unable to generate or raise sufficient funds to meet our strategic
objectives, it may cause us to abandon or delay some or all of our future
expansion plans or expenditures, which could have a material adverse effect on
our business.
We made capital expenditures of approximately $66.3 million in 1998 and
$45.6 million in the first half of 1999. We currently estimate that our capital
expenditure requirements will total approximately $45.0 million for the second
half of 1999 and between $85.0 million and $100.0 million for 2000. We also
anticipate making substantial capital expenditures thereafter.
Our planned capital expenditures will be primarily for:
o the purchase and installation of voice and data switches, electronics,
fiber, co-location facilities and other technologies in existing networks
and in additional networks to be constructed in our service areas;
o market expansion, including new sales offices;
o the continued development of our existing operations centers to service
anticipated increased traffic volumes and increased geographic areas; and
o expenditures with respect to our management information systems and
customer support infrastructure.
The actual amount of capital we require may differ significantly from our
current estimates depending on a variety of factors, including the demand for
our services, the rate and extent of our expansion and as a result of
regulatory, technological or competitive developments, including market
developments and new opportunities, or in the event we decide to make
acquisitions or enter into joint ventures and strategic alliances.
We believe that the net proceeds from this offering, together with cash
flow from operations and borrowings under our credit facilities, will provide
sufficient funds to enable us to expand our business as currently planned.
However, if our current sources of funds are insufficient or our estimates are
inaccurate for any reason, we might need to seek additional funds. We might
seek
11
<PAGE>
additional funds from public and private equity and debt financing. The
issuance of debt would increase risk to our shareholders. The issuance of
equity would dilute our shareholders' ownership interests in our company. If we
do not have access to the capital we require, or if our estimates of our
capital requirements are inaccurate, we will need to change our business plans,
which could have an adverse effect on the price of our common stock.
In the second quarter of 1998, Moody's adjusted the credit rating on our
10 1/2% Senior Notes due 2007 from B2 to B3, citing concern that our revenue
and operating cash flow were unlikely to grow as rapidly as Moody's originally
expected. In the fourth quarter of 1998, Standard and Poor's lowered the
ratings on our 10 1/2% Senior Notes from B+ to B and on our credit facilities
from BB- to B+. These credit rating reductions affected the market price of our
10 1/2% Senior Notes. Similar reductions in the future could have an adverse
effect on our ability to raise capital and our cost of capital.
An inability to effectively manage our planned rapid growth could adversely
affect our operations
Our strategy contemplates rapid expansion for the foreseeable future. This
growth will make operating our business more complex and require that we, among
other things:
o accurately assess our markets;
o hire and retain highly-skilled personnel, including sales
representatives;
o develop additional financial and management controls and systems;
o control expenses;
o integrate any acquired operations and joint ventures; and
o obtain and maintain necessary regulatory approvals.
A failure to satisfy any of these requirements or manage our growth effectively
could have a material adverse effect on us.
Difficulties in expanding our networks could increase our estimated costs and
delay scheduled completion
The expansion of our existing networks and the construction of networks in
new markets is a significant undertaking. This will require that we install and
operate additional facilities, switches and related equipment and develop,
introduce and market new products and services, including data services. In
addition, the deployment of additional data services, such as high-speed local
area network and Internet access, will require modifications to our network
architecture. The development and expansion of some of our data services
offerings will also require us to obtain and install our equipment in the
central offices of incumbent local exchange carriers. Administrative,
technical, operational, regulatory and other problems that could arise might be
more difficult to address and solve due to the scope and complexity of our
planned expansion. We are also dependent on timely performance by third-party
suppliers and contractors, including suppliers of network equipment. Many of
these factors are beyond our control. As a result, our network build-out might
not be completed as planned, for the costs or in the time frame that we
currently estimate.
Our reliance on incumbent local exchange carriers could have a material adverse
effect on us
We are dependent on the incumbent local exchange carriers operating in our
existing and targeted markets for access to their networks. We rely on them to
provide:
o access to the copper lines from the end user to the local exchange
carrier's central office;
12
<PAGE>
o local telephone services on a wholesale basis in areas where we will not
lease copper lines;
o space in their central offices so that we can install, or co-locate, our
equipment; and
o information about customer accounts, service orders and repairs.
The pace at which we are able to add new customers and services and the
quality of service that we provide could be adversely affected if the incumbent
local exchange carriers do not provide us with access to their networks and
services on a timely basis. The failure by an incumbent local exchange carrier
to cooperate with us could result in customer dissatisfaction and the loss of
our existing and potential customers. In addition, in order to provide
high-speed data services over copper lines, we need to co-locate our equipment
in the incumbent local exchange carriers' central offices and to have the
incumbent local exchange carriers condition the copper line so that it is
suitable to provide data services. The failure to obtain co-location space or
suitable copper lines would prevent us from offering high speed data services
and would place us at a competitive disadvantage to our competitors.
The Telecommunications Act of 1996 requires that the incumbent local
exchange carriers, as a prerequisite to receiving authority to sell in-region,
long-distance services, cooperate with us to establish competition for local
service. The incumbent local exchange carriers might not cooperate with us
after they get that authority.
In order to have access to an incumbent local exchange carrier's network,
we need to have an agreement, called an interconnection agreement, with the
incumbent local exchange carrier. Our interconnection agreement with BellSouth,
the incumbent local exchange carrier in most of our current markets, expired in
January 1999. We are currently negotiating a new agreement with BellSouth, and
the parties will continue to exchange traffic pursuant to the terms and
conditions of the expired agreement as long as and until a new agreement is
negotiated. The new agreement will be retroactive to January 2, 1999. A failure
to enter into interconnection agreements in new markets or renew
interconnection agreements in existing markets on favorable terms would prevent
us from being able to compete in the market.
Interconnection agreements are subject to review and approval by various
federal and state regulators. In addition, parties to the agreements may seek
to have the agreements modified based upon the outcome of regulatory or
judicial rulings occurring after the dates of the agreements. The outcome of
these rulings, or any modified agreements, could have a material adverse effect
on us. In addition, certain aspects of interconnection agreements, including
the price and economic terms of these agreements, have been subject to
litigation and regulatory action.
Competition in our industry is intense and growing, and we may be unable to
compete effectively
Our industry is highly competitive, and we expect competition to intensify
in the future. Most of our actual and potential competitors have substantially
greater financial, technical, marketing and other resources, including brand or
corporate name recognition and transmission networks, than we do. During the
past several years, market prices for telecommunications services have been
declining, and we expect that this trend will continue. Our success will depend
upon our ability to provide high-quality services at competitive prices. Any
reduction in the prices of long distance, local, data or other services by our
competitors could materially adversely affect us. See "Business -- Competition"
for a more detailed description of the competitive environment in which we
operate.
13
<PAGE>
Any failure to develop and enhance operational support systems could have a
material adverse effect on us
Our success depends on our ability to develop and enhance sophisticated
operational support systems. This is a complicated undertaking requiring
significant resources and expertise, and support from third-party vendors. We
need to develop and enhance these systems on a schedule sufficient to meet our
proposed service roll-out dates. In addition, we will require these systems to
expand and adapt with our expected growth. The failure to develop and timely
enhance our operational support systems could have a material adverse effect on
our ability to sign up, connect, serve and retain customers and on our ability
to implement our growth strategy.
We depend on our suppliers and other service providers
Transmission facilities. We lease a substantial portion of our transport
capacity. We are dependent upon the availability of fiber optic transmission
facilities owned by long distance carriers, incumbent local exchange carriers,
competitive local exchange carriers and others from whom we lease transmission
capacity. Many of these entities are, or may become, our competitors. The risks
inherent in utilizing third party providers include the possible inability to
negotiate and renew favorable supply agreements and dependence on the timelines
of the fiber optic transport providers in processing our orders for
transmission facilities. We also rely on these companies to maintain and
provide access to these facilities, as well as to restore faults in them. Some
of these providers might experience delays in the development of their
facilities, and we might not be able to obtain use of these facilities on a
timely basis and in the quantities we require. For example, Qwest, our primary
fiber optic network supplier, has experienced delays in construction of our
fiber optic transmission facilities. If we need to obtain transmission capacity
from other network providers, it may be more costly for us and reduce our gross
margins.
When we negotiate our purchase and lease agreements and make a
determination to acquire a long-term lease or ownership of transmission
capacity rather than a short-term lease, we must estimate the future supply and
demand for transmission capacity, as well as our customer calling patterns and
traffic levels. Our profitability depends, in part, on our ability to
accurately estimate the future demand for transmission capacity and to obtain
capacity on a cost-effective basis and determine when it is appropriate to buy
transmission capacity or lease it on a long-term basis, rather than to lease it
on a short-term basis. We could suffer competitive disadvantages if we base our
acquisitions of transmission capacity on inaccurate projections.
Other components. We rely on other companies to supply key components of
our network infrastructure, including switching and networking equipment and
paging services. Some of these components are only available in the quantities
and quality we require from limited sources. We might experience delays or
other problems in receiving communications services and facilities. We might
not be able to obtain such services or facilities on the scale and within the
time frames required by us at an affordable cost, or at all.
Digital subscriber line services. Where we do not install our own DSL
equipment, we will be dependent on third parties in order to offer DSL
services. As we expand our network infrastructure to sell DSL services directly
to our customers, these third-party suppliers might compete with us. Our DSL
services will also depend on the availability and quality of copper lines and
the incumbent local exchange carriers' maintenance of such lines. We might not
be able to obtain copper lines and the services we require from these carriers
on a timely basis or on terms and in quantities satisfactory to us. Our failure
to do so could materially adversely affect our ability to offer DSL services.
14
<PAGE>
We depend on governmental and other authorizations
The development, expansion and maintenance of our network will depend on,
among other things, our ability to obtain rights-of-way, authorizations and
permits from various governmental and private entities. The process of
obtaining these rights-of-way, authorizations and permits is time-consuming and
burdensome. Any significant difficulty or costs of obtaining these
rights-of-way, authorizations and permits could adversely affect us,
particularly where we must compete with companies that already have them. In
order to compete effectively, we must obtain and maintain these authorizations
in a timely manner, at reasonable costs and on satisfactory terms and
conditions. In certain of the cities or municipalities where we provide network
services, we pay license or franchise fees. The Telecommunications Act permits
municipalities to charge these fees only if they are competitively neutral and
nondiscriminatory, but some municipalities might not conform their practices to
the requirements of the Telecommunications Act in a timely manner or without
legal challenge. We also face the risks that other cities may start imposing
fees, fees will be raised or franchises will not be renewed.
The regulation of access charges involves uncertainties, and the resolution of
these uncertainties could adversely affect our business
To the extent we provide long-distance service, we are required to pay
access charges to other local exchange service providers when we use the
facilities of those companies to originate or terminate calls. As a local
exchange service provider, we also provide access services to other long-
distance service providers. The interstate access charges of incumbent local
exchange carriers are subject to extensive regulation by the FCC, while those
of other local exchange service providers are subject to a lesser degree of FCC
regulation, but remain subject to the requirement that all charges be just,
reasonable and not unreasonably discriminatory. Disputes have arisen regarding
the regulation of access charges and these may be resolved adversely to us.
The FCC has made major changes in the interstate access charge structure.
The manner in which the FCC implements and monitors these increased pricing
flexibility changes could have a material adverse effect on our ability to
compete in providing interstate access services.
Some long-distance carriers, including AT&T, have also asked the FCC to
take regulatory action to prevent competitive local exchange carriers from
charging allegedly "excessive" access charges. Although no complaints have been
filed against us, we do provide access service to long distance carriers and we
could be subject in the future to allegations that our charges for this service
are unjust and unreasonable. In that event, we would have to provide the FCC
with an explanation of how we set our rates and justify them as reasonable. The
FCC might not accept our rates as reasonable. If our rates are reduced by
regulatory order, this could have a material adverse effect on our
profitability.
We face risks in connection with litigation
On September 14, 1998, Gulf Communications, L.L.C. filed suit against us
alleging breach of a telecommunications services agreement for the termination
of long distance traffic. Gulf contends that the agreement requires us to
terminate a specified number of minutes per month and that we did not fulfill
our alleged commitment. Gulf also alleges fraud in the inducement of the
agreement and seeks an unspecified amount of actual and punitive damages, plus
interest, attorneys' fees and costs. We intend to vigorously defend ourselves
against Gulf's claims. Defending this lawsuit may be expensive and
time-consuming and, regardless of whether the outcome is favorable to us, could
divert substantial financial, management and other resources from our business.
An adverse outcome could subject us to significant liability.
15
<PAGE>
We depend on key members of our management team
Our success depends largely on the skills, experience and performance of
key members of our senior management team. If we lose one or more of these key
employees, particularly Peter T. Loftin, Chairman and Chief Executive Officer,
and R. Michael Newkirk, President and Chief Operating Officer, our ability to
successfully implement our business plan and the price of our common stock
could be materially adversely effected. None of our key employees has an
employment agreement with us, and we do not maintain "key man" insurance on any
of these employees other than Mr. Loftin.
If we do not adapt to rapid technological changes in the telecommunications
industry, we could lose customers or market share
The telecommunications industry will continue to experience rapid changes
in technology. We cannot predict the effect of technological changes on our
business and operations. In addition, DSL technology does not currently have
widely accepted standards and there are a variety of alternative technologies
for high-speed data networking. Our future success depends on our ability to
adapt to any technological changes in the industry. A failure to adopt new
technology or technology that becomes an industry standard, as well as
technological obsolescence, or the choice of one technological innovation over
another, could have an adverse impact on our ability to compete or meet
customer demands.
We cannot predict market acceptance for our data services
The market for high-speed data communications, including DSL, is in the
early stages of development. Because we offer services to this new and evolving
market and because current and future competitors are likely to introduce
competing services, it is difficult for us to predict the rate at which this
market will grow. In addition, our new services may not receive market
acceptance and the prices and demand for these services may not be sufficient
to sustain profitable operations. If a market for our new data services fails
to develop, grows more slowly than anticipated or becomes saturated with
competitors, our business, prospects, financial condition and results of
operations could be adversely affected.
If we fail to timely resolve potential Year 2000 problems, we could experience
major system failures
If we or our significant vendors or suppliers experience Year 2000
problems, those problems could have a negative impact on our network, customer
order processing and provisioning systems, customer billing and data interfaces
to and from these systems. Although we believe that we have established a
program to resolve significant Year 2000 issues in a timely manner, the process
for addressing these issues is not yet complete.
We may face risks associated with potential acquisitions, joint ventures or
strategic alliances
As part of our plans to expand, we may acquire other businesses or enter
into joint ventures or strategic alliances that we believe will complement our
existing business. These transactions will likely involve some or all of the
following risks:
o the difficulty of assimilating the acquired operations and personnel;
o the potential disruption of our ongoing business;
o the diversion of resources;
16
<PAGE>
o the possible inability of management to maintain uniform standards,
controls, procedures and policies;
o the possible difficulty of managing our growth and information systems;
o the risks of entering markets in which we have little experience;
o the potential impairment of relationships with employees or customers;
o the inability to work efficiently with joint venture or strategic
alliance partners; and
o the difficulties of terminating joint ventures or strategic alliances.
These transactions may be required for us to remain competitive. We might
not be able to obtain required financing for such transactions. Such
transactions might not occur, and any that do might not be successfully
integrated with our existing business or might not achieve expected results.
After the offering, our Chairman and Chief Executive Officer will continue to
control the majority of our common stock and conflicts of interest may arise
When this offering is completed, Peter T. Loftin, our Chairman and Chief
Executive Officer, will beneficially own or control approximately % of our
outstanding common stock. As a result, Mr. Loftin will continue to control all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions, which could delay or prevent
someone from acquiring us on terms that other investors favor. Conflicts might
arise in transactions between Mr. Loftin and BTI Telecom, including the
negotiation or enforcement of the terms of any such transactions. In addition,
Mr. Loftin might compete with us and conflicts might arise with respect to
future business opportunities.
Our common stock has not been publicly traded before this offering and the
stock price may be volatile
Our common stock has not been publicly traded prior to this offering. We
expect the common stock to be approved for quotation on the Nasdaq National
Market. However, an active trading market might not develop or be sustained. We
and the underwriters will determine the initial public offering price. The
initial public offering price might not be indicative of the trading prices
after the offering. The price of our common stock after the offering might be
volatile, and might fluctuate due to factors such as:
o variations in operating results;
o changes in financial estimates by securities analysts;
o changes in market valuations of telecommunications companies;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o our success or failure to implement our expansion plans;
o an adverse decision by a regulatory agency in one of our primary markets;
o increases or decreases in reported holdings by insiders or mutual funds;
o additions or departures of key personnel;
o future sales of common stock; and
o stock market price and volume fluctuations generally.
17
<PAGE>
In addition, in recent years, the market for stock in telecommunications
companies has been highly volatile.
Sales of large amounts of our common stock or the perception that sales could
occur may depress our stock price
After this offering, Mr. Loftin, currently our sole shareholder, will own
% of the outstanding shares of our common stock. In addition, immediately
prior to the offering, there were 3,276,461 shares of our common stock reserved
for issuance upon exercise of outstanding options granted under our 1997 Stock
Plan. BTI Telecom, Mr. Loftin, our directors, officers and some of our
employees will, with limited exceptions, be prohibited from selling shares of
our common stock for 180 days after the date of this prospectus. After the
180-day period, however, Mr. Loftin and any holder of shares of our common
stock upon the exercise of outstanding options may decide to dispose of their
shares, in some cases subject to the volume, manner of sale and notice
requirements of Rule 144 under the Securities Act. Sales of shares at that time
or the perception that sales could occur might have an adverse effect on the
price of the common stock.
Shares of common stock sold in the offering will be freely transferable
without further registration, except for shares purchased by "affiliates," as
that term is defined in Rule 144. The shares of common stock outstanding prior
to the offering are "restricted securities" within the meaning of the
Securities Act. These shares may only be sold under a registration statement or
an exemption under the Securities Act. Within 180 days after the completion of
this offering, we intend to register under the Securities Act the 7,500,000
shares reserved for issuance under our 1997 Stock Plan and the 250,000 shares
reserved for issuance under our Employee Stock Purchase Plan.
We do not expect to pay dividends for the foreseeable future
We do not anticipate paying any dividends on our common stock for the
foreseeable future. In addition, the instruments governing our indebtedness
contain restrictions on our ability to declare and pay dividends.
You will suffer substantial and immediate dilution
The initial public offering price will be substantially higher than the
net tangible book value per share of our outstanding common stock (which is
negative). As a result, you will incur immediate, substantial dilution. In
addition, we have issued options to acquire our common stock at prices
significantly below the initial public offering price. You may incur additional
dilution if holders of stock options, whether currently outstanding or
subsequently granted, exercise their options. For more information, see
"Dilution".
Our charter documents and North Carolina law might delay or prevent a change of
control
Our articles of incorporation and bylaws contain provisions that could
delay or prevent someone from acquiring us on terms that investors favor. These
provisions include:
o 10,000,000 shares of authorized preferred stock that our Board of
Directors could give preferential rights and issue without shareholder
approval; and
o procedures making it harder and more time-consuming for shareholders to
call meetings, to make proposals for shareholder action and to nominate
candidates for election as directors.
In addition, North Carolina law includes a Shareholder Protection Act and
a Control Share Acquisition Act, both of which could delay or prevent someone
from acquiring us on terms that you favor. See "Description of Capital Stock --
Statutory and Other Provisions -- Statutory Provisions" for a description of
these laws.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus that are not
historical facts, including some statements made in the sections of this
prospectus entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," are statements
of future expectations and other forward-looking statements pursuant to Section
27A of the Securities Act of 1933. These statements are based on management's
current views and assumptions and involve known and unknown risks and
uncertainties that could cause actual results, performance or events to differ
materially from those expressed or implied in those statements, including:
o the rate of expansion of our network and/or customer base;
o inaccuracies in our forecasts of telecommunications traffic or customers;
o loss of a customer that provides us with significant revenues;
o loss of sales representatives, dealers or agents;
o highly competitive market conditions;
o failure of our systems or those of our major customers, suppliers or
third-party network service providers to be Year 2000 compliant;
o changes in or developments under laws, regulations, licensing
requirements or telecommunications standards;
o changes in technology;
o changes in the availability of transmission facilities;
o changes in retail or wholesale telecommunications rates;
o loss of the services of key officers, such as Peter T. Loftin, the
Chairman and Chief Executive Officer, or R. Michael Newkirk, the
President and Chief Operating Officer; and
o general economic conditions.
This list of important factors is not exhaustive. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. See also "Risk Factors" for additional
cautionary statements identifying important factors with respect to
forward-looking statements contained in this prospectus that could cause actual
results to differ materially from results or expectations referred to in the
forward-looking statements.
19
<PAGE>
USE OF PROCEEDS
We will receive net proceeds from this offering of approximately $
million (approximately $ million if the U.S. underwriters exercise their
over-allotment option in full), assuming that our common stock is sold at $
per share, the midpoint of the range set forth on the cover page of this
prospectus, and after deducting underwriting discounts and commissions and the
$ of estimated expenses of the offering. We intend to use the net proceeds
to fund the expansion of our fiber optic network, the purchase and installation
of additional voice and data switches and related equipment and facilities, the
opening of new sales offices, to pay down our credit facilities with GE
Capital, which as of June 30, 1999, had $31.9 million outstanding, and for
working capital and general corporate purposes, including the payment of
interest on long-term debt. The precise allocation of funds among these uses
will depend on future technological, regulatory and other developments in or
affecting our business, the competitive climate in which we operate and the
emergence of future opportunities. As part of our expansion strategy, we may
make acquisitions and enter into joint ventures or strategic alliances and a
portion of the net proceeds from this offering may be used to fund them. We are
continuously evaluating acquisition candidates and are in discussions or
negotiations with other companies on an ongoing basis. However, we have no
definitive agreements with respect to any strategic alliance, acquisition or
joint venture.
DIVIDEND POLICY
We do not intend to pay cash dividends for the foreseeable future. We plan
to retain earnings, if any, for use in the operation of our business and to
fund future growth. In addition, the instruments governing our indebtedness
contain restrictions on our ability to declare and pay dividends.
20
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and capitalization of
BTI Telecom on a historical basis as of June 30, 1999 and as adjusted to
reflect the sale of the shares of common stock pursuant to this
offering assuming an offering price of $ and that the U.S. underwriters'
over-allotment option is not exercised. This table should be read in
conjunction with "Use of Proceeds," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
consolidated financial statements and other financial data included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------
Actual As Adjusted (a)
------------- ----------------
(dollars in thousands)
<S> <C> <C>
Cash and cash equivalents ........................................... $ 5,349 $
Restricted cash ..................................................... 27,969 27,969
Restricted cash -- non-current ...................................... 12,931 12,931
---------- ----------
Total cash, cash equivalents, and restricted cash ................ $ 46,249 $
========== ==========
Long-term debt:
10 1/2% Senior Notes .............................................. $ 250,000 $ 250,000
Revolving credit facilities ....................................... 31,863 31,863
---------- ----------
Total long-term debt ............................................. $ 281,863 $ 281,863
========== ==========
Shareholders' (deficit) equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none
issued and outstanding ........................................... -- --
Common stock, no par value, 500,000,000 shares authorized;
100,000,000 shares, issued and outstanding, actual; shares issued
and outstanding, as adjusted ..................................... 2,280
Accumulated deficit ............................................... (131,160) (131,160)
---------- ----------
Unearned compensation ............................................. (1,138) (1,138)
Total shareholders' (deficit) equity ............................. (130,018)
----------
Total capitalization ........................................... $ 151,845 $
========== ==========
</TABLE>
- --------
(a) As adjusted reflects the estimated net proceeds of $ million from
this offering.
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<PAGE>
DILUTION
Our net tangible book value as of June 30, 1999 was a deficiency of $144.4
million, or a deficiency of approximately $1.44 per share. Net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by 100,000,000 shares of common stock outstanding. After
giving effect to the issuance and sale of shares of common stock in this
offering (based on an assumed initial public offering price of $ per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses), our as adjusted net tangible book value as of
June 30, 1999 would have been $( ), or $( ) per share. This represents an
immediate increase in net tangible book value of $ per share to the
existing shareholder and an immediate dilution in net tangible book value of $
per share to new investors. Investors participating in this offering will
incur immediate, substantial dilution. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ................. $
Net tangible book value per share as of June 30, 1999 ......... $(1.44)
Increase in net tangible book value per share attributable
to new investors .............................................
Net tangible book value per share after the offering ............ ( )
----------
Dilution per share to new investors (a) ......................... $
==========
</TABLE>
- --------
(a) Dilution is determined by subtracting the net tangible book value per share
after completion of the offering from the initial public offering price
per share of common stock.
The following table sets forth, as of June 30, 1999, the difference
between the existing shareholder and the purchasers of shares of common stock
in the offering (at an assumed initial public offering price of $ per
share) with respect to the number of shares of common stock purchased from us,
the total consideration paid and the average price paid per share:
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
--------------------------- ------------------------ Per
Number Percent Amount Percent Share
------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholder ......... 100,000,000 % $36,668 % $ .0004
New investors ................
Total ...................... 100.0% $ 100.0% $
===== ======= ===== =======
</TABLE>
As of June 30, 1999, there were 3,276,461 shares of common stock subject
to outstanding options at a weighted average exercise price of approximately
$1.33 per share. To the extent outstanding options are exercised, there will be
further dilution to new investors.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial data for the five years ended
December 31, 1998 were derived from our audited financial statements. The
financial data for the six months ended June 30, 1998 and 1999 were derived
from our unaudited financial statements and in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of financial position and results of
operations for these periods. Operating results for the six months ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the entire year. The selected data should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
consolidated financial statements and other financial data contained elsewhere
in this prospectus.
EBITDA consists of income (loss) before interest, income taxes,
depreciation, amortization and non-cash compensation expense. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA is not a
measurement 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 flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ............................. $ 91,470 $ 114,493 $148,777 $ 194,949 $ 212,554
Operating expenses:
Cost of services .................... 54,425 68,199 90,820 139,030 150,901
Selling, general and adminis-
trative expenses ................... 30,922 41,659 49,320 53,518 68,554
Depreciation and amortization ....... 2,749 3,073 4,471 6,613 11,457
-------- --------- -------- ---------- ---------
Total operating expenses ........... 88,096 112,931 144,611 199,161 230,912
-------- --------- -------- ---------- ---------
Income (loss) from operations ........ 3,374 1,562 4,166 (4,212) (18,358)
Interest expense ..................... (750) (1,297) (1,695) (8,806) (25,430)
Other income ......................... 77 106 135 2,379 5,555
-------- --------- -------- ---------- ---------
Income (loss) before income taxes..... 2,701 371 2,606 (10,639) (38,233)
Income taxes ......................... -- -- -- -- --
-------- --------- -------- ---------- ---------
Net income (loss) .................... 2,701 371 2,606 $ (10,639) $ (38,233)
========== =========
Pro forma income taxes(a) ............ 1,135 156 1,094
-------- --------- --------
Pro forma net income
(loss)(a) ........................... $ 1,566 $ 215 $ 1,512
======== ========= ========
Basic and diluted earnings (loss)
per share (a) ....................... $ .01 $ -- $ .01 $ (.06) $ (.38)
======== ========= ======== ========== =========
Weighted average shares
outstanding ......................... 200,000 200,000 200,000 172,603 100,000
======== ========= ======== ========== =========
Cash distributions declared per
common share(b) ..................... $ .01 $ .01 $ .01 $ .01 $ .01
======== ========= ======== ========== =========
Other Financial Data:
Capital expenditures ................. $ 3,627 $ 9,711 $ 7,812 $ 22,792 $ 66,311
Net cash provided by (used in)
operating activities ................ 6,231 9,446 283 8,211 (6,418)
Net cash used in investing
activities .......................... (4,530) (10,721) (8,681) (133,248) (49,466)
Net cash provided by (used in)
financing activities ................ (1,805) 1,581 8,589 191,542 1,649
Non-cash compensation expense ........ -- -- -- 738 47
EBITDA ............................... 6,123 4,635 8,637 3,139 (6,854)
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1999
------------- --------------
(in thousands, except per
share data)
<S> <C> <C>
Statement of Operations Data:
Revenues ............................. $ 105,806 $117,762
Operating expenses:
Cost of services .................... 77,848 77,313
Selling, general and adminis-
trative expenses ................... 32,104 40,005
Depreciation and amortization ....... 4,649 8,838
--------- --------
Total operating expenses ........... 114,601 126,156
--------- --------
Income (loss) from operations ........ (8,795) (8,394)
Interest expense ..................... (12,751) (13,474)
Other income ......................... 3,469 1,417
--------- --------
Income (loss) before income taxes..... (18,077) (20,451)
Income taxes ......................... -- (5)
--------- -----------
Net income (loss) .................... $ (18,077) $(20,446)
========= ==========
Pro forma income taxes(a) ............
Pro forma net income
(loss)(a) ...........................
Basic and diluted earnings (loss)
per share (a) ....................... $ (.18) $ (.20)
========= ==========
Weighted average shares
outstanding ......................... 100,000 100,000
========= ==========
Cash distributions declared per
common share(b) ..................... $ -- $ --
========= ==========
Other Financial Data:
Capital expenditures ................. $ 27,518 $ 45,605
Net cash provided by (used in)
operating activities ................ (4,796) 958
Net cash used in investing
activities .......................... (17,136) (35,559)
Net cash provided by (used in)
financing activities ................ (1,013) 27,183
Non-cash compensation expense ........ 24 320
EBITDA ............................... (4,122) 764
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at period
end):
Cash and cash equivalents and
restricted cash (c) .............. $ -- $305,840 $496,510 $ 142,044 $ 65,547 $ 106,198 $ 46,249
Working capital (deficit) (d) ..... (1,546) (5,182) (3,189) 76,842 4,599 45,497 (13,780)
Property and equipment, net ....... 9,009 16,792 21,498 44,577 101,960 68,069 140,184
Total assets ...................... 26,802 35,969 48,682 223,550 209,171 218,367 233,364
Debt .............................. 8,388 13,553 21,088 251,794 254,882 250,296 282,123
Shareholder's equity (deficit) .... 4,070 1,897 2,374 (69,574) (109,842) (89,099) (130,018)
</TABLE>
- --------
(a) Historical financial information for the three years in the period ended
December 31, 1996 does not include a provision for income taxes because,
prior to September 1997, BTI was an S corporation not subject to income
taxes. Net income and the basic and diluted earnings (loss) per share
amounts have been adjusted on a pro forma basis to reflect the tax that
would have been paid by BTI if it had been subject to income tax for the
full period. Net loss for the years ended December 31, 1997 and 1998 and
the six months ended June 30, 1998 and 1999 does not include a credit for
income taxes because realization of the deferred tax asset resulting from
losses in those periods is not assured.
(b) The distributions were made in part to provide funds for tax obligations
owed by BTI's shareholders as a result of BTI's S-corporation status prior
to converting to a C-corporation. Distributions made during the six months
ended June 30, 1999 were $50,000.
(c) Includes total restricted cash of $75.0 million and $52.8 million as of
December 31, 1997 and 1998, and $62.1 million and $40.9 million as of June
30, 1998 and 1999. Restricted cash consists of pledged securities being
held as security for certain scheduled interest payments through September
2000 due on our 10 1/2% Senior Notes.
(d) Includes current restricted cash of $25.0 million, and $27.3 million as of
December 31, 1997 and 1998, and $25.1 million and $28.0 million as of June
30, 1998 and 1999.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the other financial data appearing
elsewhere in this prospectus.
Overview
BTI Telecom Corp., which began operations in 1983 as Business Telecom,
Inc., is a leading facilities-based integrated communications provider, or ICP,
in the southeastern United States. We currently offer integrated retail
services, including local, long distance, data, Internet access, paging and
other enhanced services, primarily to small and medium-sized business
customers. In addition, we offer wholesale services, including switched,
private line, special access and prepaid calling card services, to other
telecommunications carriers and end-user customers. We currently have 20 sales
offices in the southeastern United States.
We operate long distance switching centers in Atlanta, Dallas, New York,
Orlando and Raleigh. To facilitate early market entry, we began offering local
exchange services in November 1997 in selected markets in the southeastern
United States by reselling the services of the incumbent local exchange
carriers. In the first quarter of 1998, we began installing equipment and
infrastructure to support facilities-based local services in key markets. As of
July 15, 1999, we had installed nine Lucent 5ESS 2000 local switches, digital
loop carriers and associated infrastructure in Raleigh, Charlotte, Greensboro
and Wilmington, North Carolina; Columbia and Greenville, South Carolina;
Atlanta, Georgia; and Orlando and Jacksonville, Florida. We intend to install
additional local switches, digital loop carriers and associated infrastructure
in 10 locations by the end of 2001.
As of July 15, 1999, we had co-located network equipment in 48 incumbent
local exchange carrier central offices in order to provide more cost-effective
local services to our customers. These co-locations will also facilitate
development of our DSL services offerings. As of July 15, 1999, we had
installed seven frame relay switches within our network, with plans to install
an additional 22 frame relay switches by the end of 2001.
In October 1997, we purchased, pursuant to an indefeasible right of use,
approximately 3,300 route miles of dark fiber from New York to Miami and
Atlanta to Nashville on a fiber optic network being constructed by Qwest. As of
July 15, 1999, approximately 1,100 miles of this network was operational, and
we expect the remainder to come into service in phases through the end of 1999.
Upon completion of this network, we will have 22 points-of-presence deployed
with Nortel OC-48 and DWDM technology.
As of July 15, 1999, we had over 95 route miles of fiber in North
Carolina's Raleigh-Durham-Research Triangle Park area. In addition, we plan to
build approximately 530 miles of fiber from Raleigh to Savannah, Georgia, via
Wilmington, North Carolina and Myrtle Beach, South Carolina. We expect to begin
construction in the fourth quarter of 1999 and complete it in the third quarter
of 2000. Upon completion of the additional 530-mile network, we will have a
total of 27 points of presence deployed with Nortel OC-48 and DWDM technology.
Revenue
We generate the majority of our revenue from:
(1) the sale of integrated retail services, primarily to small and
medium-sized businesses; and
(2) the sale of wholesale services, largely to other telecommunications
carriers.
Revenues from integrated retail services represented approximately 59.7% and
62.7% of our total revenue for the six months ended June 30, 1998 and 1999. For
the years ended December 31, 1996,
25
<PAGE>
1997 and 1998, revenues from integrated retail services represented
approximately 82.7%, 59.1% and 63.1% of our total revenue.
In 1997, we added local exchange services to our package of integrated
retail services. Local services contributed to lower gross margins in 1997,
1998 and the six months ended June 30, 1999 because these services are
initially being offered on a resale basis. We expect these margins to improve
as we provide more of these services using our own local switching facilities.
As of June 30, 1999, we were providing local service in 11 states primarily on
a resale basis. Through June 30, 1999, we had sold over 75,000 local access
lines.
Through 1995, our direct sales compensation structure consisted of base
salary plus commissions on each customer's initial monthly billings and nominal
residual commissions. During 1996, we redesigned our sales compensation
structure in order to provide sales representatives with greater long-term
incentives and to encourage stronger customer relationships. Our new sales
commission structure compensates sales representatives by offering a base
salary for a ramp-up period, with higher commissions on initial billings,
followed by more significant residual commissions. As anticipated, the
implementation of the new sales compensation structure initially caused
increased turnover of sales personnel and resulted in decreased integrated
retail services revenues and customer retention. Although revenue from retail
services decreased in 1997 as a result of these changes, retail services
revenue increased in 1998 and the six months ended June 30, 1999.
We entered the wholesale services business to leverage our network
infrastructure developed for our integrated retail services. In 1996, we began
to aggressively pursue wholesale revenues from sales to carriers, resellers and
prepaid calling card providers. Wholesale revenue as a percentage of total
revenue was 17.3% in 1996, 40.9% in 1997 and 36.9% in 1998. Wholesale revenue
as a percentage of total revenue was 40.3% and 37.3% for the six months ended
June 30, 1998 and 1999.
During the past several years, market prices for telecommunications
services have been declining, which is a trend that we believe will likely
continue. This decline will have a negative effect on our revenue and gross
margin, which may not be offset completely by savings from decreases in our
cost of services.
Operating Expenses
Our primary operating expense categories include cost of services and
selling, general and administrative expenses. Cost of services includes the
fixed costs of leased facilities and the variable costs of origination,
termination and access services provided through local exchange carriers and
other telecommunications companies. Cost of services also includes the fixed
costs of unbundled network elements and the cost of resold local services. By
using multiple carriers for transmission capacity, we maintain network
diversity and take advantage of least-cost traffic routing. In addition, the
approximately 3,400 route miles of our fiber optic network, which are expected
to become operational in phases through the end of 1999, will enable us to
carry a significant portion of our intraregional traffic over our own
facilities, thereby reducing our costs of services by decreasing payments to
other carriers for the use of their facilities. We are continuing to install
local switching equipment, which will allow us to increase the percentage of
the local services we provide on our own network, thereby improving our
margins.
Selling, general and administrative expenses include all infrastructure
costs, such as selling expenses, customer support, corporate administration,
personnel, network maintenance, and depreciation and amortization. Selling
expenses include commissions for our direct sales program. Selling expenses
also include commissions paid to our dealers and agents, which are based upon a
fixed percentage of the customers' monthly billings. Depreciation and
amortization is primarily related to switching equipment, facilities, computer
equipment and software, and is expected to
26
<PAGE>
increase as we incur substantial capital expenditures to continue the expansion
of our network facilities. Depreciation and amortization also includes the
amortization of line access fees, which represent installation charges paid
primarily to incumbent local exchange carriers for leased copper and fiber
optic facilities.
We recorded approximately $2.1 million in compensation expense in 1997 in
connection with the grant of stock options. We also satisfied stock repurchase
obligations in 1997 and 1998 in connection with the acquisition of all of the
fiber optic network assets of FiberSouth. See "Certain Transactions" for a
description of the FiberSouth acquisition.
Income Taxes
We generated a net loss for 1997 and 1998, and during the six months ended
June 30, 1998 and 1999. Based upon our plans to expand through the construction
and expansion of our network, customer base and product offerings, we expect
this trend to continue. Given these circumstances and the level of taxable
income expected to be generated from reversing temporary differences, we have
established a valuation allowance for the deferred tax assets associated with
these net operating losses. We will reduce the valuation allowance when, based
on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will be realized.
Prior to September 1997, BTI was an S corporation not subject to income
taxes. BTI's income, losses and credits were passed through directly to the
shareholders rather than taxed at the corporate level. As part of our
reorganization, we converted from an S corporation to a C corporation, which
made us subject to federal and state income taxes. We were also required to
adopt the provisions of Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes". The cumulative effect of adoption of this
standard is reflected in our financial statements for the year ended December
31, 1997.
In the past, we paid dividends to BTI's shareholders to fund their tax
obligations arising from income earned by BTI that was reported on their
individual income tax returns. We have indemnified those shareholders for any
additional tax obligations arising from the income earned by BTI while it was
an S corporation. We believe that any such reimbursements will not have a
material effect on our financial condition or results of operations.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue
Revenue for the six months ended June 30, 1999 increased $12.0 million, or
11.3%, to $117.8 million from $105.8 million for the six months ended June 30,
1998. This increase consisted of an increase in integrated retail revenue of
$10.6 million combined with an increase of $1.4 million in wholesale services
revenue. The $10.6 million increase in integrated retail revenue consisted of
an increase in local services revenue of $13.8 million partially offset by a
decrease in retail long distance revenue of $3.2 million. This decrease in long
distance revenue was primarily due to price compression, as retail long
distance minutes increased by 7.2% during this period. Integrated retail
revenues increased from 59.7% of total revenue for the first six months of 1999
as compared to 62.7% for the same period in the previous year.
The $1.4 million increase in wholesale services revenue during the first
six months of 1999 resulted primarily from increases of $10.4 million in
prepaid calling card revenues and $4.9 million in fiber network capacity sales,
offset by decreases of $12.8 in international termination services and $1.1
million in domestic origination and termination services. The change in
switched wholesale services revenue, both domestic and international, is
primarily a result of the effect of access charge reform, price compression in
international termination rates and pricing decisions we made to
27
<PAGE>
preserve margins, which resulted in decreased volumes of termination services.
Although wholesale service revenue increased during the six-month period in
1999 compared to 1998, wholesales revenues decreased as a percentage of total
revenues from 40.3% to 37.3%.
Cost of Services
Cost of services decreased from $77.8 million during the first six months
of 1998 to $77.3 million during the first six months of 1999. Cost of services
represented 73.6% and 65.7% of revenue for the six month-periods ended June 30,
1998 and June 30, 1999, respectively. The decrease as a percentage of revenue
primarily resulted from the change in our revenue mix to a higher percentage of
integrated retail revenue, which has a higher associated margin. In addition, we
experienced an increase in the percentage of local services provided through
our facilities, which services have a higher margin than those provided on a
resale basis. Expansion of our fiber optic network and the continuing effect of
access charge reform have also improved our margin percentages. In addition to
adding revenues from capacity sales to other telecommunication providers, this
fiber optic network provides for cost savings throughout the network. We expect
our cost of services as a percentage of revenues to continue to decrease as we
deploy more of our fiber optic network and continue to increase the percentage
of local customers with facilities-based local service.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.9 million, or
24.6%, to $40.0 million, or 34.0% of revenue, for the six months ended June 30,
1999 and from $32.1 million, or 30.3% of revenue, for the same period in 1998.
The increase in selling, general and administrative expenses during the first
six months of 1999 is largely attributable to the significant investments in
human resources and increased marketing and advertising efforts associated with
the continued expansion of our local services. Since these investments often
occur in advance of the realization of significant revenue from local services,
they have the effect of increasing selling, general and administrative expenses
as a percentage of revenue. These investments in infrastructure and support are
intended to provide us with the ability to continue to expand into new markets,
maximize customer retention and provide for growth. In addition, we have hired
additional personnel to facilitate the deployment of our fiber optic network.
Depreciation and amortization was $4.6 million and $8.8 million in the six
months ended June 30, 1998 and June 30, 1999. This 90.1% increase is primarily
due to capital expenditures related to the expansion of our existing operations
centers, fiber network and support infrastructure to accommodate increased
traffic volume and expanded service offerings.
Other Income (Expense)
Interest expense increased from $12.8 million for the six months ended
June 30, 1998 to $13.5 million for the same period in 1999. This $.7 million
increase is primarily attributable to increased borrowings under our credit
facilities during the first six months of 1999 as compared to 1998. In
addition, we capitalized $.9 million of interest expense associated with the
construction of our network in the six months ended June 30, 1999, as compared
to $.7 million for the same period in 1998.
Interest income decreased from $3.5 million in the six months ended June
30,1998 to $1.4 million in the six months ended June 30, 1999. This decrease is
due to lower restricted and non-restricted cash balances during 1999.
28
<PAGE>
EBITDA
EBITDA for the six months ended June 30, 1999 was $.8 million, an
improvement of $4.9 million from the negative $4.1 million we experienced
during the same period in the prior year. The increase in EBITDA during 1999
was primarily attributable to the decrease in cost of services resulting from
increased margin percentages and changes in our revenue composition.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue
Revenue increased 9.0% from $194.9 million in 1997 to $212.6 million in
1998. This $17.6 million increase was primarily driven by our introduction of
local exchange services, which increased revenue by $11.8 million in 1998. Our
cumulative number of local access lines sold increased from approximately 2,600
at December 31, 1997 to approximately 48,500 at December 31, 1998. The
remaining revenue increase of $5.8 million consisted of $7.1 million in other
integrated retail services, offset by a decrease of $1.3 million in wholesale
service revenue in 1998.
Within wholesale service revenue, prepaid calling card revenue increased
$8.7 million from $5.0 million in 1997 to $13.7 million in 1998. The increase
in prepaid calling card revenue was offset by a decrease in revenue from
wholesale switched origination and termination services. We lost volume because
we priced our services to preserve our margins. Other factors contributing to
this decrease included competitive pricing pressures, access charge reform and
consolidation within the industry.
Cost of Services
Cost of services increased 8.5% from $139.0 million in 1997 to $150.9
million in 1998. Cost of services represented 71.0% of revenue for the year
ended December 31, 1998, as compared to 71.3% for 1997. This reflects the
impact of our introduction of local services, changes in the long distance
revenue mix and cost efficiencies gained in our network operations. The revenue
mix impact included an increase in the percentage of revenue represented by
higher margin integrated services from 59.1% in 1997 to 63.1% in 1998. However,
the positive impact of these changes was partially offset by the higher costs
associated with providing local services, which were introduced in late 1997
and offered initially on a resale basis. In addition, through the end of 1998
approximately 10% of our planned 3,400-mile fiber network had been activated,
which allowed us to begin reducing certain fixed costs associated with leased
facilities.
In addition, cost of services was adversely impacted by regulatory
matters, including increased costs related to the public payphone compensation
order. Effective October 1997, an FCC ruling established a per call
compensation plan requiring us to pay service providers for calls completed
using their payphones. During the first quarter of 1998, we began assessing a
surcharge to our customers in order to cover these costs.
Construction of our fiber optic network and the continuing effect of
access charge reform are expected to reduce our network costs in the future. We
anticipate that our fiber optic network will become substantially operational
by December 31, 1999, and that our network expansion will enable us to carry a
significant portion of our intraregional telecommunications traffic over our
own facilities, thereby decreasing payments to other carriers for use of their
facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 1998 increased 28.1% to
$68.5 million, or 32.3% of revenue, as compared to $53.5 million, or 27.5% of
revenue in 1997. The increase in selling, general and administrative expenses
during 1998 was largely attributable to the hiring and
29
<PAGE>
increased marketing and advertising associated with our introduction of local
services. These investments are intended to provide us with the ability to
continue to expand into new markets, maximize customer retention and provide
for growth. We have also hired additional personnel to facilitate the
deployment of our fiber optic network. In addition, depreciation and
amortization increased 73.2% to $11.5 million in 1998. The increase in
depreciation and amortization was primarily due to capital expenditures related
to the expansion of our network facilities and support infrastructure to
accommodate expanded service offerings and increased traffic volume.
Other Income (Expense)
During 1998, interest expense was $25.4 million, compared to $8.8 million
in 1997. The increase in interest expense during 1998 is primarily attributable
to our September 1997 issuance of 10 1/2% Senior Notes due 2007 to finance
capital expenditures, working capital and our introduction of local services.
In addition, we capitalized $1.5 million of interest expense associated with
the construction of our local service facilities and fiber networks during
1998.
Interest income increased to $5.6 million in 1998 from $2.4 million in
1997, due to the investment of a portion of the proceeds of the 10 1/2% Senior
Note offering.
EBITDA
We had negative EBITDA of $6.9 million for 1998, and positive EBITDA of
$3.1 million for 1997. The decrease in EBITDA in 1998 is primarily attributable
to the additional selling, general and administrative expenses associated with
our introduction of local services and the expansion of our fiber network.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue
Revenue increased 31.0% from $148.8 million for 1996 to $194.9 million for
1997, primarily as a result of a $54.0 million increase in wholesale services
revenue. The increase in wholesale revenue was attributable to increased sales
to existing customers as well as sales to new customers. This increase was
partially offset by a $7.9 million decrease in integrated services revenue
resulting from the implementation of our new sales compensation structure, and
to a lesser extent due to decreasing retail long distance rates and increasing
competitive pressures.
Cost of Services
Cost of services increased 53.1% from $90.8 million for 1996 to $139.0
million for 1997, primarily as a result of the increase in total call volume
resulting from increased wholesale revenue. Cost of services as a percentage of
revenue increased from 61.0% for 1996 to 71.3% for 1997, largely due to the
increase in lower margin wholesale revenue as a percentage of total revenues.
Wholesale revenue accounted for 40.9% of total revenue for 1997, up from 17.3%
for 1996. In addition, the effect of spreading fixed network costs over a
reduced integrated retail services revenue base also contributed to the
increase in cost of services as a percentage of revenue in 1997 as compared to
1996. Cost of services was also adversely impacted by regulatory matters,
including increased costs related to the FCC's public payphone compensation
order.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 8.5% from $49.3
million for 1996 to $53.5 million for 1997, though it declined as a percentage
of total revenue from 33.2% in 1996 to 27.5% in 1997. The decrease as a
percentage of revenue is largely attributable to cost containment efforts
implemented in the second quarter of 1996. Selling, general and administrative
expenses in 1997 also included the one-time charge of $2.1 million to recognize
stock compensation expense in
30
<PAGE>
connection with our reorganization. Depreciation and amortization increased
47.9% from $4.5 million for 1996 to $6.6 million for 1997, due primarily to
capital expenditures related to our investment in new switching operations and
expansion of existing operations centers and infrastructure due to increased
traffic volume and expanded product offerings.
Other Income (Expense)
Interest expense was $1.7 million for 1996, as compared to $8.8 million
for 1997, primarily due to the issuance of the 10 1/2% Senior Notes to finance
capital expenditures, working capital and our introduction of local services.
EBITDA
EBITDA decreased 63.7% from $8.6 million for 1996 to $3.1 million for
1997. The decrease is due primarily to an increase in cost of services,
partially offset by increased revenues.
Liquidity and Capital Resources
Cash Flows
For the year ended December 31, 1996, we generated cash flow from
operating activities of $.3 million. This primarily resulted from net income of
$2.6 million plus depreciation and amortization of $4.5 million, offset by an
increase in accounts receivable of $6.6 million. Cash used in investing
activities in 1996 was $8.7 million, primarily consisting of $7.8 million in
capital expenditures. Net cash provided by financing activities was $8.6
million in 1996. This increase in cash was primarily due to proceeds of
long-term debt of $11.6 million which was partially offset by $2.0 million in
dividends paid to shareholders. These dividends were paid in part to pay taxes
because BTI was an S corporation during 1996.
For the year ended December 31, 1997, we generated $8.2 million of cash
flow from operating activities, primarily driven by a net loss of $10.6
million, depreciation and amortization of $6.6 million, and increases in
accounts payable and accrued expenses of $4.2 million and accrued interest of
$7.1 million. Cash used in investing activities in 1997 was $133.2 million,
including $74.6 million in restricted cash used to purchase securities pledged
to secure the first six scheduled interest payments on the 10 1/2% Senior
Notes. In addition, 1997 investing activities included $35.2 million utilized
for the FiberSouth acquisition and $22.8 million in capital expenditures. Net
cash provided by financing activities in 1997 was $191.5 million. This amount
consists of $250.0 million of gross proceeds from the 10 1/2% Senior Notes
offering, partially offset by $28.3 million used for the share repurchase,
$18.7 million used to pay off existing long-term debt and $9.5 million in
financing costs and other assets. We also paid dividends of $1.6 million, in
part to permit shareholders to pay taxes. When BTI converted from an S
corporation to a C corporation, we became fully subject to federal and state
income taxes and recorded $2.8 million of deferred income tax liabilities.
There was no corresponding impact on our results from operations due to net
operating losses generated during 1997, which were partially offset by the
recording of a valuation allowance.
For the year ended December 31, 1998, we used $6.4 million of cash flow to
fund operating activities. This amount consisted primarily of a net loss of
$38.2 million, offset by depreciation and amortization of $11.5 million, and an
increase in accounts payable and accrued expenses of $20.1 million associated
with our capital expenditures and continued operational expansion. Cash used in
investing activities in 1998 was $49.5 million, including capital expenditures
of $66.3 million and an increase in other assets of $3.1 million, partially
offset by the decrease in restricted cash of $22.3 million. Capital
expenditures during 1998 were primarily related to the deployment of the fiber
optic network and purchases of equipment for the development of
facilities-based local exchange services. The $3.1 million increase in other
assets consisted of $1.6 million in capitalized
31
<PAGE>
expenditures for line access fees, and the $1.5 million purchase of a
multimedia franchise to secure service rights in Raleigh (see "Certain
Transactions" for a description of this transaction). The decrease in
restricted cash resulted from the provision of $25.7 million to fund the March
and September 1998 interest obligations on the 10 1/2% Senior Notes, net of
$3.5 million in related investment earnings. In addition, during 1998 we
satisfied stock and option repurchase obligations, including ones that arose in
connection with the FiberSouth acquisition. We settled these obligations with a
$2.3 million cash payment, which is reflected as an adjustment to equity and
represents a reallocation of the original FiberSouth purchase price. Net cash
provided by financing activities in 1998 was $1.6 million which consisted
primarily of $4.1 million in net borrowings on long-term debt partially offset
by a decrease in other long term liabilities.
For the six months ended June 30, 1998, we used $4.8 million of cash flow
to fund operating activities. This amount consisted primarily of a net loss of
$18.1 million and an increase in accounts receivable of $4.9 million, partially
offset by depreciation and amortization of $4.6 million and an increase in
accounts payable and accrued expenses of $14.5 million. Cash used in investing
activities for the six months ended June 30, 1998 was $17.1 million. This
amount consists primarily of capital expenditures of $27.5 million and
settlement of FiberSouth obligations of $2.3 million partially offset by the
decrease in restricted cash of $12.9 million. The decrease in restricted cash
resulted from the provision of $12.6 million to fund the March 1998 interest
obligations on the 10 1/2% Senior Notes, net of interest earned on these
balances. Net cash used in financing activities in the first six months of 1998
was $1.0 million which consisted primarily of $.5 million increase in deferred
financing costs and a $.5 million decrease in other long term liabilities.
For the six months ended June 30, 1999, our operating activities provided
us with $1.0 million of cash flow. This amount consisted primarily of increases
in accounts payable and accrued expenses of $14.7 million and advanced billings
and other liabilities of $2.3 million in addition to depreciation and
amortization expense of $8.8 million. Cash provided by operating activities was
partially offset by a net loss of $20.4 million and an increase in accounts
receivable of $4.3 million. Cash used in investing activities for the six
months ended June 30, 1999 was $35.6 million. This amount consists primarily of
capital expenditures of $45.6 million partially offset by the decrease in
restricted cash of $11.9 million. The decrease in restricted cash resulted from
the provision of $13.1 million to fund the March 1999 interest obligations on
the 10 1/2% Senior Notes, net of interest earned on these balances. Net cash
provided by financing activities in the first six months of 1999 was $27.2
million, which consisted primarily of $27.7 million proceeds from long-term
debt.
Debt
10 1/2% Senior Notes. On September 22, 1997, we issued $250.0 million
principal amount of 10 1/2% Senior Notes due 2007. Interest on the 10 1/2%
Senior Notes is payable semiannually in cash, on each March 15 and September
15.
The 10 1/2% Senior Notes are unsubordinated indebtedness equal in right of
payment with all of our existing and future unsubordinated indebtedness.
Approximately $74.1 million of the net proceeds from the sale of the 10 1/2%
Senior Notes was used to purchase U.S. government securities to secure and fund
the balance of the first six interest payments on the 10 1/2% Senior Notes. The
10 1/2% Senior Notes will mature on September 15, 2007.
Upon a change of control, as defined in the indenture governing the
10 1/2% Senior Notes, we will be required to make an offer to purchase the
10 1/2% Senior Notes at a purchase price equal to 101% of their principal
amount, plus accrued interest.
The indenture governing the 10 1/2% Senior Notes contains certain
covenants that affect, and in certain cases significantly limit or prohibit,
among other things, our ability to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, make investments,
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<PAGE>
engage in transactions with stockholders and affiliates, create liens, sell
assets and engage in mergers and consolidations. If we fail to comply with
these covenants, our obligation to repay the 10 1/2% Senior Notes may be
accelerated. However, these limitations are subject to a number of important
qualifications and exceptions. In particular, while the indenture restricts our
ability to incur additional indebtedness by requiring compliance with specified
leverage ratios, it permits us to incur an unlimited amount of additional
indebtedness to finance the acquisition of equipment, inventory and network
assets and up to $100.0 million of additional indebtedness.
GE Capital Credit Facilities. Our wholly owned subsidiary, BTI, has a
credit agreement with GE Capital providing for the following credit facilities:
o a $30.0 million revolving credit facility to be used for working capital
and other purposes; and
o a $30.0 million note facility for capital expenditures.
We amended these facilities effective June 30, 1998, to provide us with
additional operating flexibility. Borrowings under these facilities are based
on a percentage of eligible accounts receivable, in the case of the revolving
facility, and eligible capital expenditures, in the case of the note facility.
At June 30, 1999, we had outstanding an aggregate of $31.9 million under these
facilities, in addition to $.1 million in letters of credit. The facilities
mature on September 17, 2002.
Amounts drawn under the credit facilities bear interest, at our option, at
either a floating rate equal to prime or at 30-, 60- or 90-day LIBOR rates, as
we choose, plus, in each case, a percentage rate that fluctuates, based on the
ratio of our total debt to EBITDA, from 0% to 1.25% for borrowings at prime and
from 1.75% to 3% for borrowings at LIBOR. We are also required to pay a fee of
.375% per year on the unused portion of the facilities.
BTI's obligations under the facilities are guaranteed by BTI Telecom and
its other subsidiaries and secured by a first-priority lien on all current and
future assets of BTI and our other subsidiaries and our pledge of the stock of
BTI and any intercompany notes.
Under the facilities, we have agreed, among other things, to achieve
minimum EBITDA targets, meet minimum interest coverage ratios and not exceed
the limits set for capital expenditures in the credit agreement. We have agreed
to, among other things, limits on our ability to incur debt, create liens, pay
dividends, make distributions or stock repurchases, engage in transactions with
affiliates, sell assets and engage in mergers and acquisitions, except as
specifically permitted under the credit agreement. In addition, these
facilities contain affirmative covenants, including, among others, covenants
requiring maintenance of corporate existence, licenses and insurance, payments
of taxes and the delivery of financial and other information. We are currently
in compliance with these covenants, as amended. However, we might not be able
to continue meeting these covenants or, if required, obtain additional
financing on acceptable terms. Our failure to do so may have a material adverse
impact on our business and operations.
Bank of America Commitment Letter. We have received a commitment letter
from Bank of America for a $60.0 million credit facility. Availability under
the facility will be based on the amount of fiber optic network purchased from
Qwest and associated infrastructure purchased from Nortel. Borrowings are to be
secured by the fiber optic network and infrastructure and bear interest at 30-,
60- or 90-day LIBOR or the prime rate, plus an applicable spread that will vary
based on our financial performance. The facility will require our compliance
with various financial and administrative covenants, including among others,
covenants limiting our ability to incur indebtedness, create liens, make
distributions or stock repurchases, make capital expenditures, engage in
transactions with affiliates, sell assets and engage in mergers and
acquisitions. In addition, the facility will contain affirmative covenants,
including among others, covenants requiring us to:
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<PAGE>
maintain the fiber, network facilities and infrastructure, our corporate
existence, licenses, insurance and a corporate interest-rate hedging policy;
pay taxes; and deliver financial and other information to Bank of America. Bank
of America intends to syndicate the facility. If syndication is not successful,
Bank of America reserves the right to change pricing and structure of the
facility. If we do not agree to the pricing and structure changes, Bank of
America may, at its option, demand payment in full 120 days after the
determination that the requested changes in pricing and structure are not
acceptable to us. Closing of this facility is subject to standard conditions,
such as the negotiation of final documentation, including covenants, and an
intercreditor agreement with GE Capital.
Capital Spending
We expect to need significant financing for our capital expenditure and
working capital requirements. We currently estimate that our aggregate capital
expenditures will total approximately $45.0 million for the remainder of 1999
and between $85.0 million and $100.0 million for 2000. We expect to make
substantial capital expenditures thereafter. Capital expenditures will be
primarily for:
o the purchase and installation of switches, electronics, fiber, co-location
facilities and other technologies in existing networks and in additional
networks to be constructed in our service areas;
o market expansion, including new sales offices;
o the continued development of our existing operations centers to service
anticipated increased traffic volumes and increased geographic areas; and
o expenditures with respect to our management information systems and
customer support infrastructure.
The actual amount and timing of our capital requirements may differ
materially from these estimates as a result of, among other things:
o the cost of the development of our networks in each of our markets;
o a change in or inaccuracy of our development plans or projections;
o a change in the schedule or extent of our roll-out plan;
o the extent of price and service competition for telecommunications
services in our markets;
o the demand for our services;
o regulatory and technological developments, including additional market
developments and new opportunities, in the telecommunications industry;
o an inability to borrow under our credit facilities; and
o the consummation of acquisitions, joint ventures or strategic alliances.
Although there can be no assurance, we believe that proceeds from this
offering, together with cash on hand, borrowings expected to be available under
our credit facilities and cash flow from operations, will be sufficient to
expand our business as currently planned. In the event our plans change or
prove to be inaccurate, these funds might be insufficient. We might also
require additional capital in the future (or sooner than currently anticipated)
for new business activities related to our current and planned businesses, or
if we decide to make additional acquisitions or enter into joint ventures and
strategic alliances.
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<PAGE>
Sources of additional capital could include public and private equity
offerings, and subject to compliance with the provisions in the indenture
governing the 10 1/2% Senior Notes and our credit facilities, debt financings.
Additional financing might not be available, or it might not be available on
terms acceptable to us and within the restrictions contained in our financing
arrangements. Failure to generate or obtain sufficient funds could result in
delay or abandonment of some or all of our development and expansion plans.
Year 2000 Issues
Beginning in 1996, we conducted a thorough review of our information
technology and operating systems and non-information technology systems, as
well as the systems of our major customers, suppliers, and third party network
service providers to ensure that the systems would properly recognize the Year
2000. We also reviewed internally developed software. As a result of this
assessment, we have developed a thorough plan to address the Year 2000 issue. A
project manager and significant other programming and operational staff are
dedicated to the plan's implementation. The Year 2000 plan includes the
wide-ranging assessment of the Year 2000 problems that may affect us, the
development of remedies to address the problems discovered in the assessment
phase, testing of the remedies and the preparation of contingency plans.
We began implementing the plan in 1997. Implementation will continue
through 1999. We have completed the evaluation phase for our systems. We are in
the remediation and testing phases of the Year 2000 plan. We anticipate that
all major business-critical systems will be tested and Year 2000 compliant by
September 30, 1999. In that regard, we have received assurances or written
agreements from significant vendors that their systems are either already Year
2000 compliant or will be as of September 30, 1999. These vendors include our
major suppliers of switching equipment, fiber optic electronics, and billing
and customer care systems. We believe that these systems represent our most
critical business systems. All other systems are targeted for compliance by the
end of the third quarter 1999. We are currently testing the systems and
applications that have been corrected or reprogrammed.
As part of the Year 2000 plan, we are seeking information from our 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. To
date these parties have indicated that they are implementing procedures to
ensure that their computer systems will be Year 2000 compliant by December 31,
1999.
We have developed contingency plans to deal with potential Year 2000
related business interruptions that may occur. These contingency plans are
designed to address the most reasonably likely worst-case scenarios based upon
the responses of vendors, service providers and customers to our requests for
Year 2000 compliance information.
Through June 30, 1999, we had spent approximately $1.5 million on Year
2000 projects and activities. The estimated total cost for Year 2000 projects
and activities is $2.8 million, excluding capital expenditures. Most of these
capital expenditures, which include both equipment and software, will not only
provide for Year 2000 compliance but are also expected to enhance 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 our financial condition or results from
operations. We believe we have 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 us and/or our major vendors, third party network service providers
or other material service providers or customers to adequately address
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their respective Year 2000 issues in a timely manner could have a material
adverse effect on our business, results of operations and financial condition.
Effects of New Accounting Standards
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which are both effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 addresses reporting
amounts of other comprehensive income and SFAS No. 131 addresses reporting
segment information. As of January 1, 1998, we implemented SFAS No. 130. There
are no material differences between net income and comprehensive income as
defined by SFAS 130 for the periods presented. SFAS 131 uses a management
approach to report financial and descriptive information about a company's
operating segments. Operating segments are revenue-producing components of the
enterprise for which separate financial information is produced internally for
the company's management. Under this definition, we operated, for the years
ended December 31, 1996, 1997 and 1998, as a single segment.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". We expect to adopt SFAS No. 133 effective
January 1, 2000. We do not expect any significant additional disclosure
requirements or other financial statement impacts to result from the adoption
of SFAS No. 133.
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", which requires
the capitalization of certain costs incurred in connection with developing or
obtaining software for internal-use. We adopted the provisions of SOP 98-1 in
our 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", which requires that costs related to start-up
activities be expensed as incurred. We adopted the provisions of SOP 98-5 in
our financial statements as of January 1, 1999. Prior to 1999, we expensed
start-up costs and therefore, the adoption of SOP 98-5 will have no impact on
our financial statements.
Inflation
We do not believe inflation has had a significant impact on our
operations.
Quantitative and Qualitative Disclosure of Market Risks
Although we invest our short-term excess cash balances, the nature and
quality of these investments are restricted under the terms of the indenture
governing the 10 1/2% Senior Notes and by our internal investment policies.
These investments are limited primarily to U.S. Treasury securities, certain
time deposits, and high quality repurchase agreements and commercial paper
(with restrictions on the rating of the companies issuing these instruments).
We do not invest in any derivative or commodity type instruments. In addition,
our restricted cash balance available to fund scheduled interest payments on
the 10 1/2% Senior Notes through September 2000 is invested in U.S. Treasury
securities in accordance with the terms of the 10 1/2% Senior Notes.
Accordingly, we are subject to minimal market risk on our investments.
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The majority of our debt, which consists of $250.0 million of the 10 1/2%
Senior Notes, bears interest at a fixed rate. Although the actual service
requirements of this debt are fixed, changes in interest rates generally could
put us in a position of paying interest that differs from then existing market
rates. The remainder of our debt consists of the GE Capital credit facilities,
which bear interest at variable rates based upon market conditions and our
financial position. As of June 30, 1999, borrowings under these facilities were
$31.9 million. We have not engaged in any hedging transactions related to these
facilities. As market conditions and outstanding borrowings under these
facilities change, we intend to continue to evaluate the advisability of
hedging transactions. We expect to enter into interest rate hedging
transactions with respect to the credit facility we intend to enter into with
Bank of America.
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BUSINESS
Overview
We are a leading facilities-based integrated communications provider, or
ICP, in the southeastern United States. Since we began operations in 1983 as a
long distance provider, we have continually leveraged our infrastructure and
presence throughout the Southeast to add new services. Most notably, we
introduced local services in November 1997, and by June 30, 1999, we had sold
75,000 local access lines. Our successful local service offering has enhanced
our ability to cross-sell other services to both new and existing customers. We
currently offer a full suite of integrated retail service offerings, including
local, long distance, data, Internet access, paging and other enhanced
services, to small and medium-sized business customers, and we are in the
process of rolling out DSL high-speed data services. We also offer wholesale
services, including switched, private line, special access and prepaid calling
card services, to other telecommunications carriers and end-user customers. We
are continuing to expand our facilities-based network, which we expect will
include a total of approximately 3,900 route miles of fiber across the eastern
United States and 19 local switches by the end of 2001. As of June 30, 1999, we
had approximately 30,000 small and medium-sized business customers. In 1998 and
the six months ended June 30, 1999, we had total revenue of $212.6 million and
$117.8 million.
Market Opportunity
We believe that the opening of the local telecommunications market to
competition, accelerated growth rates for local access lines, demands for
faster data transmission requiring greater bandwidth and the desire of small
and medium-sized businesses to purchase all of their telecommunications
services from one provider present us a significant market opportunity.
Attractive Southeastern United States Demographics. We believe that the
southeastern United States is an attractive market that should provide
significant opportunities to increase revenues and gain market share in the
region. According to the U.S. Department of Commerce and Woods & Poole
Economics, Inc., the population in the Southeast has grown at a 1.5%
compound annual growth rate over the last twenty years compared to .9% for
the United States Currently, over 20% of the United States population lives
in the Southeast and the region's population is expected to grow 25% over
the next 20 years. Since 1980, total retail sales in the Southeast have
increased 2.6% per year as compared to the national average of 1.7%.
Small and Medium-Sized Business Opportunity. We believe that small and
medium-sized businesses present a sizable market opportunity for us because
they are often underserved by both incumbent local exchange carriers and
the larger telecommunications service providers, which tend to focus on
larger business customers. According to the U.S. Department of Commerce,
our target segment, businesses with 1 to 499 employees, makes up 99.7% of
the 1.3 million businesses in the Southeast. In addition, we believe small
and medium-sized business customers prefer to use one telecommunications
services provider that will provide them with a bundled package of services
on a single bill, including local, long distance, data services, Internet
access, paging and other enhanced services.
Local Telephone Opportunity. The Telecommunications Act of 1996 and certain
state regulatory initiatives provide increased opportunities in the
telecommunications marketplace by opening local markets to competition and
requiring incumbent local exchange carriers to provide increased direct
interconnection to competitors. According to the FCC, in 1998, total
revenue from local exchange services in the United States was approximately
$108.3 billion, and there were 56.6 million business access lines for
reporting local exchange carriers in the United
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States. Of these lines, 10.0 million, or 17.7%, were in the southeastern
United States, as shown below:
<TABLE>
<CAPTION>
North South
Alabama Florida Georgia Kentucky Carolina Carolina Tennessee Virginia Total
--------- --------- --------- ---------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 business access lines
(in millions) ........... 0.6 3.2 1.5 0.5 1.3 0.5 0.8 1.6 10.0
</TABLE>
Long Distance Opportunity. According to FCC data, total U.S. long distance
service revenue was over $99.6 billion in 1997, with nonresidential
wireline long distance service accounting for $55.4 billion. Since the 1984
deregulation of the long distance service industry, competition has
increased, service levels and end-user prices have improved and service
offerings have expanded, all of which have resulted in increased demand and
significant market growth for long distance services. According to the FCC,
long distance switched access minutes have increased from 215.7 billion
minutes in 1987 to 497.3 billion minutes in 1997, representing a compound
annual growth rate of 8.7%.
Data Opportunity. High-speed, reliable data services and Internet
connectivity have become more important due to increased usage of the
Internet for business applications and electronic commerce. The number of
Internet users worldwide has increased substantially over the last several
years, reaching nearly 100 million in 1998. According to International Data
Corporation, the number of Internet users worldwide is forecasted to grow
to approximately 320 million by 2002. Forrester Research projects that the
total market for data networking services and Internet access will grow
from $6.2 billion in 1997 to approximately $49.7 billion by 2002.
Approximately $27.9 billion of this market is expected to be from services
to businesses. We believe businesses of all sizes increasingly view data
networking services and Internet access as mission-critical. Therefore, the
availability of cost-effective high-speed data capacity, network quality, a
value-added services portfolio and technical capabilities are important
competitive distinctions among service providers. Small and medium-sized
businesses, people working in home offices and telecommuters are
increasingly demanding cost-effective high-speed data connections for
applications such as Internet access, intranets, extranets, telecommuting,
e-commerce, e-mail, video conferencing and multimedia. According to
International Data Corporation, approximately 78% of Internet access
revenues derived from small and medium-sized businesses in 1997 were
generated through the traditional telephone system, using relatively slow
28.8 to 56 kilobits per second dial-up modems or ISDN lines. Recently
introduced DSL technology increases the data-carrying capacity of copper
telephone lines by up to 25 times compared to standard dial-up modems.
Wholesale Opportunity. We believe that due to technological innovations,
there will be increasing demand for high-bandwidth transmission capacity,
and that these innovations are driving increased integration of voice and
data networks. In addition we believe that industry specialization will
continue as communications companies focus on their core competencies and
therefore outsource non-core activities to wholesale telecommunications
services providers, principally those with whom they have existing
relationships. For example, in the long distance services market, we
believe that an increasing number of carriers will focus on branding and
retail distribution while buying telecommunications services from carriers
with available network capacity and related network infrastructure.
Similarly, we believe communications providers such as Internet service
providers will focus on developing and marketing Internet-related services
and will outsource transmission services.
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Our Solution
We believe that there is substantial and growing demand in the
southeastern United States among small and medium-sized businesses for a
bundled package of retail services. We offer:
o local and long distance services;
o data services;
o Internet access;
o paging and voice messaging services;
o advanced intelligent network applications; and
o operator and other enhanced services.
Neither the incumbent local exchange carriers nor the larger
telecommunications service providers typically market retail services in a
comprehensive package to small and medium-sized business customers. We offer
these customers personalized service and the ability to purchase integrated
telecommunications services from a single supplier and on a single bill. We
have more than 15 years of experience in delivering telecommunications services
to our customers. We believe our experience and expertise in selling and
supporting these services give us a market advantage. Our service-oriented
focus is designed to provide our customers with the kind of direct sales and
support that other service providers generally reserve for their larger
customers. We believe that the combination of our integrated package of
services and personalized approach to sales and support will enable us to
continue to attract and retain customers.
We believe that we can leverage our network infrastructure to meet
increasing demand for wholesale services, including from our existing customers
such as Intermedia, Cable & Wireless USA, McLeod, Nextel, ITC-DeltaCom,
NEXTLINK, Williams Communications, PSINet, UUNet, MCI Worldcom, Sprint, GTE and
BellSouth Mobility. In response to the increased demand for carrying wholesale
traffic, we offer:
o switched services, including origination and termination;
o private line services;
o special access services;
o Signaling System 7 services; and
o prepaid calling card services.
We also believe that there are significant opportunities for us to
maintain greater control over our network operations and improve our overall
margins by offering more facilities-based services to existing and new
customers. We are continuing to expand our facilities by deploying our fiber
optic network, installing additional Lucent 5ESS 2000 local switches,
co-locating our own network equipment in incumbent local exchange carrier
central offices and installing frame relay and asynchronous transfer mode, or
ATM, switches.
In the following table we set forth the current status of our facilities
and their estimated status as of December 31, 1999 and 2001.
<TABLE>
<CAPTION>
Estimated
December
31,
----------------
Facilities July 15, 1999 1999 2001
- -------------------------------- --------------- ------- ------
<S> <C> <C> <C>
Route miles of fiber ........... 1,200 3,400 3,900
Local switches ................. 9 10 19
Long distance switches ......... 5 5 5
Co-locations ................... 48 50 100
Frame relay switches ........... 7 21 29
ATM switches ................... 0 5 5
</TABLE>
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We will continue to expand our facilities footprint through the deployment
of fiber, switches and other network infrastructure, including back office and
operations support systems, as customer demand dictates.
Business Strategy
Our objective is to strengthen our market position as a leading
facilities-based integrated communications provider, or ICP, in the
southeastern United States. We believe that our more than 15 years of
operations, our 30,000 business customers and our significant experience in the
southeastern United States will enable us to implement our growth strategy. To
achieve this objective, we intend to:
o leverage our current market position, extensive customer base, brand
name, service offerings and network infrastructure to aggressively
penetrate the local exchange and data services markets in the southeastern
United States;
o continue to expand our telecommunications network to lower the cost of
providing services to retail and wholesale customers, while enhancing and
increasing the services offered; and
o expand into new southeastern U.S. markets through capital-efficient
network deployment and strategic acquisitions, alliances and joint
ventures.
The principal elements of our business strategy include:
Offering Integrated Retail Services Targeted to Small and Medium-Sized
Business Customers. We focus principally on small and medium-sized business
customers in the southeastern United States. We offer these customers
bundled telecommunications services, including local, long distance, data,
Internet access, paging and other enhanced services. Since beginning
operations in 1983, we have continually added to the comprehensive package
of services we offer in response to regulatory changes and customer demand.
In addition, we are able to provide customers with an integrated bill for
these services. We also provide our customers with a single point of
contact for their sales and service needs. We believe that by offering an
integrated package of retail services together with a high level of ongoing
customer care, we increase customer satisfaction, enhance our ability to
attract and retain customers, and thereby better penetrate our target
market.
Rapidly Penetrating the Local Exchange Market. Our strategy centers on
providing local service over our own network because we believe that a
local exchange services provider can better serve its customers when it
owns, manages and controls the network used to carry their calls. In
November 1997, to facilitate early market entry, we began offering local
services bundled with long distance and data services in selected markets
in the southeastern United States by reselling the services of the
incumbent local exchange carriers. In the first quarter of 1998, we began
installing equipment and infrastructure to support facilities-based local
services in key markets. As of July 15, 1999, we had installed nine Lucent
5ESS 2000 local switches, digital loop carriers and associated
infrastructure in Raleigh, Charlotte, Greensboro and Wilmington, North
Carolina; Columbia and Greenville, South Carolina; Atlanta, Georgia; and
Orlando and Jacksonville, Florida. We now provide facilities-based services
in these markets. We plan to install switches, digital loop carriers and
associated infrastructure to support facilities-based local service in 10
additional markets by the end of 2001. We believe that providing
facilities-based local service as part of an integrated bundle of retail
services should allow us to attract and retain customers.
Accelerating Deployment of Data Services. The rapid growth of the Internet,
expansion of electronic commerce and introduction of new business
applications have fueled increasing demand from small and medium-sized
businesses for access to high-speed data services. We are
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positioning our company to meet this demand in our target markets by
deploying frame relay, DSL and ATM technologies to meet the needs of
existing and new business customers. As of July 15, 1999, we had installed
seven frame relay switches, with plans to install an additional 22 frame
relay switches by the end of 2001. These switches allow for a more
cost-effective solution for our customers while providing us with a higher
operating margin. We have co-located network equipment in 48 incumbent
local exchange carrier central offices throughout the southeastern United
States, with plans to add approximately 50 more co-locations by the end of
2001. We plan to leverage this network infrastructure, as well as our
existing relationships with several Internet service providers, including
PSINet, UUNet and Interpath, to sell DSL services to existing and new
customers.
Building Market Share Through Personalized Sales, Marketing and Customer
Service. We believe that the key to revenue growth in our target markets is
capturing and retaining small and medium-sized business customers through
effective, personalized sales, marketing and customer service programs. We
use a direct sales force, as well as agents and dealers, to market our
integrated package of services to business customers. We strengthen our
customer relationships with personalized contact for all product inquiries,
repair needs and billing questions, which we believe increases customer
satisfaction and customer retention.
Focusing on the Southeastern United States. We intend to continue to focus
on the high-growth southeastern United States in order to leverage our
existing market presence, brand name and telecommunications network
facilities. In 1998, we derived over 85% of our integrated services revenue
in North Carolina, South Carolina, Georgia, Florida, Virginia and
Tennessee. We believe that our regional focus will enable us to achieve
higher margins as we move traffic onto our own network, to take advantage
of economies of scale in network infrastructure, operations and
maintenance, sales, marketing and management, and to further develop its
long-standing customer and business relationships in the region. We believe
our market presence and brand name awareness in the southeastern United
States should continue to provide new service opportunities in the region.
Building a Capital-Efficient Network. Since we began operations in 1983,
our strategy has generally been to build and/or acquire additional network
capacity as we add customers. We believe that this strategy reduces the
risks associated with speculative network expansion and allows us to focus
our capital expenditures in markets where network expansion will provide
cost or competitive advantages. An important element of our strategy is to
build our network to take advantage of our extensive customer base and
sales office coverage in the southeastern United States. We have acquired
approximately 3,300 miles of dark fiber from New York to Miami and Atlanta
to Nashville to better serve customers in our regional market. Because the
fiber is dark, we can use the latest technology to maximize the amount of
voice and data traffic that we can carry on our network. Based on current
multiplexing technology, we have the ability to transmit over 4 million
simultaneous phone calls. In addition, because we own the fiber, we have
the ability to increase the capacity of our network as future improvements
in technology permit. As of July 15, 1999, approximately 1,100 miles of
this network was operational. We expect the remainder to be deployed in
phases through December 31, 1999. In addition, we plan to build 530 miles
of fiber from Raleigh to Savannah, Georgia. We believe that our network
expansion will result in higher operating margins as a greater percentage
of our traffic is carried over our own network. We also expect our network
expansion to provide greater control of our network and enhanced service
quality.
Leveraging Network Infrastructure to Service Wholesale Marketplace. We plan
to continue leveraging our network capacity to provide a full complement of
services to wholesale customers, including facilities-based carriers,
switchless resellers and prepaid calling card
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providers. This allows us to more efficiently use our network facilities,
while reducing overall fixed network costs as a percentage of revenue. As
we expand our fiber optic network, we believe the strength of our wholesale
customer base and service offerings will more effectively position us to
market capacity.
Expanding Through Strategic Acquisitions and Alliances. As part of our
expansion strategy, we plan to consider strategic acquisitions of, and
alliances with, related or complementary businesses. We believe that we can
generate additional revenues by acquiring companies that do not offer a
full bundle of telecommunications and data services to offer their
customers. We continuously evaluate and often engage in discussions and
negotiations regarding various acquisition and alliance opportunities, but
are not currently a party to any agreement for a material acquisition or
alliance.
Services
Integrated Retail Services. Our integrated retail services include the
following:
<TABLE>
<S> <C>
Local Services We provide local services in North Carolina, South Carolina, Georgia,
Virginia, Florida, Tennessee and five other states, and we have authority
to provide local services in 11 other states and the District of Columbia.
We offer a full range of local services features, including central
exchange (Centrex) services, ISDN services, voice mail, universal
messaging services, directory assistance, call forwarding, return call,
hunting services, call pick-up, repeat dialing and speed dialing.
Long Distance We offer both domestic and international switched and dedicated long
distance services, including "1+" outbound dialing, inbound toll-free and
calling card services.
Data Services We offer both dial-up and dedicated Internet access, Web site design and
hosting services, private line services and frame relay services that
provide high-performance, cost-efficient interconnection of multiple local
area networks or legacy systems. We plan to offer DSL and asynchronous
transfer mode technologies. We are currently testing and evaluating
Alcatel and Teltrend HDSL products. DSL technology provides "always
on" high-speed local connections to the Internet and to private and local
area networks. DSL technology can increase the data transfer rates of a
standard copper telephone line to up to 25 times faster than a standard
dial-up modem, at a lower initial fixed investment than alternative
technologies such as fiber, cable modems or satellite communications. We
have preliminary agreements with Covad and NorthPoint to resell their
DSL services in markets where we have not installed our own equipment.
Asynchronous transfer mode technology will provide data transport
services which allow customers to interconnect local area networks
maintained at different sites at speeds that match the transmission speeds
of their networks.
Paging Services We offer advanced, facilities-based wireless paging services, including
digital and alphanumeric paging, personal identification number services,
voice mail, out-dial capability, locator service, fax-on-demand and
broadcast faxing.
</TABLE>
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<TABLE>
<S> <C>
Advanced Intelligent We offer advanced intelligent network functionality and custom services
Network Applications tailored to the customer needs, including NPA/NXX routing, which routes
calls based upon the first six digits of the calling party's telephone
number, interactive voice response applications, menu routing, expanded
account codes and virtual private networks.
Operator Services We offer owners of pay telephones and multi-telephone facilities, such as
hotels, hospitals and universities, live or automated operators to assist in
placing outbound long distance calls and to transmit the calls over our
network.
Other Enhanced We offer conference calling services, including toll-free and operator-
Services assisted access, sub-conferencing and transcription services, prepaid
calling cards and enhanced calling card services, including features such
as voice and fax mail, voice-activated speed dialing, conference calling
and network voice messaging. We also provide customized services upon
request.
</TABLE>
As of June 30, 1999, we provided integrated retail services to
approximately 30,000 small and medium-sized business customers located
primarily in the southeastern United States and long distance services to over
15,000 residential customers.
Wholesale Services. Our wholesale services include the following:
<TABLE>
<S> <C>
Switched Services We offer 1+ domestic call origination and termination services over our
network, as well as both inbound and outbound international services. We
also provide toll-free number origination services and local access and
transport area services.
Private Line Services Our private line services provide telecommunications connectivity
between a customer's different locations to transmit voice, video or data
in a variety of bandwidths from DS-0 to OC-48. We also offer dedicated
data facilities.
Special Access Services Our special access services provide wholesale customers with telecommu-
nications lines that connect the locations of one or more long distance
carriers, as well as telecommunications lines that connect an end-user to
its carrier.
Signaling System 7 We offer Signaling System 7 services that reduce call connect times by
Services carrying the signals for setting up and routing calls. Our redundant pair of
signaling transfer points, one in Atlanta and one in Raleigh, along with
interconnections to the networks of Illuminet, GTE, SBC Communi-
cations and various regional Bell operating companies, provide access to
all local access and transport areas.
Prepaid Calling Card We provide prepaid calling card services, including such features as
Services private label branding, recharge capabilities, multilingual instructions and
24-hour customer support.
Other Wholesale We also provide a variety of other wholesale services such as Internet
Services access, paging, conference calling, local, operator services and frame
relay services.
</TABLE>
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As of June 30, 1999, we provided wholesale services to over 100
telecommunications carriers and other end-user customers, including Intermedia,
Cable & Wireless USA, McLeod, Nextel, ITC-DeltaCom, NEXTLINK, Williams
Communications, PSINet, UUNet, MCI Worldcom, Sprint, GTE and BellSouth
Mobility.
Sales and Marketing
Integrated Retail Services
Our retail sales efforts target small and medium-sized businesses in the
southeastern United States. We believe that historically, neither the incumbent
local exchange carriers nor large long distance carriers have focused their
sales and marketing efforts on these customers. Our sales and marketing
approach is to build long-term business relationships with our customers, with
the intent of becoming the single-source provider of all their communications
services. Our sales team is led by executives with experience in managing large
numbers of direct sales personnel in the telecommunications industry. Our
customer-support software and network architecture give our sales personnel,
along with our dealers and agents, immediate access to customer data, allowing
for a quick and effective response to customer requests and needs.
We market our integrated retail services primarily through two channels:
our direct sales and support force and our network of independent dealers and
agents. We also market local and long distance services through our Association
Program and Academic Edge Program.
We support the direct and independent agent sales efforts with a group of
skilled specialists. We currently have specialists supporting:
o local service;
o frame relay services;
o private line services;
o internet services;
o paging and personal messaging;
o conference calling services; and
o operator services.
Across both sales channels, these specialists support sales efforts by:
o meeting with customers and prospects;
o conducting competitive analysis;
o providing preliminary pricing services;
o providing continued training for the sales forces; and
o preparing proposals and providing technical support on complex sales
opportunities.
Our specialists are compensated based on the acquisition and the retention of
the customers for which they are responsible.
Direct Sales and Support. Our direct sales and support staff markets our
integrated retail communications services directly to end users. As of June 30,
1999, we employed over 200 direct sales representatives working in 20 sales
offices located throughout the southeastern United States.
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Each of our sales offices is staffed with one or two sales managers,
depending on the market, with each sales manager supporting a team of direct
sales personnel and specialists. Each office generally has at least one field
support representative to meet with customers, specialists and a sales
administrator who tracks sales and order flow for that office. Sales managers
oversee the day-to-day sales activities of their teams and act as mentors to
the sales and support staff assigned to them.
All new sales representatives receive formal training, in which we expect
them to gain a thorough knowledge of our services. We train our sales force
with a customer-focused program that promotes increased sales through both
customer attraction and customer retention. After formal training, sales
representatives participate in a continuing mentoring program. We believe this
gives us a competitive advantage in attracting and retaining sales personnel.
We base our marketing strategy on the belief that our target customers
want to have their telecommunications needs met by one company. Moreover, they
want to have a single point of contact for all of their product, billing and
service requirements. We typically assign to each customer a dedicated field
support specialist who is responsible for taking care of the customer's
telecommunications needs. Our field support specialists regularly contact and
meet with customers to discuss their ongoing telecommunications needs and
provide competitive analyses of services. In addition, we provide 24-hour,
toll-free access to a centralized customer service center.
Our sales force compensation strategy provides significant incentives for
customer retention. We compensate all sales personnel with both a salary and a
new and residual commission structure based on each customer's continued use of
our services. We believe that our compensation structure motivates each
salesperson to remain actively involved with customers and participate in the
customer support process. We believe this approach provides us with competitive
advantages that increase customer retention and cross-selling opportunities and
reduce the costs of customer service and support.
Sales personnel identify potential business customers by several methods,
including customer referral, market research, telemarketing and other
networking alliances, such as endorsement agreements with trade associations
and local chambers of commerce. Our sales personnel work closely with our
specialists to address customers' network and service delivery needs and to
design new services for customers.
We have sales offices located in the cities listed below, and we plan to
open 15 more sales offices by the end of 2002.
Charlotte, NC Wilmington, NC Atlanta, GA Norfolk, VA
Chapel Hill, NC Winston-Salem, NC Ft. Lauderdale, FL Richmond, VA
Greensboro, NC Charleston, SC Jacksonville, FL Roanoke, VA
Greenville, NC Columbia, SC Orlando, FL Knoxville, TN
Raleigh, NC Greenville, SC Tampa, FL Nashville, TN
We enhance our direct and dealer sales with our Association Program. We
typically pay a share of the revenue generated under the program to
participating organizations and provide a discount to its members in return for
being endorsed as a preferred vendor. As of June 30, 1999, over 200
organizations were participating in our Association Program.
In order to capitalize on the excess capacity of our network, we market
local and long distance services through our Academic Edge Program for colleges
and universities. By using off-peak network capacity and existing
infrastructure, this program produces incremental revenue without materially
increasing fixed network costs. We pay a share of the revenue generated under
the program to participating colleges and universities in return for being
selected as an official campus telecommunications service provider. As of June
30, 1999, there were over 35 colleges and universities participating in the
Academic Edge Program.
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In 1998 and for the first half of 1999, sales through our direct sales
force accounted for approximately 68.5% and 71.3% of our integrated retail
services revenue.
Independent Dealer and Agent Sales. In 1992 we established a network of
independent dealers and agents authorized by us to market our services. As with
our direct sales force, our dealers and agents have access to our specialists.
We believe this enables our dealers and agents to be more effective in their
sales efforts. As compensation for their services, our authorized dealers and
agents receive commissions based on services sold, usage volume and customer
retention. We have dealer managers who recruit and support dealers and agents.
We also support our dealers and agents through an order management team located
in Raleigh. In 1998 and for the first half of 1999, sales through our
authorized independent dealers and agents accounted for approximately 29.7% and
27.1% of our integrated retail services revenue.
Wholesale Services
We established a wholesale service sales force in November 1995. This
group markets our wholesale services to telecommunications carriers, large
corporations, government entities, prepaid calling card distributors and other
end-user customers. We believe that we can compete effectively in this market
based on a combination of price, reliability, advanced technology, route
diversity, ease of ordering and customer service. We market wholesale services
primarily through 14 direct sales personnel and seven support specialists
located in our corporate headquarters. In general, these sales professionals
locate potential customers for our wholesale services through customer
referrals, trade shows and industry alliances. When contacting a potential
customer, our sales professionals work with network engineers to gain a better
understanding of the customer's operations and telecommunications transmission
needs to develop innovative application-specific solutions to each customer's
requirements.
Marketing and Advertising
We launch aggressive marketing and advertising programs in conjunction
with initiating retail services in specific markets. These campaigns typically
include print ads, mailings, trade shows and focused television and radio
advertisements. We have also negotiated multiyear cooperative advertising
agreements with key vendors. We also sponsor or are otherwise actively involved
in a number of community and charitable events. We are negotiating an agreement
to provide local and long distance services to the Carolina Hurricanes, the
National Hockey League team, and the arena where the team will play, in return
for certain advertising rights.
We market our wholesale services through trade journals, event
sponsorships, trade shows and direct mail campaigns.
Network
Overview
Since we began operations in 1983, our strategy has been to build a
geographic concentration of customers before building, acquiring or extending
our network to serve that concentration of customers. We lease transmission
facilities on an incremental basis to satisfy customer demand. As network
economics justify the deployment of switching or transport capacity, we expand
our network and migrate customers onto our network.
We believe that owning network components, rather than relying on the
facilities of third parties, enables us to have more flexibility in meeting
customer needs for new products and services, generate higher operating
margins, obtain origination and termination fees from other carriers and
maintain greater control over our network operations and service quality. Where
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expected market penetration does not justify the deployment of our own network
elements, we utilize the networks of alternative carriers.
Network Architecture
We provide services to our customers over a network that supports local,
long distance and high-speed data and Internet services. Our fiber network uses
Nortel Network's dense wavelength division multiplexing, or DWDM, technology to
increase the flexibility of the network. This technology makes our network
scalable, optimizing network configurations and allowing quick deployment of
needed bandwidth. Any type of signal may be directly transported over our
network using this technology, each wavelength carrying different types of
signals to maximize the capacity of the system.
Local Switching Architecture
As of July 15, 1999, we had installed Lucent 5ESS 2000 local switches,
digital loop carriers and associated infrastructure in Raleigh, Charlotte,
Greensboro and Wilmington, North Carolina; Atlanta, Georgia; Orlando and
Jacksonville, Florida; and Columbia and Greenville, South Carolina. Each of
these central office switches serves as an interconnection and concentration
point between our customers and the public switch network. We intend to deploy
additional local switches, digital loop carriers and associated infrastructure
in 10 locations by the end of 2001.
Co-location Facilities
We co-locate our equipment in incumbent local exchange carrier central
offices to obtain direct connections to our customers. Within most of our
co-location facilities we have deployed, or are deploying, Alcatel Lightspan
2000/2012 digital loop carriers to support switched voice services. In
addition, we plan to deploy digital subscriber line access multiplexers, or
DSLAMs, to support our high-speed DSL services in selected facilities. This
co-location architecture supports integrated voice and data service and can be
extended to support emerging applications as customer requirements dictate. By
designing our co-locations in this manner, we are able to allocate our overhead
costs across multiple revenue streams.
As of July 15, 1999, we had 48 co-location facilities in operation, with
approximately 50 co-location facilities expected to come online by the end of
2001. In addition, we had sold over 75,000 local access lines, with 68,600 in
service. Approximately 13,100, or 19%, of these lines were on our network. As
we deploy additional co-locations, we will move more customers onto our
network.
Unbundled Network Elements
To reach our customers, we lease simple copper loops, or, if customer
traffic justifies, T-1 facilities, as unbundled network elements, or UNEs, from
the incumbent local exchange carrier. By using unbundled network elements
instead of reselling the incumbent local exchange carrier's services, we
generate revenues as if we owned the copper loop to the customer without the
cost and delay associated with deploying our own facilities to the customer's
premises. To support our high-speed DSL service, we plan to provide customers
with a modem connected to a digitally conditioned copper loop that we have
leased as an unbundled network element.
In order to acquire these unbundled network elements, we need to have an
interconnection agreement in place with the incumbent local exchange carrier in
each of our target markets. We have entered into interconnection agreements
with the incumbent local exchange carriers in the majority of our target
geographical markets, including agreements with BellSouth, GTE, Sprint, Bell
Atlantic and Southwestern Bell. Although the initial term of our agreement with
BellSouth, the incumbent local exchange carrier in most of those markets,
expired in January 1999, the agreement provides that we continue to exchange
traffic pursuant to its terms and conditions as long as and
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until a new agreement is negotiated. In addition, BellSouth has committed in
writing that it will honor the terms of our initial agreement at least until
September 23, 1999, and thereafter through any arbitration proceeding that we
initiate prior to that date. Any new agreement will be retroactive to January
2, 1999.
We are currently negotiating renewal terms for our interconnection
agreement with BellSouth. We are also negotiating interconnection agreements
with other incumbent local exchange carriers. As we enter new markets or as the
terms of existing interconnection agreements expire, we will need to enter into
new, and negotiate renewal terms for existing, interconnection agreements with
the incumbent local exchange carriers in our target markets.
Long Distance Switching Platform
For our long distance switching platform, we have deployed Alcatel DEX
600E tandem switches in Raleigh and Dallas, and Alcatel DEX 600 switches in
Atlanta, New York and Orlando. We are currently upgrading the Atlanta, New York
and Orlando switches to Alcatel DEX 600E tandem switches.
Fiber and Transport
In October 1997, we purchased, pursuant to an indefeasible right of use,
approximately 3,300 route miles of dark fiber from New York to Miami and
Atlanta to Nashville on a fiber optic network being constructed by Qwest. This
network will provide us with significant transmission capacity. As of July 15,
1999, approximately 1,100 miles of this network was operational. We expect the
remainder of this fiber to come into service in phases through the end of 1999.
Upon completion of this network, we will have 21 points-of-presence deployed on
this network with DWDM and OC-48 technology. As of July 15, 1999, we had
installed over 95 route miles of fiber in North Carolina's
Raleigh-Durham-Research Triangle Park area. In addition, we plan to build
approximately 530 miles of fiber from Raleigh to Savannah, Georgia, via
Wilmington, North Carolina and Myrtle Beach, South Carolina. We expect to begin
this project in the fourth quarter of 1999 and complete it in the third quarter
of 2000.
To complement our facilities-based operations, we lease long-haul network
transport capacity from major network-based carriers and local access from
incumbent local exchange carriers in their respective territories. We lease
long-haul capacity from other carriers either directly or through the
Associated Communications Companies of America, an 11-member trade organization
we co-founded with other regional telecommunications service providers in 1993.
The ACCA negotiates with carriers for bulk transmission capacity for its
members. The collective buying power of its members enables the ACCA to
negotiate as if it were one of the larger telecommunications service providers
in the United States.
Our fiber optic network will also be protected by geographically diverse
routing, also called a self healing ring. When routes are not geographically
diverse we have implemented electronic redundancy, which enables traffic to be
rerouted to another fiber in the same fiber sheath in the event of a partial
fiber cut or electronic failure.
Using flexible network design capabilities, fiber optic connectivity is
available at various speeds for more cost-effective growth of the network and
improved reliability. In addition, our digital cross-connect systems will be
equipped with optical interfaces to enhance flexibility and reliability.
We also use Nortel's Integrated Network Management System to manage,
operate and provision our network. This system supports our 24-hour-a-day
operations, and allows online provisioning throughout the network, thus
reducing errors.
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Data Transport
As of July 15, 1999, we had deployed seven Lucent/Ascend 9000 switches to
support frame relay services, and we were installing three additional switches.
We also intend to deploy 19 more frame relay switches by the end of 2001. Our
frame relay services allow customers to reliably and cost-effectively send and
receive packets of data. Our data network connects with other carriers' frame
relay networks to provide nationwide connectivity for our customers.
We are deploying five Lucent/Ascend 500 asynchronous transfer mode, or
ATM, switches to enhance transmission of high-speed data. These switches allow
for a more efficient configuration of our network. ATM is targeted at customers
who require high-volume data traffic, multi-media integration, and a single
network architecture for their high-speed data applications. Such applications
include telemedicine, distance learning, high-end video conferencing, financial
service transactions, government research and process control.
Signaling System 7 and Advanced Intelligent Network Architecture
We own and operate a gateway pair of Alcatel MegaHub Signaling Transfer
Points in Atlanta and Raleigh providing packet switching of Signaling System 7
signaling throughout our network. This system reduces call connect times by
carrying the signals for setting up and routing calls. It also supports
advanced services, such as caller ID, local number portability, and toll-free
number portability. Our network has also been designed to use advanced
intelligent network technology to allow us greater flexibility in data
management and feature development. Our investment in digital switching,
Signaling System 7 and advanced intelligent network technologies has
significantly increased network capacity, which has lowered the cost of
providing services and enabled us to sell excess capacity to other
telecommunications carriers. Our redundant pair of signaling transfer points,
one in Atlanta and one in Raleigh, along with interconnections to the networks
of Illuminet, GTE, SBC Communications and various regional Bell operating
companies, provide access to all local access and transport areas. In Atlanta,
Dallas and Raleigh we operate advanced intelligent network platforms providing
services such as enhanced 800 services, calling card services, virtual private
networks, interactive voice response application and voice-activated dialing.
Paging and Personal Messaging
We own and operate a pair of Glenayre Modular Voice Processing platforms
in Atlanta and Raleigh to provide facilities-based voicemail and paging
services to our customer base. These platforms, which are integrated with our
Lucent 5ESS 2000 and Alcatel DEX switching platforms, enable us to provide the
following services:
o numeric and alphanumeric paging;
o voice messaging;
o fax messaging;
o call answering;
o message waiting notification;
o personal number service;
o constant touch service;
o voice activated dialing; and
o calling card services.
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Anticipated Network Expansion
As we plan to continue our network expansion, we expect to deploy
additional co-location, switching and transport infrastructure. These network
additions will support our goal of capturing additional market share and
continuing to move our customers' traffic onto our network where demand
warrants. Expansion of our network-based infrastructure with long distance and
local switches, frame relay, asynchronous transfer mode and DSL equipment will
increase the proportion of our customer traffic that is originated or
terminated on our network, which we believe will result in higher long-term
operating margins and greater flexibility of and control over our network
operations.
Operational Support Systems
Overview
We believe that our operational support systems provide us with
competitive advantages in terms of cost, large order volume processing and
customer service. Our systems integrate and enable management of important
elements of our operations, including service order entry, provisioning,
workflow management, customer service and billing. Features of these systems
include:
o a modular design that enables integration of service order entry,
provisioning, customer service and billing for all of the services we
offer;
o electronic workflow and routing of tasks and provisioning events;
o electronic interfaces to other service providers to support more
efficient provisioning of customer orders;
o the ability to customize product and service offerings and pricing for
individual customers and to bring new product and pricing plans to market
quickly;
o the ability to provide customers with a single bill for all of our
services;
o electronic billing that allows customers to analyze and generate their
own reports using billing data; and
o electronically routed trouble ticket technology.
Since 1993, Electronic Data Systems Corporation has been our primary
information systems supplier. We now use IXplusTM, the EDS local and long
distance billing system, and EDS systems for service provisioning, network
design, customer service, trouble management and fraud prevention. We have
installed software developed by Metasolv to enhance our service provisioning
and network design systems, and we have contracted with DSET Corporation and
Metasolv to provide further enhancements to these systems. We believe that
these enhancements will help us to more rapidly implement switch-based local
services and offer data services in our target markets.
We also plan to install IXplusNetTM, a Web-enabled telecommunications
management system recently developed by EDS, in the first quarter of 2000. We
believe that IXplusNetTM will enable us to better focus on and increase the
level of personalized attention we provide to our customers and accommodate
customer growth. IXplusNetTM uses Internet protocol functionality to provide a
graphical user interface that presents to all users a complete view of all
customer activity, including orders, provisioning, billing, customer service,
trouble ticket and collections. IXplusNetTM will also integrate all of our
operational support systems, including those from DSET and Metasolv.
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Order Entry, Service Provisioning and Network Design
We believe that an ongoing challenge for integrated communications
providers will be to continuously improve order entry and provisioning systems.
We believe that IXplusNetTM will improve our order entry and provisioning
systems by enabling us to access them from a single common interface for all of
our service offerings. As a result, service representatives will be able to
process orders more efficiently and, with online access to customer
information, better manage accounts and cross-sell services to meet specific
customer needs.
Our service provisioning system automates management of the provisioning
process, including workflow and scheduling. Once service orders are entered,
the system schedules, assigns and routes tasks for initiating services to
customers. We have electronic interfaces to BellSouth, Bell Atlantic,
Ameritech, US West, SBC Communications, GTE, Sprint and Alltel to allow for
more efficient provisioning of orders to migrate long distance customers to our
network. To provide similar functionality for provisioning local service
orders, we have contracted with DSET Corporation to engineer electronic-bonding
gateways to incumbent local exchange carriers in our market. Once installed,
the electronic-bonding gateways will enable us to access data from the
incumbent local exchange carriers, submit service requests electronically and
promptly address any issues arising from those requests. We believe that these
electronic-bonding gateways can further enhance our flow-through provisioning
of local services by reducing the time it takes for incumbent local exchange
carriers to fulfill our service requests and by enhancing quality control of
the ordering process.
Our service provisioning and network design systems are used by our
engineers to design the services we offer our customers. These systems support
end-to-end circuit assignment, design and configuration in terms of both on-net
and off-net facilities. Our provision system handles any service requests to
other carriers for facilities needed to fill customer orders. We have
contracted with Metasolv to provide enhancements to our provisioning system's
circuit design functionality that we expect to install in the first quarter of
2000.
Customer Service and Trouble Management
We believe that our emphasis on customer service and support
differentiates us from many of our competitors. We provide customer service 24
hours a day, seven days a week, primarily through our customer service and
support department located in Raleigh. Trained customer care representatives
answer all customers' calls.
We monitor and measure the quality and timeliness of customer interaction
through quality assurance procedures. Pick-up times for incoming calls, length
of calls and other support information are automatically monitored by our
automated call distribution system. Our call distribution system also
dynamically allocates incoming support requests, assuring that customer calls
are routed to specialists trained to handle their needs. In addition, our most
knowledgeable and experienced customer support representatives are assigned to
handle support requests from our largest customers.
In the event that a customer is experiencing difficulty with a particular
service, our trouble management system has an extensive trouble ticket function
that allows every user to see in real-time that a trouble condition exists and
the steps being taken to resolve the problem. We believe that our ability to
track and resolve trouble events in a timely manner, while keeping both
customers and customer service representatives informed, gives us a strategic
advantage over competitors.
Billing
Our billing system integrates usage information for local, long distance,
paging, Internet access and data services offerings to provide customers with a
single bill for the services we provide. In
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addition, we offer electronic billing, which allows customers to analyze and
generate their own reports using billing data.
We maintain, within our billing system, all customer information,
operational data, accounts receivable information, rating rules and tables and
tax tables needed for billing our customers. We collect and process on a daily
basis all usage information from our own network and from the networks of
third-party providers. The actual process of applying rating and taxing
information to the millions of individual message units generated each month,
and of generating invoice print files, is conducted by a third party. Bills are
printed for us by a high-speed print shop. To optimize both cash flow and
internal workflow, we use multiple billing cycles. We use quality control,
including boundary and statistical variation testing, sample price matrices and
direct sampling, to ensure the quality of our billing process.
Involvement in Industry Organizations
We are actively involved in industry organizations in order to promote our
company and the telecommunications industry and in order to build strategic
relationships.
In 1993 we co-founded the Associated Communications Companies of America,
an 11-member trade association of regional telecommunications service
providers, of which our President and Chief Operating Officer, R. Michael
Newkirk, is president. ACCA negotiates with carriers for bulk transmission
capacity for its members. The collective buying power of its members enables
ACCA to negotiate as if it were one of the larger telecommunications service
providers in the United States.
We are active in the Competitive Telecommunications Association (Comptel),
a national organization that represents telecommunications companies before
legislative and regulatory bodies. Mr. Newkirk serves as a member of the Board
of Directors of Comptel. We are also active in, among other industry
organizations, the Southeastern Competitive Carriers Association, of which
Anthony M. Copeland, our Executive Vice President and General Counsel, is vice
president, and the Telecommunications Resellers Association.
Competition
The telecommunications industry is highly competitive. We believe that we
compete primarily on the basis of customer service, price, reliability and
availability of service offerings. Our ability to compete effectively will
depend on our ability to maintain high quality services at prices generally
equal to or below those charged by our competitors.
Overall Market
A continuing trend towards business combinations and alliances in the
telecommunications industry may create significant new competitors to us. Many
of these combined entities will have resources far greater than ours. These
combined entities may provide a bundled package of communications products,
including local, long distance and data services, that compete directly with
the products we offer. These entities may also offer services sooner and at
more competitive rates than we do.
We also face competition from fixed wireless services, wireless devices
that do not require site or network licensing, cellular, personal
communications services, cable, satellite, other commercial mobile radio
service providers and Internet telephony.
In February 1998, Federal Communications Commission rules that make it
substantially easier for many non-U.S. communications companies to enter the
U.S. market went into effect. This may further increase the number of
competitors.
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Long Distance Services Market
One of the key competitive aspects of the long distance industry is
customer retention. Our revenue has been, and is expected to continue to be,
affected by our ability to retain our customers.
AT&T, MCI WorldCom, Sprint and other carriers have implemented price plans
aimed at residential customers with significantly simplified rate structures.
This may lower long distance prices. Long distance carriers have made similar
offerings available to the small and medium-sized businesses we primarily
serve, creating additional pricing competition and creating pressure on gross
margins. If we are unable to reduce costs in a timely manner, our margins may
be significantly reduced.
We anticipate that a number of regional Bell operating companies will seek
authority to provide in-region long distance services in 1999 and beyond. The
regional Bell operating companies already have extensive fiber optic cable,
switching and other network facilities in their respective regions that can be
used for their long distance services. Once regional Bell operating companies
are allowed to offer widespread in-region long distance services, they will be
in a position to offer single-source local and long distance service.
We expect continued long distance price declines because some carriers are
expanding their capacity. IXC, Qwest, Level 3 and Williams Communications, for
example, are constructing nationwide fiber optic systems with routes through
portions of the southeastern United States. BellSouth is likely to receive
authority to use its excess capacity to market in-region long distance, and
technological advances continue to expand the capacity of networks. If industry
capacity expansion exceeds demand along any of our routes, we might suffer
severe additional pricing pressure.
Local Services Market
In the local communications market, our primary competitor is the
incumbent local exchange carrier serving each geographic area, including
BellSouth in most of our markets. Most incumbent local exchange carriers offer
substantially the same services as those offered by us. Incumbent local
exchange carriers benefit from:
o longstanding relationships with our target customers;
o greater financial and technical resources;
o the ability to subsidize local services from revenues in unrelated
businesses; and
o recent regulations that relax price restrictions and decrease regulatory
oversight of incumbent local exchange carriers.
If the incumbent local exchange carriers are allowed additional
flexibility by regulators to offer discounts to large customers, engage in
aggressive discount pricing practices, or charge competitors excessive fees for
interconnection to their networks, the revenue of their competitors, including
us, could be materially adversely affected.
We also face competition from new entrants into the local services
business, who may also be better established and have greater financial
resources. For example, AT&T, MCI WorldCom and Sprint have each begun to offer
local communications services in major U.S. markets. Other entities that
currently or may offer local switched services include companies that have
previously operated as competitive access providers, cable television
companies, electric utilities, microwave carriers, wireless telephone system
operators, out-of-region regional Bell operating companies and large customers
who build private networks. These entities, upon entering into appropriate
interconnection
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agreements or resale agreements with incumbent local carriers, including
regional Bell operating companies, could offer single-source local and long
distance services similar to those offered by us.
Competition in local services has also increased as a result of changing
government regulations. Certain rates we charge our customers must be filed
with the FCC and/or state regulators, which provides transparency to customers
and competitors. The Telecommunications Act of 1996 has increased competition
in the local telecommunications business. The Telecommunications Act:
o requires incumbent local exchange carriers and competitive local exchange
carriers to interconnect their networks with those of requesting
telecommunications carriers and requires incumbent local exchange carriers
to allow requesting carriers to co-locate equipment on their premises;
o requires all local exchange service providers to compensate each other
for calls that originate on the network of one carrier and go to the
network of the other;
o requires all local exchange providers to offer their services for resale
without unreasonable conditions;
o requires incumbent local exchange carriers to offer to requesting
telecommunications carriers certain network elements on an unbundled
basis;
o requires incumbent local exchange carriers to offer to requesting
telecommunications carriers the services they provide to end-users to
other carriers at wholesale rates;
o requires all local exchange providers to permit competing carriers access
to poles, ducts, conduits and rights of way at regulated prices; and
o requires all local exchange providers to provide dialing parity and
telephone number portability.
Competition may also increase as a result of a recent World Trade
Organization agreement on telecommunications services. As a result of the
agreement, the FCC has made it easier for foreign companies to enter the U.S.
telecommunications market.
Data Services Market
The market for data communications and Internet access services is
extremely competitive and characterized by price declines and rapid
technological innovation. There are no substantial barriers to entry, and we
expect that competition will intensify in the future. We expect significant
competition from a large variety of companies, including long-distance service
providers, cable modem service providers, Internet service providers, online
service providers, wireless and satellite data service providers and companies
focusing on DSL services. These companies may offer competing products with
price or other characteristics that are more attractive than our own.
Regulation
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
federal and state regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which the industry operates. At this
time, we cannot predict the outcome of these proceedings, nor their impact upon
the telecommunications industry or us. This section also sets forth a brief
description of regulatory and tariff issues pertaining to our operations.
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Overview
We are subject to federal, state and local regulation. The FCC exercises
jurisdiction over all interstate and international telecommunications services.
While carriers can provide domestic services without prior authorization, the
FCC requires prior authorization to construct and operate international
facilities or to provide resale of international services. State regulatory
commissions retain some jurisdiction over the same facilities and services to
the extent they are used to originate or terminate intrastate common carrier
communications. Local governments may require us to obtain licenses, permits or
franchises regulating the use of public rights-of-way necessary to install and
operate our networks.
Federal Regulation
The Telecommunications Act became effective February 8, 1996. The
Telecommunications Act preempts state and local laws to the extent that they
prevent competitive entry into the provision of any telecommunications service.
Subject to this limitation, however, the state and local governments retain
most of their regulatory authority. The Telecommunications Act imposes a
variety of new duties on incumbent local exchange carriers in order to promote
competition in local exchange and access services. Some duties are also imposed
on non-incumbent local exchange carriers, such as our company. The duties
created by the Telecommunications Act include reciprocal compensation, resale,
interconnection, unbundled network elements, number portability, dialing parity
and access to rights-of-way.
Incumbent local exchange carriers are required to negotiate in good faith
with carriers requesting any or all of the above arrangements. Certain FCC
rules regarding pricing and the unbundling of network elements that must be
made available are subject to further review by the United States Court of
Appeals for the Eighth Circuit and the FCC. However, carriers still may
negotiate agreements, and if the negotiating carriers cannot reach agreement
within a prescribed time, either carrier may request binding arbitration of the
disputed issues by the state regulatory commission.
The Telecommunications Act also eliminates previous prohibitions on the
provision of long distance services by the regional Bell operating companies
and the GTE operating companies. The regional Bell operating companies are now
permitted to provide long distance service outside those states in which they
provide local exchange service upon receipt of any necessary state and/or
federal regulatory approvals that are otherwise applicable to the provision of
intrastate and/or interstate long distance service. Under the
Telecommunications Act, the regional Bell operating companies will be allowed
to provide long distance service within the regions in which they also provide
local exchange service upon specific approval of the FCC and satisfaction of
other conditions, including a checklist of interconnection requirements.
BellSouth has sought such authority in Louisiana and South Carolina. Both
requests were denied by the FCC and the denials were upheld by the United
States Court of Appeals for the D.C. Circuit. The GTE operating companies are
permitted to enter the long distance market without regard to limitations by
region, although regulatory approvals otherwise applicable to the provision of
long distance service will need to be obtained. The GTE operating companies are
also subject to the provisions of the Telecommunications Act that impose
interconnection and other requirements on incumbent local exchange carriers.
The Telecommunications Act imposes certain restrictions on the regional
Bell operating companies in connection with the entry into long distance
services by the regional Bell operating companies. Among other things, the
regional Bell operating companies must provide long distance service within the
regions in which they also provide local exchange service only through separate
subsidiaries with separate books and records, financing, management and
employees, and all affiliate transactions must be conducted on an arm's length
and nondiscriminatory basis. The regional Bell
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operating companies are also prohibited from jointly marketing local and long
distance services, equipment and certain information services unless
competitors are permitted to offer similar packages of local and long distance
services in their market. Further, the regional Bell operating companies must
obtain authority to provide long distance service within the regions in which
they also provide local exchange service before jointly marketing local and
long distance services in a particular state. US West and Ameritech Corporation
announced marketing arrangements with Qwest whereby they would market Qwest
long distance services in their respective regions. The FCC found these
arrangements to be unlawful. The FCC decision was affirmed on appeal.
Prior to the passage of the Telecommunications Act, the FCC had already
established different levels of regulations for dominant and non-dominant
carriers. For domestic common carrier telecommunications regulation, incumbent
local exchange carriers, including the regional Bell operating companies, are
considered dominant carriers for the provision of interstate access and
interexchange services, while other interstate service providers, such as our
company, are considered non-dominant carriers. The FCC determined that the
regional Bell operating companies offering interstate long distance services
outside those states in which they provide local exchange service will be
regulated as non-dominant carriers, as long as such services are offered by an
affiliate of the regional Bell operating company that complies with certain
structural separation requirements. The FCC regulates many of the rates,
charges and services of dominant carriers to a greater degree than non-dominant
carriers.
Services of non-dominant carriers are subject to relatively limited
regulation by the FCC. Non-dominant carriers are required to file tariffs
listing the rates, terms and conditions of interstate access and international
services provided by the carrier. Periodic reports concerning the carrier's
interstate circuits and deployment of network facilities also are required to
be filed. The FCC generally does not exercise direct oversight over cost
justification and the level of charges for services of non-dominant carriers,
although it has the power to do so. We must offer our interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain subject to
FCC complaint procedures. We have obtained FCC authority to provide
international services. Pursuant to these FCC requirements, we have filed and
maintain with the FCC a tariff for our interstate and international services.
On October 29, 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as our company maintain
tariffs on file with the FCC for domestic interstate long distance services.
Following a nine-month transition period, relationships between carriers and
their customers were to be set by contract. However, on February 13, 1997, the
United States Court of Appeals for the District of Columbia Circuit stayed the
FCC's order pending judicial review of the appeals. If the appeals are
unsuccessful and the FCC's order becomes effective, we believe that the
elimination of the FCC's tariff requirement will permit us to respond more
rapidly to changes in the marketplace. In the absence of tariffs, however, we
will be required to obtain agreements with our customers regarding many of the
terms of our existing tariffs, and uncertainties regarding such new contractual
terms could increase the risk of claims against us from our customers.
On May 8, 1997, the FCC issued an order to implement the provisions of the
Telecommunications Act relating to the preservation and advancement of
universal telephone service. The order requires all telecommunications carriers
providing interstate telecommunications services, including our company, to
contribute to universal service support. These contributions are assessed based
on interstate and international end-user telecommunications revenues. The
revenues for the high cost and low income fund are our estimated quarterly
interstate and gross end-user telecommunications revenues. The revenues for the
schools and libraries and rural healthcare fund are our estimated quarterly
intrastate, interstate and international gross end-user telecommunications
revenues. We may pass these costs on to our subscribers.
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The FCC also imposes prior approval requirements on transfers of control
and assignments of operating licenses. The FCC has the authority to generally
condition, modify, cancel, terminate or revoke operating authority for failure
to comply with federal laws and/or the rules, regulations and policies of the
FCC. Fines or other penalties also may be imposed for such violations. There
can be no assurance that the FCC or third parties will not raise issues with
regard to our compliance with applicable laws and regulations.
The FCC, through decisions announced in September 1992 and August 1993, as
modified by subsequent FCC and court decisions, has ordered the regional Bell
operating companies and all but one of the other local exchange carriers having
in excess of $100 million in gross annual revenue for regulated services to
provide expanded interconnection to local exchange carrier central offices to
any competitive access provider, long distance carrier or end user seeking such
interconnection for the provision of interstate access services. As a result of
these decisions and the Telecommunications Act, once we enter into
interconnection agreements with local exchange carriers, we are able to reach
most business customers in its metropolitan service areas and can expand our
potential customer base. The Telecommunications Act now requires most incumbent
local exchange carriers to offer physical collocation, enabling the
interconnector to place its equipment in the central office space of these
incumbent local exchange carriers.
On August 8, 1996, the FCC adopted rules to implement the interconnection,
resale and number portability provisions of the Telecommunications Act. Certain
provisions of these rules were appealed. The Eighth Circuit Court vacated
certain provisions, including the pricing rules and rules that would have
permitted new entrants to "pick and choose" among various provisions of
existing interconnection agreements between the incumbent local exchange
carriers and other carriers. The Supreme Court reversed most aspects of the
Eighth Circuit's decision and, among other things, decided the FCC has general
authority under the Telecommunications Act to promulgate rules governing local
interconnection pricing. The Supreme Court reinstated the FCC's "pick and
choose" rules. The Supreme Court remanded to the FCC for further consideration
its identification of the network elements that must be unbundled. The overall
impact of the Eighth Circuit Court and Supreme Court decisions on us cannot yet
be determined and there can be no assurance that it will not have a material
adverse affect on us. In addition, other FCC rules relating to local service
competition are still being challenged and there can be no assurance that
decisions with respect to such rules will not be adverse to companies seeking
to enter the local service market.
The FCC has granted local exchange carriers additional flexibility in
pricing their interstate special and switched access services on a central
office specific basis. Although there can be no assurance, we anticipate that
the FCC will grant incumbent local exchange carriers increasing pricing
flexibility as the number of interconnection agreements and competitors
increases. In a series of decisions, the FCC pricing rules that restructured
local exchange carrier switched transport rates in order to facilitate
competition for switched access. In addition, the FCC adopted rules that
required incumbent local exchange carriers to substantially decrease the prices
they charge for switched and special access, and changed how access charges are
calculated. These changes were intended to reduce access charges paid by long
distance carriers to local exchange companies and shift certain usage-based
charges to flat-rate, monthly per-line charges.
On April 10, 1998, the FCC issued a Report to Congress on its
implementation of the universal service provision of the 1996
Telecommunications Act. In that report, the FCC stated that the provision of
transmission capacity to Internet service providers constitutes the provision
of telecommunications and is, therefore, subject to common carrier regulation.
The FCC indicated it would reexamine its policy of not requiring an Internet
service provider to contribute to the universal service mechanisms when the
Internet service provider provides its own transmission facilities and engages
in data transport over those facilities in order to provide an information
service. Any such contribution would be related to the Internet service
provider's provision of the underlying
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telecommunications services. The FCC noted it did not have an adequate record
to make a decision at that time on whether certain forms of phone-to-phone
Internet protocol telephony are telecommunications services rather than
information services. It noted that on the record before it, the services
appeared to have the same functionality as non-Internet protocol telephony and
lacked the characteristics that would render the services information services.
The FCC also has been considering whether local carriers are obligated to
pay compensation to each other for the transport and termination of calls to
Internet service providers when a local call is placed from an end user of one
carrier to an Internet service provider served by the competing local exchange
carrier. Recently, the FCC determined that it had no rule addressing
inter-carrier compensation for these calls. In the absence of a federal rule,
the FCC determined that it would not be unreasonable for a state commission, in
some circumstances, to require payment of compensation for these calls. The FCC
also released for comment alternative federal rules to govern compensation for
these calls in the future. If state commissions, the FCC or the courts
determine that inter-carrier compensation does not apply, we may be unable to
recover our costs or will be compensated at a significantly lower rate.
In March 1999, the FCC issued an order requiring incumbent local exchange
carriers to provide unbundled loops and co-location on more favorable terms
than had previously been available. The order permits co-location of equipment
that could be used to more efficiently provide advanced data services such as
high-speed DSL service, and requires less expensive "cageless" co-location. In
the March order, the FCC deferred action on its previous proposal to permit
incumbent local exchange carriers to offer advanced data services through
separate affiliates, free from some of the obligations of the
Telecommunications Act. Permitting incumbent local exchange carriers to
provision data services through separate affiliates with fewer regulatory
requirements could have a material adverse impact on our ability to compete in
the data services sector. These areas of regulation are subject to change
through additional proceedings at the FCC or judicial challenge.
State Regulation. We are subject to various state laws and regulations.
Most public utilities commissions subject providers such as our company to some
form of certification requirement, which requires providers to obtain authority
from the state public utilities commission prior to the initiation of service.
In most states, we are also required to file tariffs setting forth the terms,
conditions and prices for services that are classified as intrastate. We also
are required to update or amend our tariffs when we adjust our rate or add new
products, and we are subject to various reporting and record-keeping
requirements.
Certificates of authority can generally be conditioned, modified,
canceled, terminated or revoked by state regulatory authorities for failure to
comply with state law and/or the rules, regulations and policies of state
regulatory authorities. Fines or other penalties also may be imposed for such
violations. There can be no assurance that state utilities commissions or third
parties will not raise issues with regard to our compliance with applicable
laws or regulations.
We have obtained authority to provide intrastate long distance service in
all states outside of our target markets because we believe this capability
enhances our ability to attract business customers that have offices outside of
our target markets. We may also apply for authority to provide local exchange
services in other states in the future. We hold certificates to offer local
services in North Carolina, Alabama, Arkansas, California, Delaware, the
District of Columbia, Florida, Georgia, Kansas, Kentucky, Louisiana, Maryland,
Mississippi, Missouri, New Jersey, New York, Oklahoma, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia and West Virginia. While we expect and
intend to obtain necessary operating authority in each jurisdiction where we
intend to operate, there can be no assurance that each jurisdiction will grant
our request for authority.
Although the Telecommunications Act preempts the ability of states to
forbid local service competition, some states have not yet completed all
regulatory actions to comply with the
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Telecommunications Act. Furthermore, the Telecommunications Act preserves the
ability of states to impose reasonable terms and conditions of service and
other regulatory requirements.
We believe that, as the degree of intrastate competition increases, states
will offer incumbent local exchange carriers increasing pricing flexibility.
This flexibility may present incumbent local exchange carriers with an
opportunity to subsidize services that compete with our services with revenues
generated from non-competitive services, thereby allowing incumbent local
exchange carriers to offer competitive services at prices below the cost of
providing the service. We cannot predict the extent to which this may occur or
its impact on our business.
Local Government Authorizations. We are required to obtain street use and
construction permits and licenses and/or franchises to install and expand our
fiber optic network using municipal rights-of-way. In some municipalities where
we have installed or anticipate constructing networks, we will be required to
pay license or franchise fees typically based on a percentage of gross revenues
or on a per linear foot basis. There can be no assurance that, following the
expiration of existing franchises, fees will remain at their current levels. In
many markets, incumbent local exchange carriers do not pay such franchise fees
or pay fees that are substantially less than those required to be paid by us.
To the extent that competitors do not pay the same level of fees as us, we
could be at a competitive disadvantage. Termination of the existing franchise
or license agreements prior to their expiration dates or a failure to renew the
franchise or license agreements and a requirement that we remove our facilities
or abandon our network in place could have a material adverse effect on us.
Employees
As of June 30, 1999, we employed approximately 850 employees. We believe
that our future success will depend on our continued ability to attract and
retain highly skilled and qualified employees. None of our employees are
currently represented by a collective bargaining agreement. We believe that our
relations with our employees are good.
Properties
We lease offices and space in a number of locations, primarily for sales
offices and network equipment installations. We lease approximately 95,000
square feet of office space for our corporate headquarters in Raleigh, North
Carolina, under a lease expiring in April 2005. We lease space for sales
offices in North Carolina, Florida, Georgia, South Carolina, Tennessee and
Virginia. The leases for these offices expire between August 1999 and April
2005. In addition, we lease office space and land for our network equipment.
These leases expire between September 1999 and January 2009. We have also
obtained franchises and rights of way to install our fiber optic network. We
believe that our leased facilities are adequate to meet our current needs and
that additional facilities are available to meet our needs for the foreseeable
future.
Legal Proceedings
On September 14, 1998, Gulf Communications, L.L.C. filed suit against us
alleging breach of a telecommunications services agreement for the termination
of long distance traffic. Gulf contends that the agreement requires us to
terminate a specified number of minutes per month and that we did not fulfill
our alleged commitment. Gulf also alleges fraud in the inducement of the
agreement and seeks an unspecified amount of actual and punitive damages, plus
interest, attorneys' fees and costs. We intend to vigorously defend ourselves
against Gulf's claims. Discovery is ongoing. Defending this lawsuit may be
expensive and time-consuming and, regardless of whether the outcome is
favorable to us, could divert substantial financial, management and other
resources from our business. An adverse outcome could subject us to significant
liability.
Except as described above, we are not a party to any pending legal
proceedings that we believe would, individually or in the aggregate, have a
material adverse effect on our financial condition or results of operations.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning our
executive officers and directors as of June 30, 1999:
<TABLE>
<CAPTION>
Name Age Position(s) with Company
- ------------------------------------ ----- --------------------------------------------------------
<S> <C> <C>
Peter T. Loftin ................ 41 Chairman, Chief Executive Officer and Director
R. Michael Newkirk ............. 37 President, Chief Operating Officer and Director
H.A. (Butch) Charlton .......... 48 Executive Vice President
Anthony M. Copeland ............ 43 Executive Vice President, Secretary and General Counsel
Brian K. Branson ............... 34 Chief Financial Officer, Treasurer and Director
Thomas F. Darden ............... 44 Director
William M. Moore, Jr. .......... 59 Director
Paul J. Rizzo .................. 71 Director
</TABLE>
Peter T. Loftin founded BTI and serves as Chief Executive Officer and
Chairman of the Board of Directors. Mr. Loftin has more than 15 years of
experience in the telecommunications industry. He serves on the Advisory Board
of the Duke Heart Center at the Duke University Medical Center, the Steering
Committee for the North Carolina Museum of Natural Sciences, the Board of
Directors of the Greater Raleigh Chamber of Commerce and the Board of Visitors
of the Kenan-Flagler Business School at the University of North Carolina at
Chapel Hill ("UNC-CH"). Mr. Loftin attended North Carolina State University.
R. Michael Newkirk joined BTI in 1986 and has served as Chief Operating
Officer since October 1996, President since July 1997 and as a director since
August 1997. Mr. Newkirk was Executive Vice President of BTI from March 1994
until October 1996. Mr. Newkirk has over 15 years of experience in the
telecommunications industry and is President of the Associated Communications
Companies of America. He also serves on the Board of Directors of the
Competitive Telecommunications Association (Comptel), a national organization
that represents telecommunications companies before legislative and regulatory
bodies.
H.A. (Butch) Charlton has served as Executive Vice President since July
1997. Mr. Charlton had joined FiberSouth as its President and Chief Executive
Officer in April 1997. We acquired the fiber optic network assets of FiberSouth
in September 1997, See "Certain Transactions". Mr. Charlton served from 1984 to
1997 with DSC Communications Corporation, a manufacturer of telecommunications
equipment for local, long distance and cellular markets, most recently as Vice
President -- Public Network Sales. Prior to joining DSC, Mr. Charlton spent 13
years with Contel Corporation, a local exchange carrier, holding a variety of
positions in the engineering and network planning area. Mr. Charlton holds a
B.S. in Business Finance from the University of Texas at Dallas.
Anthony M. Copeland joined BTI as General Counsel in 1992 after serving as
Chief Counsel for the North Carolina Department of Public Instruction and as
Assistant District Attorney for North Carolina's 10th Prosecutorial District.
Mr. Copeland has served on the North Carolina Board of Public
Telecommunications since July 1995, and in July 1996 was appointed to the Board
of Directors of the North Carolina Electronics and Information Technologies
Association. He also is the vice president of the Southeastern Competitive
Carriers Association and is a member of the Federal Communications Bar
Association, the North Carolina State Bar and the North Carolina Bar
Association. Mr. Copeland received his A.B. from Duke University and his J.D.
from the T.M. Cooley Law School at Lansing, Michigan.
Brian K. Branson was named Chief Financial Officer in August 1996 and
Treasurer and a director in August 1997. Mr. Branson joined BTI in July 1992 as
a financial analyst and served in a
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variety of financial roles prior to his appointment as Chief Financial Officer.
Prior to joining BTI, he worked in the Entrepreneurial Services Group of Ernst
& Young LLP. Mr. Branson is a board member of the National Telecom Data
Exchange. Mr. Branson is a Certified Public Accountant and holds a B.S. in
Accounting and an M.B.A. from Elon College.
Thomas F. Darden has served since 1984 as Chairman of Cherokee Sanford
Group LLC or its predecessors and affiliates, which include companies in
building materials and environmental remediation and an institutional
investment fund. He also serves as a director of two public companies, Waste
Industries, Inc. and Winston Hotels, Inc., and is a trustee of Shaw University.
Mr. Darden holds a B.A. and an M.R.P. in Environmental Planning from UNC-CH and
a J.D. from Yale University.
William M. Moore, Jr. served as Chairman of the Board and Chief Executive
Officer of Trident Financial Corp., a specialty investment bank, from 1975
until its acquisition by KeyCorp on June 1, 1999. He currently serves as a
senior advisor to McDonald Investments, the investment banking subsidiary of
KeyCorp, and as a director of the following private companies: Franklin Street
Partners; Anchor Capital Corp.; Oberlin Capital, LP; MCNC; and Franklin Street
Trust Co. In the past, Mr. Moore served as chairman of the Educational
Foundation at UNC-CH and as the president of the Kenan-Flagler Business School
Foundation at UNC-CH. He currently serves as a trustee of the National
Humanities Center and is an adjunct professor of finance at the Kenan-Flagler
Business School at UNC-CH. Mr. Moore holds a B.S. in Naval Science from the
U.S. Naval Academy and an M.B.A. from the Kenan-Flagler Business School at
UNC-CH.
Paul J. Rizzo has served as Chairman of the Board of Franklin Street
Partners, a private investment company, since 1996 and also serves as a
director of the following public companies: Kenan Transport Co.; Pharmaceutical
Product Development; Ryder System Inc.; and Johnson & Johnson. Following his
retirement as Vice Chairman of IBM in 1987, Mr. Rizzo became Dean of the
Kenan-Flagler Business School at UNC-CH. He returned to IBM in 1993 as Vice
Chairman and retired from that position in 1994. Mr. Rizzo serves as chairman
of the Board of the University of North Carolina Healthcare System. In
addition, he serves as a director of four private companies.
There are no family relationships between any of our directors or
executive officers.
Committees of the Board of Directors
We have a compensation committee currently composed of Messrs. Darden,
Moore and Rizzo. The compensation committee reviews and acts on matters
relating to compensation levels and benefit plans for our executive officers
and key employees, including salary and stock options. The compensation
committee is also responsible for granting stock options and other awards to be
made under our existing incentive compensation plans.
We also have an audit committee composed of Messrs. Darden, Moore and
Rizzo. The audit committee assists in selecting our independent auditors and in
designating services to be performed by, and maintaining effective
communication with, those auditors.
Incentive Compensation Plans
1997 Stock Plan
Our 1997 Stock Plan was adopted by the Board of Directors in August 1997.
A total of 7,500,000 shares of common stock has been reserved for issuance
under the 1997 Stock Plan. As of June 30, 1999, options to purchase 3,276,461
shares of common stock at a weighted average exercise price of $1.33 per share
had been granted and no shares had been issued under the plan. The 1997 Stock
Plan will terminate in August 2007, unless sooner terminated by the Board of
Directors.
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Our stock plan provides for grants of "incentive stock options," within
the meaning of Section 422 of the Internal Revenue Code, to employees
(including officers and employee directors) and grants of nonstatutory options
to employees and consultants. It also allows for the grant of stock purchase
rights. The stock plan is administered by the Board of Directors. The exercise
price of incentive stock options granted under the stock plans must not be less
than the fair market value of the common stock on the date of grant. With
respect to any optionee who owns stock representing more than 10% of the voting
power of all classes of our outstanding capital stock, the exercise price of
any incentive stock option must be equal to at least 110% of the fair market
value of the common stock on the date of grant, and the term of the option must
not exceed five years. The terms of all other options may not exceed ten years.
The aggregate fair market value of common stock (determined as of the date of
the option grant) for which incentive stock options may for the first time
become exercisable by any individual in any calendar year may not exceed
$100,000.
The Board may amend or terminate the plan at any time, except that
shareholder approval may be required for such amendment or termination. No
amendment or termination may adversely affect the rights, with respect to
previous grants, of any optionee without his or her consent. The Board may also
select the consultants and employees to whom options or stock purchase rights
may be granted as well as the number of shares of common stock covered by each
award and the terms and conditions, including any vesting schedule, for each
award. The Board may accelerate the vesting or exercisability of any option or
stock purchase rights issued under the plan.
The plan also provides for the award of stock purchase rights, subject to
the execution of a restricted stock purchase agreement which, unless the Board
determines otherwise, grants us an option to repurchase the restricted stock
upon termination of its recipient and at the purchase price paid by the
recipient. The purchase price, specified in the agreement, may not be less than
85% of the fair market value of the underlying shares at the time of the award.
A holder of stock purchase rights is entitled to the same rights as a
shareholder.
In the event of any change in our outstanding common stock by reason of a
stock split, reverse stock split, stock dividend, combination, recapitalization
or reclassification of our common stock, or any other increase or decrease in
the number of issued shares effected without receipt of consideration, the plan
provides, subject to any shareholder action, for the proportionate increase or
decrease in the number of shares of our common stock authorized for issuance
under the plan and covered by each outstanding option or stock purchase right.
In the event of a proposed sale of all or substantially all of our assets
or a merger of our company with or into another corporation where the successor
corporation issues its securities to our shareholders, the plan provides that
either all outstanding options and stock purchase rights are assumed, or, an
equivalent security is substituted by the successor. All such assumed or
substituted securities shall vest in their entirety on termination without
cause, within 12 months of the event, of the holder of the securities. The
outstanding options and stock purchase rights vest, and become immediately
exercisable, prior to the consummation of the event, if the successor
corporation refuses to assume, or to provide a substitute, for the securities.
Employee Stock Purchase Plan
In July 1999, the Board of Directors and sole shareholder adopted the BTI
Telecom Corp. Employee Stock Purchase Plan. The purchase plan is intended to
qualify as an "employee stock purchase plan" under the Internal Revenue Code. A
total of 250,000 shares are reserved for issuance under the plan.
The purchase plan will be administered by the Compensation Committee of
the Board of Directors. Generally, each offering of common stock under the plan
is for a period of six months. Offerings will start on or about January 1 and
July 1 of each year The first plan offering, however,
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will begin on the effective date of this offering and end on June 30, 2000. The
plan will continue until terminated by the Board of Directors or until all of
the shares reserved for issuance under the plan have been issued.
Only our full-time employees who have been with us for at least six months
can participate in the plan. Payroll deductions must equal at least $10 per
semimonthly pay period and $20 per monthly pay period. No person who owns
shares or holds options to purchase, or who as a result of participation in the
plan would own shares or hold options to purchase, 5% or more of the total
combined voting power or value of all classes of our stock is entitled to
participate in the plan. Once an employee becomes a participant in the plan, he
or she will automatically participate in each successive offering until such
time as he or she ceases to be a full-time employee or withdraws from the plan.
On the last day of each offering period, participants purchase shares of
our common stock with their accumulated payroll deductions. The purchase price
per share generally will be 85% of the lesser of the fair market value of the
shares on the beginning and end of the six-month offering period.
Participants may not purchase shares of our common stock under the plan
having a fair market value exceeding $25,000, as determined as of the beginning
of each offering period, in any calendar year.
A participant may withdraw from an offering at any time without affecting
his or her eligibility to participate in future offerings. Once a participant
withdraws from an offering, however, he or she may not again participate in the
same offering.
In the event of a transfer of control of our company, the Board of
Directors may arrange with the surviving, continuing, successor or purchasing
corporation, or the parent of that corporation, to assume our company's rights
and obligations under the plan. Purchase rights that are neither assumed by the
acquiring corporation nor exercised as of the transfer of control terminate as
of the date of the transfer of control.
The Board of Directors may at any time amend or terminate the purchase
plan, except that any termination shall not affect purchase rights previously
granted under the plan, nor may any amendment make any change in a purchase
right previously granted under the plan that would adversely affect the right
of any participant. In addition, an amendment to the plan must be approved by
our shareholders within 12 months of the adoption of the amendment if required
under any applicable law.
401(k) Plan
We maintain a tax-qualified employee savings and retirement plan for
employees who elect to participate. Subject to certain limitations,
participants may contribute up to 20% of their compensation on a pre-tax basis
to the 401(k) plan. In 1996, 1997 and 1998, we contributed matching funds in
amounts equal to 50% of each dollar of an employee's contributions, up to the
point at which employee contributed 6% of the employee's salary. Amounts
attributable to participant contributions under the 401(k) plan are fully
vested at all times (with our contributions vesting beginning after three years
and becoming fully vested after five years). Participants are entitled to
receive their vested 401(k) plan accounts, including investment earnings, upon
death, retirement or other termination of employment.
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Executive Compensation
Summary Compensation Information
The following table sets forth information concerning the cash and
non-cash compensation during fiscal years 1996, 1997 and 1998 of:
o our Chief Executive Officer
o our four other most highly compensated executive officers during 1998 and
whose salary and bonus exceeded $100,000 during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------ -----------------------------------
Fiscal Stock Options All Other
Name and Principal Position Year Salary Bonus (Shares) Compensation
- ----------------------------------------- -------- ----------- ---------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Peter T. Loftin, Chairman and Chief
Executive Officer ..................... 1998 $875,016 $ 2,537 -- $ 138,982(a)
1997 500,000 129,403 -- 275,440(b)
1996 500,000 20,763 -- 346,193(c)
R. Michael Newkirk, President
and Chief Operating Officer ........... 1998 168,750 130,000 250,000 16,736(d)
1997 125,000 210,313 1,732,960 17,478(e)
1996 100,000 137,706 -- 10,327(f)
Anthony M. Copeland, Executive Vice
President and General Counsel ......... 1998 145,000 20,000 125,000 12,290(g)
1997 120,000 52,048 33,330 12,857(h)
1996 100,000 17,586 -- 13,728(i)
H.A. (Butch) Charlton, Executive
Vice President ........................ 1998 175,000 50,000 125,000 8,300(j)
1997 122,052 34,428 33,330 --(k)
Brian K. Branson, Chief Financial Officer
and Treasurer ......................... 1998 121,667 -- 125,000 13,001(l)
1997 95,000 30,929 33,330 13,246(m)
</TABLE>
- --------
(a) Includes $62,000 of relocation expenses, $5,190 medical insurance premium
cost, $2,213 disability insurance cost, $4,793 telephone expense, $21,161
tax planning/consulting cost and $43,625 car allowance and personal use of
company vehicles.
(b) Includes $225,600 of relocation expenses, $2,213 disability insurance,
$3,175 telephone expense, $949 of miscellaneous expenses and a $43,502 car
allowance.
(c) Includes $209,952 of relocation expenses, $45,835 personal use of an
airplane, $2,213 disability insurance cost, $3,842 telephone expenses,
$42,112 of miscellaneous expenses and a $43,239 car allowance.
(d) Includes $4,800 of matching contributions to the 401(k) plan and $11,936
representing the taxable portion of car lease payments.
(e) Includes $11,177, representing the taxable portion of certain car lease
payments, and $6,301 of BTI's matching contributions to the 401(k) plan.
Current annual base salary is $150,000.
(f) Includes $7,134 of matching contributions to the 401(k) plan and $3,193
representing the taxable portion of car lease payments.
(g) Includes $4,770 of BTI's matching contributions to the 401(k) plan and
$7,520 representing the taxable portion of car lease payments.
(h) Includes $3,825 car allowance, $4,750 of matching contributions to the
401(k) plan, and $4,282 representing the taxable portion of certain car
lease payments.
(i) Includes a $10,200 car allowance and $3,528 of matching contributions to
the 401(k) plan.
(j) Includes $4,800 of matching contribution to the 401(k) plan and $3,500
representing the taxable portion of car lease payments.
(k) Salary includes $71,010 paid by FiberSouth. Bonuses include $22,000 paid by
FiberSouth.
(l) Includes $3,041 of matching contributions to the 401(k) plan and $9,960
representing the taxable portion of certain car lease payments.
(m) Includes $2,000 car allowance, $3,148 of matching contributions to the
401(k) plan and $8,098 representing the taxable portion of car lease
payments.
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<PAGE>
Option Grants, Exercises and Holdings and Fiscal Year-End Option Values
The following table sets forth information regarding options granted
during fiscal year 1998 to the executive officers named in the compensation
table above.
Option Grants During Fiscal Year Ended December 31, 1998
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Number of Shares % of Total Options Exercise or
Underlying Granted to Employees Base Price Expiration for Option Term(b)
Name Options Granted in Fiscal Year 1997 Per Share(a) Date 5% 10%
- ------------------------------- ------------------ ---------------------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Michael Newkirk ............ 250,000 25.5% $ 3.00 12/21/08 $471,671 $1,195,307
Anthony M. Copeland ........... 125,000 12.7 3.00 12/21/08 235,835 597,653
H.A. (Butch) Charlton ......... 125,000 12.7 3.00 12/21/08 235,835 597,653
Brian K. Branson .............. 125,000 12.7 3.00 12/21/08 235,835 597,653
</TABLE>
- --------
(a) The exercise price may be paid in cash or by any other means determined by
the Board of Directors.
(b) The compounding assumes a 10-year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the common stock, which is not currently publicly traded.
The amounts reflected in this table may not necessarily be achieved.
The following table sets forth certain information concerning the number
and value of unexercised options held as of December 31, 1998 by the executive
officers named in the compensation table above. No stock options were exercised
in 1998.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 1998 at December 31, 1998(a)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
R. Michael Newkirk ............ 1,749,633 233,327 $4,982,237 $ 0
Anthony M. Copeland ........... 41,667 116,663 0 99,657
H.A. (Butch) Charlton ......... 74,997 83,333 99,657 0
Brian K. Branson .............. 41,667 116,663 0 99,657
</TABLE>
- --------
(a) Value based on the difference between the fair market value of a share of
common stock at December 31, 1998 ($3.00), as determined in good faith by
the Board of Directors, and the exercise price of the options.
Severance Agreements
In December 1998, we entered into severance agreements with Mr. Newkirk,
Mr. Charlton, Mr. Copeland and Mr. Branson. These agreements require us to pay
these officers severance if their employment by us is terminated, other than
for cause, within three years of:
(1) the date on which Peter T. Loftin is no longer Chairman of our Board
of Directors; or
(2) the sale of our company.
The severance payments would be payable over three years and include:
(1) three times the officer's annual base salary for the full calendar
year prior to termination;
(2) three times the officer's cash bonuses for the full calendar year prior
to termination;
(3) three times the officer's average annual commissions for the two full
calendar years prior to termination; and
(4) fringe benefits and perquisites as provided immediately prior to
termination.
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<PAGE>
In addition, the officer would get use of his company car and reimbursement of
up to $10,000 for all reasonable executive out-placement services for up to 12
months.
Director Compensation
Directors receive no cash compensation for serving on our Board, but we do
reimburse their out-of-pocket expenses in connection with attending meetings.
In 1998, each director who was not an employee was granted a fully vested
option to purchase 3,333 shares of common stock at an exercise price of $3.00
per share.
Compensation Committee Interlocks and Insider Participation
We recently established a compensation committee consisting of Messrs.
Darden, Moore and Rizzo, none of whom have ever been employees of our company.
During 1998, Peter T. Loftin, our Chairman of the Board, Chief Executive
Officer and the sole shareholder, was the only current or former officer or
employee of BTI Telecom or any of its subsidiaries who participated in
deliberations of the Board of Directors concerning executive officer
compensation. No executive officer of BTI Telecom serves as a member of the
board of directors or compensation committee of any entity which has one or
more executive officers serving as a member of our Board of Directors.
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<PAGE>
CERTAIN TRANSACTIONS
We lease on a month-to-month basis a townhouse in Raleigh, North Carolina
for relocation of employees and a condominium in Wilmington, North Carolina for
corporate and customer entertainment from Peter T. Loftin, our Chairman, Chief
Executive Officer and the sole shareholder. Lease payments for the townhouse
were $32,500 in 1996, $30,000 in 1997, $30,000 in 1998 and $15,000 for the six
months ended June 30, 1999, and for the condominium, $32,500 in 1996, $30,000
in 1997, $30,000 in 1998 and $15,000 for the six months ended June 30, 1999. We
have terminated these leases effective July 31, 1999.
We also lease a corporate aircraft from an entity controlled by Mr.
Loftin. Lease payments for the aircraft, which is subject to a five-year lease
entered into in November 1995, were $343,000 in each of 1996, 1997 and 1998,
and $171,000 for the six months ended June 30, 1999. This lease is a "dry"
lease, which means that we pay all costs of operation of the aircraft. We
intend to terminate this lease prior to the end of 1999 and enter into a
similar new lease with the same entity. We plan to enter into a five-year lease
with a five-year option with estimated annual lease payments of $750,000.
Beginning in 1994, we paid certain operating expenses and provided certain
management services for ComSouth Cable International, Inc., an undersea fiber
optic cable company which is 80% owned by Mr. Loftin. These expenses totaled
$176,803 in 1996 and $372,013 in 1997. We expect no further funding of these
expenses.
Since February 1997, we have sold certain integrated telecommunications
services through International Communications Corporation, a company which is
50% owned by Mr. Loftin. We paid ICC between a 5% and 20% commission on all
sales through it. During 1998, we paid ICC $493,000 in commissions pursuant to
this arrangement. We have not paid ICC any commissions in 1999. We do not
expect to sell our services through ICC in 1999 or thereafter.
Pursuant to a shareholders' agreement, Mr. Loftin and A.B. Andrews, a
former shareholder of BTI, were entitled to receive distributions in amounts
sufficient to pay their taxes resulting from ownership of BTI while it was an S
corporation. For each shareholder, these distributions were $283,325 in 1996,
and $192,300 in 1997. In addition, each of them was entitled to receive
additional dividends in an amount equal to $61,736 per month. Each shareholder
received additional dividends of $740,835 in 1996 and $600,898 in 1997. Under
the shareholders' agreement, Mr. Loftin was required to loan us the additional
dividends paid to him through June 1996. This loan, which as of June 30, 1999
totaled $260,000, net of certain advances to Mr. Loftin, bears interest at
prime and is payable over 24 months through September 1999. The shareholders'
agreement and the right to receive additional dividends terminated upon our
reorganization in September 1997. However, we have indemnified Mr. Loftin and
Mr. Andrews for any additional tax obligations arising from income earned by
BTI while it was an S corporation. We believe that any such reimbursements will
not have a material adverse effect on us.
In September 1997, we acquired all of the fiber optic network facilities
assets of FiberSouth, whose sole director, chief executive officer and
principal shareholder is Mr. Loftin, for approximately $31.0 million, and
repaid approximately $5.3 million of FiberSouth indebtedness, together with
accrued interest.
In July 1998, we acquired a multimedia franchise in Raleigh from
FiberSouth for approximately $1.5 million in cash. We are currently considering
our alternatives with respect to this franchise, including the possibility of
selling it to a third party.
We believe that all of the transactions described above are on terms no
less favorable to us than could be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of June 30, 1999 the number of shares of
common stock and the percentage of outstanding shares of common stock that are
beneficially owned by:
o each person that is the beneficial owner of more than 5% of the
outstanding shares of our common stock;
o each director;
o each of the named executive officers; and
o all of our current directors and executive officers as a group.
<TABLE>
<CAPTION>
Percentage
Beneficially Owned
----------------------
Number
of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- -------------------------------------------------------------------- -------------------- ---------- ---------
<S> <C> <C> <C>
Peter T. Loftin(a) ................................................. 100,000,000 100.0% %
R. Michael Newkirk(b) .............................................. 1,749,633 1.7
H.A. (Butch) Charlton(b) ........................................... 74,997 *
Anthony M. Copeland(b) ............................................. 41,667 *
Brian K. Branson(b) ................................................ 41,667 *
Thomas F. Darden(b) ................................................ 3,333 *
William M. Moore, Jr.(b) ........................................... 3,333 *
Paul J. Rizzo(b) ................................................... 3,333 *
Directors and executive officers as a group (8 persons)(c) ......... 101,917,963 100.0%
</TABLE>
- --------
* Less than one percent.
(a) The shareholder's address is c/o BTI Telecom Corp., BTI Corporate Center,
4300 Six Forks Road, Raleigh, North Carolina 27609.
(b) Consists entirely of shares of common stock that such person has the right
to purchase pursuant to options.
(c) Includes 1,917,963 shares of common stock that such persons have the right
to purchase pursuant to options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will
consist of 500,000,000 shares of common stock, no par value per share, and
10,000,000 shares of preferred stock, $.01 par value per share. Immediately
prior to this offering, 100,000,000 shares of common stock and no shares of
preferred stock were issued and outstanding.
Common Stock
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders generally, including the election of
directors. Holders of common stock will be entitled to receive dividends, if
any, declared from time to time by BTI Telecom's board of directors out of
funds legally available for dividends. If BTI Telecom is liquidated, dissolved
or wound-up, holders of common stock will share proportionately in all assets
available for distribution. However, dividend and distribution rights of
holders of common stock will be subject to the rights of any holders of any
series of preferred stock as described below. The holders of common stock have
no preemptive or conversion rights. The common stock does not have cumulative
voting rights. As a result, the holder or holders of more than half of the
shares of common stock voting for the election of directors can elect all
directors being elected at that time. All shares of common stock outstanding
immediately following the offering will be fully paid and will not be subject
to further calls or assessments. There are no redemption or sinking fund
provisions applicable to the common stock.
Preferred Stock
The Board of Directors is authorized, without further shareholder action,
to issue preferred stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
redemption rights and terms, including sinking fund provisions, and certain
other rights and preferences, of the preferred stock. Although there is no
current intention to do so, the Board of Directors may, without shareholder
approval, issue shares of a class or series of preferred stock with voting and
conversion rights which could adversely affect the voting power or divided
rights of the holders of common stock and may have the effect of delaying,
deferring or preventing a change in control.
Statutory and Other Provisions
Statutory Provisions
We are subject to the North Carolina Shareholder Protection Act. This law,
with certain exceptions discussed below, requires approval of certain business
combinations between a North Carolina corporation and any beneficial holder of
more than 20% of the voting shares of the corporation by the holders of at
least 95% of the voting shares of the corporation. Business combinations
subject to this approval requirement include:
o any merger or consolidation of the corporation with or into any other
corporation;
o the sale or lease of all or any substantial part of the corporation's
assets; or
o any payment, sale or lease to the corporation or any subsidiary thereof
in exchange for securities of the corporation of any assets (except
assets having an aggregate fair market value of less than $5 million) of
any other entity.
The principal exception to the special voting requirement applies to
business combinations that satisfy various complex statutory provisions,
including provisions relating to the fairness of the price
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<PAGE>
and the constituency of the Board of Directors. In addition, the special voting
requirement does not apply to any corporation if:
(1) the corporation was not a public corporation at the time such other
entity acquired in excess of 10% of the voting shares;
(2) the corporation adopted an amendment to its bylaws or provided in its
original articles of incorporation that the provisions shall not apply to it in
accordance with the statue; or
(3) the business combination in question was the subject of an existing
agreement of the corporation on April 23, 1987.
In addition, corporations with fewer than 2,000 shareholders of record and
those whose stock is not listed on a national securities exchange are exempt
from the special voting requirement.
We are also subject to "The North Carolina Control Share Acquisition Act."
This law provides that shares acquired in a transaction that would cause the
acquiring person's voting power to meet or exceed any of three thresholds (20%,
33.3% or a majority) of voting power have no voting rights unless granted by a
majority vote of all the outstanding shares of the corporation (not including
interested shares) entitled to vote for the election of directors. "Interested
shares" means the shares of a corporation beneficially owned by:
(1) any person who has acquired or proposes to acquire control shares in a
control share acquisition;
(2) any officer of the corporation; or
(3) any employee of the covered corporation who is also a director of the
corporation.
This provision empowers an acquiring person to require the North Carolina
corporation to hold a special meeting of shareholders to consider the matter
within 50 days of its request.
These provisions were designed to deter takeovers of North Carolina
corporations.
Other Provisions
Our bylaws contain other provisions that could have the effect of
deterring a takeover of our company, including:
Nomination of Directors; Filling of Vacancies. Our bylaws provide that
nominations for the election of directors may only be made by the Board of
Directors, a nominating committee of the Board of Directors or by any
shareholder entitled to vote generally in the election of directors where such
shareholder complies with certain notice provisions. The purpose of these
provisions is to provide us with advance notice of a nomination and to discover
arrangements or relationships between a shareholder and his or her nominees.
This provision may have the effect of impeding efforts to gain control of the
Board by anyone who obtains a controlling interest in our common stock.
Special Meetings of Shareholders. Our bylaws provide that special meetings
of the shareholders may be called only by the President, the Chief Executive
Officer, the Chairman of the Board or a majority of the Board of Directors then
in office. As a result, this provision would restrict the shareholders from
compelling the consideration of proposals over the opposition of the Board of
Directors.
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<PAGE>
Shareholder Proposals. Our bylaws provide that shareholders who wish to
bring business before a meeting of shareholders must follow specified
procedures, including advanced written notice to us. This provision may make it
more difficult for shareholder proposals to be considered at shareholder
meetings.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is .
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<PAGE>
UNITED STATES FEDERAL TAX CONSEQUENCES TO
NON-U.S. HOLDERS OF COMMON STOCK
General
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of our
common stock that may be relevant to you if you are a "non-U.S. holder." For
purposes of this summary, a non-U.S. holder is a beneficial owner of our common
stock that is, for United States federal income tax purposes:
o a nonresident alien individual
o a foreign corporation
o a nonresident alien fiduciary or foreign estate or trust or
o a foreign partnership.
This discussion does not address all aspects of United States federal
income and estate taxation that may be relevant to you in light of your
particular circumstances, and does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code, Treasury regulations and administrative and judicial
interpretations as of the date hereof. All of these are subject to change,
possibly with retroactive effect, or different interpretations. If you are
considering buying our common stock, you should consult your own tax advisor
about current and possible future tax consequences of holding and disposing of
our common stock in your particular situation.
Distributions
Currently, we do not intend to pay dividends. In the event that we change
this policy and declare dividends on our common stock, any such dividends paid
to a non-U.S. holder that are not effectively connected with a United States
trade or business of the non-U.S. holder or, if a tax treaty applies, are not
attributable to a United States permanent establishment or fixed base of the
non-U.S. holder, will, to the extent paid out of earnings and profits, be
subject to United States withholding tax at a 30 percent rate or, if a tax
treaty applies, a lower rate specified by the treaty. To receive a reduced
treaty rate, a non-U.S. holder must furnish to us or our paying agent a duly
completed Form 1001 or Form W-8BEN, or substitute form, certifying to its
qualification for such rate. If a distribution is made that is not a dividend,
it will first constitute a return of capital that is applied against the
non-U.S. holder's basis in the common stock and any remaining amount will be
treated as gain from the sale or exchange of the common stock.
Currently, withholding is generally imposed on the gross amount of a
distribtuion, regardless of whether we have sufficient current and accumulated
earnings and profits to cause the distribution to be a dividend for U.S.
federal income tax purposes. However, withholding on distributions made after
December 31, 2000 may be on less than the gross amount of the distribution if
the distribution exceeds a reasonable estimate made by us of our accumulated
and current earnings and profits.
Dividends that are effectively connected with the conduct of a trade or
business within the United States of a non-U.S. holder and, if a tax treaty
applies, are attributable to a United States permanent establishment or fixed
base of the non-U.S. holder, are exempt from United States federal withholding
tax, provided that the non-U.S. holder furnishes to us or our paying agent a
duly completed Form 4224 or Form W-8ECI, or substitute form, certifying the
exemption. However, dividends exempt from United States withholding because
they are effectively connected or they are attributable to a United States
permanent establishment or fixed base are subject to United States federal
income tax on a net income basis at the regular graduated United States federal
income tax rates. Any such effectively connected dividends received by a
foreign corporation may, under some
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<PAGE>
circumstances, be subject to an additional "branch profits tax" at a 30 percent
rate or a lower rate specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid before
January 1, 2001 to an address outside the United States are presumed to be paid
to a resident of the country of address for purposes of the withholding
discussed above and for purposes of determining the applicability of a tax
treaty rate. However, United States Treasury regulations applicable to
dividends paid after December 31, 2000 eliminate this presumption, subject to
various transition rules and a non U.S. holder who wishes to claim the benefit
of an applicable treaty rate, and avoid backup withholding, as discussed below,
would be required to satisfy applicable certification and other requirements.
For dividends paid after December 31, 2000, a non-U.S. holder generally
will be subject to United States backup withholding tax at a 31 percent rate
under the backup withholding rules described below, rather than at a 30 percent
rate or a reduced rate under an income tax treaty, as described above, unless
the non-U.S. holder complies with certain Internal Revenue Service
certification procedures or, in the case of payments made outside the United
States with respect to an offshore account, certain IRS documentary evidence
procedures. Further, to claim the benefit of a reduced rate of withholding
under a tax treaty for dividends paid after December 31, 2000, a non-U.S.
holder must comply with certain modified IRS certification requirements.
Special rules also apply to dividend payments made after December 31, 2000 to
foreign intermediaries, United States or foreign wholly owned entities that are
disregarded for United States federal income tax purposes and entities that are
treated as fiscally transparent in the United States, the applicable income tax
treaty jurisdiction, or both. You should consult your own tax advisor
concerning the effect, if any, of the rules affecting post-December 31, 2000
dividends on your possible investment in our common stock.
A non-U.S. holder may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund along with the required information with
the IRS.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
our common stock unless one of the following applies:
o The gain is effectively connected with a trade or business of the
non-U.S. holder in the United States and, if a tax treaty applies, the
gain is attributable to a United States permanent establishment or fixed
base maintained by the non-U.S. holder. In this case, the non-U.S. holder
will, unless an applicable treaty provides otherwise, be taxed on its net
gain derived from the sale at regular graduated United States federal
income tax rates. If the non-U.S. holder is a foreign corporation, it may
be subject to an additional branch profits tax equal to 30 percent of its
effectively connected earnings and profits within the meaning of the
Internal Revenue Code for the taxable year, as adjusted for certain items,
unless it qualifies for a lower rate under an applicable income tax treaty
and duly demonstrates that it qualifies.
o The non-U.S. holder is an individual, holds our common stock as a capital
asset, is present in the United States for 183 or more days in the taxable
year of the disposition, and certain other conditions are met. In this
case, the non-United States holder will be subject to a flat 30 percent
tax on the gain derived from the sale, which may be offset by certain
United States capital losses.
o We are or have been a "United States real property holding corporation"
for United States federal income tax purposes at any time during the
shorter of the five-year period ending on the date of the disposition or
the period during which the non-U.S. holder held our common
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<PAGE>
stock. We believe that we never have been and are not currently a United
States real property holding corporation for United States federal income
tax purposes. Although we consider it unlikely based on our current
business plans and operations, we may become a United States real property
holding corporation in the future. Even if we were to become a United
States real property holding corporation, any gain realized by a non-U.S.
holder would not be subject to United States federal income tax as
described in this paragraph if our common stock were considered to be
"regularly traded on an established securities market" and the non-U.S.
holder did not own, actually or constructively, at any time during the
shorter of the periods described above, more than five percent of our
common stock.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is not a
citizen or resident, as defined for United States federal estate tax purposes,
at the time of death, or common stock as to which such person made certain
lifetime transfers, will be included in such person's gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
Information Reporting and Backup Withholding Tax
Under United States Treasury regulations, we must report annually to the
IRS and to each non-U.S. holder the amount of dividends paid to such non-U.S.
holder and the tax withheld with respect to such dividends. These information
reporting requirements apply even if withholding was not required because the
dividends were effectively connected dividends or withholding was reduced or
eliminated by an applicable income tax treaty. Pursuant to an applicable tax
treaty, information may also be made available to the tax authorities in the
country in which the non-U.S. holder resides.
United States federal backup withholding generally is a withholding tax
imposed at the rate of 31 percent on certain payments to persons that fail to
furnish certain required information. Backup withholding generally will not
apply to dividends paid before January 1, 2001 to non-U.S. holders. See the
discussion under "Distributions" above for rules regarding reporting
requirements to avoid backup withholding on dividends paid after December 31,
2000.
As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale of our common stock effected outside the United States.
However, information reporting requirements, but not backup withholding, will
apply to a payment by or through a foreign office of a broker of the proceeds
of a sale of our common stock effected outside the United States if that
broker:
o is a United States person for United States federal income tax purposes;
o is a foreign person that derives 50 percent or more of its gross income
for certain periods from the conduct of a trade or business in the United
States;
o is a "controlled foreign corporation" as defined in the Internal Revenue
Code; or
o is a foreign partnership with certain United States connections (for
payments made after December 31, 2000).
Information reporting requirements will not apply in the above cases if
the broker has documentary evidence in its records that the holder is a
non-U.S. holder and certain conditions are met or the holder otherwise
establishes an exemption.
Payment by or through a United States office of a broker of the proceeds
of a sale of our common stock is subject to both backup withholding and
information reporting unless the holder
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<PAGE>
certifies to the payor as to its status as a non-U.S. holder on a duly
completed Form W-8BEN, or substitute form, under penalties of perjury or
otherwise establishes an exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate United States federal income tax. Rather, any amounts withheld under
the backup withholding rules will be refunded or allowed as a credit against
the holder's United States federal income tax liability, if any, provided the
required information or appropriate claim for refund is filed with the IRS.
The foregoing discussion is for general information and is not tax advice.
Accordingly, you are urged to consult you own tax advisor with respect to the
particular United States federal income tax consequences to you of ownership
and disposition of our common stock, as well as the effect of any state, local,
foreign or other tax laws.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common stock
outstanding. Of this amount, the shares offered hereby will be available for
immediate sale in the public market as of the date of this prospectus. An
additional 3,276,461 shares of common stock are issuable upon the exercise of
outstanding options under our 1997 Stock Plan at a weighted average exercise
price of $1.33 per share. Of this amount, options for 2,357,391 shares are now
exercisable and 919,070 are subject to the satisfaction of vesting criteria.
BTI Telecom and each of its directors, executive officers, optionees and
sole shareholder have agreed that without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, they will not, during
the period ending 180 days after the date of this prospectus:
o offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
o enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise. Approximately
100,000,000 shares of common stock will be available for sale following the
expiration of the lockup period, subject to the limitations of Rule 144
described below.
The outstanding shares of common stock not issued in connection with this
offering are available for sale in the public market, subject to the lockup
period and compliance with the requirements of Rule 144. In general, under Rule
144 as currently in effect, a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least one year is entitled to sell
within any three-month period commencing 90 days after the date of this
prospectus a number of shares that does not exceed the greater of (1) 1% of the
then outstanding shares of common stock or (2) the average weekly trading
volume during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of BTI
Telecom at any time during the 90 days immediately preceding the sale who has
beneficially owned his or her shares for at least two years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the volume limitations
described above. Persons deemed to be affiliates must always sell pursuant to
the volume limitations under Rule 144, even after the applicable holding
periods have been satisfied.
Within 180 days after the completion of this offering, we intend to file a
registration statement on Form S-8 under the Securities Act to register the
7,500,000 shares of common stock reserved for issuance under our 1997 Stock
Plan and the 250,000 shares of common stock reserved for issuance under our
Employee Stock Purchase Plan, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities
Act.
Sales of a substantial number of shares of common stock after the
offering, or the perception that such sales might occur, could adversely affect
the market price of the common stock and could impair our ability to raise
capital through the sale of additional equity securities.
77
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., Banc of
America Securities LLC and Bear, Stearns & Co. Inc. are acting as U.S.
representatives, and the international underwriters named below for whom Morgan
Stanley & Co. International Limited, Salomon Brothers International Limited,
Bank of America International Limited and Bear, Stearns International Limited
are acting as international representatives, have severally agreed to purchase,
and we have agreed to sell to them, severally, the respective number of shares
of common stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
Number
Name of Shares
- ---------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated ..................
Salomon Smith Barney Inc. ..........................
Banc of America Securities LLC .....................
Bear, Stearns & Co. Inc. ...........................
Subtotal ...........................................
International Underwriters:
Morgan Stanley & Co. International Limited .........
Salomon Brothers International Limited .............
Bank of America International Limited ..............
Bear, Stearns International Limited ................
Subtotal ...........................................
Total ............................................
</TABLE>
The U.S. underwriters and the international underwriters are collectively
referred to as the underwriters, and the U.S. representatives and the
international representatives are collectively referred to as the
representatives. The underwriters are offering the shares of common stock
subject to their acceptance of the shares from us and subject to prior sale.
The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of various legal matters by their
counsel and to several other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered hereby, other than those
covered by the U.S. underwriters' over-allotment option described below, if any
such shares are taken.
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Under the agreement between U.S. and international underwriters, each U.S.
underwriter has represented and agreed that, with some exceptions:
o it is not purchasing any shares for the account of anyone other than a
United States or Canadian person; and
o it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the shares
outside the United States or Canada or to anyone other than a United
States or Canadian person.
Under the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that, with some
exceptions:
o it is not purchasing any shares for the account of any United States or
Canadian person; and
o it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares in the United States or Canada or to any United States or Canadian
person.
With respect to any underwriter that is a U.S. underwriter and an
international underwriter, the foregoing representations and agreements made by
it in its capacity as a U.S. underwriter apply only to it in its capacity as a
U.S. underwriter and made by it in its capacity as an international underwriter
apply only to it in its capacity as an international underwriter. The foregoing
limitations do not apply to stabilization transactions or to other transactions
specified in the agreement between U.S. and international underwriters. As used
herein, "United States or Canadian person" means any national or resident of
the United States or Canada, or any corporation, pension, profit-sharing or
other trust or other entity organized under the laws of the United States or
Canada or of any political subdivision thereof, other than a branch located
outside the United States and Canada of any United States or Canadian person,
and includes any United States or Canadian branch of a person who is otherwise
not a United States or Canadian person.
Under the agreement between U.S. and international underwriters, sales may
be made between the U.S. underwriters and international underwriters of any
number of shares as may be mutually agreed. The per share price of any shares
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Under the agreement between U.S. and international underwriters, each U.S.
underwriter has represented that it has not offered or sold, and has agreed not
to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of shares in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer or sale is made, and that such dealer
will deliver to any other dealer to whom it sells any of such shares a notice
containing substantially the same statement as is contained in this sentence.
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Under the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that:
o it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international
underwriters, will not offer or sell, any shares to persons in the United
Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments as principal or
agent for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;
o it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United
Kingdom; and
o it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
offering of the shares to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996, as amended, or is a person to whom such document
may otherwise lawfully be issued or passed on.
Under the agreement between U.S. and international underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese international underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and Exchange
Law and otherwise in compliance with applicable provisions of Japanese law.
Each international underwriter has further agreed to send to any dealer who
purchases from it any of the shares a notice stating in substance that, by
purchasing such shares, such dealer represents and agrees that it has not
offered or sold, and will not offer or sell, any of such shares, directly or
indirectly, in Japan or to or for the account of any resident thereof except
for offers or sales to Japanese international underwriters or dealers and
except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such shares a notice containing substantially the same
statement as is contained in this sentence.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to various dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to various dealers. After
the initial offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the representatives.
We have granted the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on
the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares of
common stock offered hereby. To the extent such option is exercised, each U.S.
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
the number set forth next to such U.S. underwriter's name in the preceding
table
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<PAGE>
bears to the total number of shares of common stock set forth next to the names
of all U.S. underwriters in the preceding table. If the U.S. underwriters'
option is exercised in full, the total price to the public for this offering
would be $ , the total underwriters' discounts and commissions would be $
and our total proceeds from the offering would be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "BTIX."
At our request, the underwriters will reserve up to shares of common
stock to be issued by us and offered hereby for sale, at the initial offering
price, to our directors, officers, employees and associates. This directed
share program will be administered by Morgan Stanley & Co. Incorporated. The
number of shares of common stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.
BTI Telecom and each of its directors, executive officers, optionees and
sole shareholder have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated and Salomon Smith Barney Inc. on behalf of the
underwriters, they will not, during the period ending 180 days after the date
of this prospectus:
o offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
o enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
o the sale of shares to the underwriters;
o our issuance of shares of common stock upon the exercise of an option or
a warrant or the conversion of a security outstanding on the date of this
prospectus of which the underwriters have been advised in writing;
o transactions by any other person other relating to shares of common stock
or other securities acquired in open market or other transactions after
the completion of the offering.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot in connection with
the offering, creating a short position in the common stock for their own
account. In addition, to cover over-allotments or to stabilize the price of the
common stock, the underwriters may bid for, and purchase, shares of common
stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing
shares of common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the
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<PAGE>
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
From time to time, certain of the underwriters have provided, and may
continue to provide, us with investment banking services.
We and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the representatives of the underwriters. The factors considered
in determining the initial public offering price include our future prospects
of the telecommunications industry in general, our revenues, earnings and
certain other financial operating information in recent periods, and the
price-revenue ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to ours. The
estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed on for us
by Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina. Certain legal
matters in connection with the offering will be passed on for the underwriters
by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements of BTI Telecom Corp. at December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Act,
and, in accordance therewith, file reports and other information with the SEC.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the SEC at:
Room 1024 Northwestern Atrium Center
Judiciary Plaza 500 West Madison Street Seven World Trade
450 Fifth Street, N.W. Center Suite 1400 13th Floor
Washington, D.C. 20549 Chicago, Illinois 60661 New York, New York 10048
Copies of such material also can be obtained from the Public Reference
Section of the SEC, at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The SEC maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of such site is http://www.sec.gov.
We have applied for quotation of our common stock on the Nasdaq National
Market, and once approved, those reports, proxy and information statements and
other information also can be inspected at the office of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
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We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered in this offering. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information about us and our common stock, you should
refer to the registration statement and its exhibits. In addition, each
statement made in this prospectus concerning a document filed as an exhibit to
the registration statement is qualified in its entirety by reference to that
exhibit for a complete statement of its provisions. The registration statement
may be inspected without charge at the SEC's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from such office
after payment of fees prescribed by the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors ........................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited) ............................................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and
1998 and for the Six Months Ended June 30, 1998 and 1999 (Unaudited) ................... F-4
Consolidated Statements of Shareholder's Equity (Deficit) for the Years Ended December 31,
1996, 1997 and 1998 and for the Six Months Ended June 30, 1999 (Unaudited) ............. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and
1998 and for the Six Months Ended June 30, 1998 and 1999 (Unaudited) ................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
Schedule
Schedule II -- Valuation and Qualifying Accounts ......................................... F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDER
BTI TELECOM CORP.
We have audited the accompanying consolidated balance sheets of BTI
Telecom Corp. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholder's equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index on page F-1.
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BTI Telecom
Corp. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Raleigh, North Carolina
February 17, 1999
F-2
<PAGE>
BTI TELECOM CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998 1999
------------ ------------- ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................................. $ 67,002 $ 12,767 $ 5,349
Restricted cash ............................................ 25,016 27,282 27,969
Accounts receivable, net ................................... 22,065 25,840 30,134
Accounts and notes receivable from related parties ......... 645 344 361
Other current assets ....................................... 2,303 1,551 2,059
--------- ---------- --------
Total current assets ...................................... 117,031 67,784 65,872
Equipment, furniture and fixtures:
Equipment, furniture and fixtures .......................... 53,744 103,416 129,126
Construction in progress ................................... 10,154 27,052 46,944
Less: accumulated depreciation and amortization ............ 19,321 28,508 35,886
--------- ---------- --------
Total equipment, furniture and fixtures ...................... 44,577 101,960 140,184
Other assets, net ............................................ 11,916 13,929 14,377
Restricted cash, non-current ................................. 50,026 25,498 12,931
--------- ---------- --------
Total assets .............................................. $ 223,550 $ 209,171 $233,364
========= ========== ========
Liabilities and shareholder's deficit
Current liabilities:
Accounts payable ........................................... $ 27,305 $ 46,376 $ 60,005
Accrued expenses ........................................... 2,505 3,461 4,487
Accrued interest ........................................... 7,232 7,772 7,950
Shareholder note payable, current portion .................. 944 763 260
Advanced billings and other liabilities .................... 2,203 4,813 6,950
--------- ---------- --------
Total current liabilities ................................. 40,189 63,185 79,652
Commitments and contingencies (Note 10)
Long-term debt ............................................... 250,000 254,119 281,863
Shareholder note payable, less current portion ............... 762 -- --
Other long-term liabilities .................................. 2,173 1,709 1,867
--------- ---------- --------
Total liabilities ......................................... 293,124 319,013 363,382
Shareholder's deficit:
Preferred stock, $.01 par value, authorized 10,000,000
shares, none issued and outstanding ....................... -- -- --
Common stock, no par value, authorized
500,000,000 shares, issued and outstanding
100,000,000 shares in 1997, 1998 and 1999 ................. 775 822 2,280
Accumulated deficit ........................................ (70,349) (110,664) (131,160)
--------- ---------- --------
Unearned compensation ...................................... -- -- (1,138)
Total shareholder's deficit ............................... (69,574) (109,842) (130,018)
--------- ---------- --------
Total liabilities and shareholder's deficit .................. $ 223,550 $ 209,171 $233,364
========= ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
---------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
------------ -------------- -------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue ...................................... $ 148,777 $ 194,949 $ 212,554 $ 105,806 $117,762
Cost of services ............................. 90,820 139,030 150,901 77,848 77,313
--------- ---------- ---------- --------- --------
Gross profit ............................... 57,957 55,919 61,653 27,958 40,449
Selling, general and administrative
expenses ................................... 49,320 53,518 68,554 32,104 40,005
Depreciation and amortization ................ 4,471 6,613 11,457 4,649 8,838
--------- ---------- ---------- --------- --------
Income (loss) from operations ................ 4,166 (4,212) (18,358) (8,795) (8,394)
Other income (expense)
Interest expense ........................... (1,695) (8,806) (25,430) (12,751) (13,474)
Other income, principally interest ......... 135 2,379 5,555 3,469 1,417
--------- ---------- ---------- --------- --------
Income (loss) before income taxes ............ 2,606 (10,639) (38,233) (18,077) (20,451)
Income taxes ................................. -- -- -- -- (5)
--------- ---------- ---------- --------- -----------
Net income (loss) ............................ $ 2,606 $ (10,639) $ (38,233) $ (18,077) $(20,446)
========= ========== ========== ========= ==========
Basic and diluted income (loss) per
share ..................................... $ .01 $ (.06) $ (.38) $ (.18) $ (.20)
========= ========== ========== ========= ==========
Weighted average shares outstanding .......... 200,000 172,603 100,000 100,000 100,000
========= ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Total
Common Retained Unearned Shareholder's
Stock Earnings (Deficit) Compensation Equity (Deficit)
---------- -------------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31,1995 ..................... $ 400 $ 1,497 $ -- $ 1,897
Net income .................................... -- 2,606 -- 2,606
Distributions ................................. -- (2,048) -- (2,048)
Decrease in unrealized gains .................. -- (80) -- (80)
------ --------- -------- ---------
Balance at December 31,1996 ..................... $ 400 $ 1,975 $ -- $ 2,375
Net loss ...................................... -- (10,639) -- (10,639)
Distributions ................................. -- (1,587) -- (1,587)
Repurchase of shares .......................... (363) (27,922) -- (28,285)
Acquisition of FiberSouth ..................... -- (32,175) -- (32,175)
Compensation related to stock options ......... 738 -- -- 738
Decrease in unrealized gains .................. -- (1) -- (1)
------ ------------ -------- ------------
Balance at December 31,1997 ..................... $ 775 $ (70,349) $ -- $ (69,574)
Net loss ...................................... -- (38,233) -- (38,233)
Distributions ................................. -- (606) -- (606)
Compensation related to stock options ......... 47 -- -- 47
Decrease in unrealized gains .................. -- (1) -- (1)
Settlement of stock and option repurchase
obligations .................................. -- (1,475) -- (1,475)
------ ----------- -------- -----------
Balance at December 31,1998 ..................... $ 822 $(110,664) $ -- $(109,842)
Net loss (unaudited) .......................... -- (20,446) -- (20,446)
Distributions (unaudited) ..................... -- (50) -- (50)
Unearned compensation related to common
stock options (unaudited) .................... 1,434 -- (1,138) 296
Compensation related to stock options
(unaudited) .................................. 24 -- 24
------ ----------- -----------
Balance at June 30, 1999 (unaudited) ............ $2,280 $(131,160) $ (1,138) $(130,018)
====== =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------- -------------------------------
1996 1997 1998 1998 1999
----------- ------------- ------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) .................................... $ 2,606 $ (10,639) $ (38,233) $(18,077) $(20,446)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation ....................................... 4,101 5,427 9,201 4,300 7,381
Amortization ....................................... 370 1,186 2,256 349 1,457
Non-cash compensation related to stock
options ........................................... -- 738 47 24 320
Changes in operating assets and liabilities:
Accounts and notes receivable ...................... (6,594) 307 (3,775) (4,879) (4,294)
Accounts and notes receivable from related
parties ........................................... (568) (645) 301 40 (18)
Other assets ....................................... (560) (437) 150 (2,237) (570)
Accounts payable and accrued expenses .............. 450 4,168 20,057 14,471 14,655
Accrued interest expense ........................... -- 7,100 540 510 178
Advanced billings and other liabilities ............ 478 1,006 3,038 703 2,295
-------- ---------- --------- -------- --------
Net cash provided by (used in) operating
activities ......................................... 283 8,211 (6,418) (4,796) 958
Investing Activities:
Change in restricted cash ............................ (459) (74,583) 22,262 12,911 11,880
Sales of marketable securities ....................... 179 -- 6 (3) --
Purchases of equipment, furniture and fixtures,
net ................................................ (7,812) (22,792) (66,311) (27,518) (45,605)
Purchase of FiberSouth assets ........................ -- (35,186) -- -- --
Purchase of other assets ............................. (589) (687) (3,123) (226) (1,834)
Settlement of FiberSouth stock option repurchase
obligation ......................................... -- -- (2,300) (2,300) --
-------- ---------- --------- ---------- --------
Net cash used in investing activities ................ (8,681) (133,248) (49,466) (17,136) (35,559)
Financing Activities:
Net proceeds (payments) of long-term debt ............ 11,627 (18,671) 4,119 -- 27,744
Proceeds from shareholder notes ...................... 370 -- -- -- --
Proceeds from senior notes ........................... -- 250,000 -- -- --
Decrease in other long-term liabilities .............. (690) (391) (1,032) (513) (503)
Increase in deferred financing costs and other
assets ............................................. (670) (9,523) (832) (500) (8)
Repurchase of common stock ........................... -- (28,286) -- -- --
Distributions paid ................................... (2,048) (1,587) (606) -- (50)
-------- ---------- --------- ---------- ----------
Net cash provided by (used in) financing
activities ......................................... 8,589 191,542 1,649 (1,013) 27,183
-------- ---------- --------- ---------- ----------
Increase (decrease) in cash and cash equivalents ..... 191 66,505 (54,235) (22,945) (7,418)
Cash and cash equivalents at beginning of period 306 497 67,002 67,002 12,767
-------- ---------- --------- ---------- ----------
Cash and cash equivalents at end of period ........... $ 497 $ 67,002 $ 12,767 $ 44,057 $ 5,349
======== ========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- BTI Telecom Corp. and its majority owned
subsidiaries (the "Company" or "BTITC") provide integrated retail services,
including long distance, local, data, Internet access and other enhanced
services, primarily to small to medium-sized business customers located in the
southeastern United States. The Company also provides wholesale services,
including switched, dedicated access, special access and prepaid calling card
services primarily to telecommunication carriers. The Company serves its
customers utilizing an advanced digital fiber optic telecommunications network
consisting of both leased and owned transmission capacity.
Basis of Presentation -- The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
all significant intercompany transactions.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles 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 revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- The Company considers highly liquid,
short-term investments with a maturity of three months or less when purchased
to be cash equivalents.
Restricted Cash -- Restricted cash consists of pledged securities being
held as security for certain scheduled interest payments due on the Company's
ten year 10 1/2% notes ("Senior Notes"). The securities were purchased
pursuant to the pledge agreement executed in connection with the issuance of
the Senior Notes. The balance as of December 31, 1998 includes securities
pledged for the remaining scheduled interest payments through September 2000
(Note 2).
Equipment, Furniture and Fixtures -- Equipment, furniture and fixtures is
stated at cost, including labor and other direct costs associated with the
installation of network facilities. Improvements that significantly add to
productive capacity or extend the useful life are capitalized, while repairs
and maintenance are expensed as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of various assets, ranging
from 5 to 20 years.
Interest is capitalized as part of the cost of constructing the Company's
fiber optic network. The amount capitalized for the year ended December 31,
1998 was approximately $1.5 million. There were no amounts capitalized in 1996
or 1997.
Costs associated with fiber optic network segments under construction 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.
Other Assets -- Costs incurred in connection with obtaining long-term
financing have been deferred and are being amortized over the terms of the
related debt agreements. Deferred costs relating to long-term financing at
December 31, 1997 and 1998 were $10.4 million and $11.2 million, respectively.
Accumulated amortization of these costs at December 31, 1997 and 1998 were $0.6
million and $2.1 million, respectively.
Line access costs are capitalized and amortized over the estimated period
the related lines will be used by the Company (24 months to 60 months) using
the straight line method. Deferred line access costs at December 31, 1997 and
1998 were $5.8 million and $7.5 million, respectively, with accumulated
amortization of $4.0 million and $4.8 million, respectively.
F-7
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The balance in "Other Assets" as of December 31, 1998 also includes $1.5
million for the multi-media franchise the Company purchased from a related
company (Note 9).
Supplemental Cash Flow Information -- The Company paid interest of $1.5
million, $1.7 million and $26.4 million for the years ended December 31, 1996,
1997 and 1998, respectively and $12.9 million and $14.2 million for the six
months ended June 30, 1998 and 1999, respectively. The transfer of paging
equipment from inventory to equipment for the years ended December 31, 1996,
1997, and 1998 was $.6 million, $.4 million, and $.3 million, respectively and
$.3 million and $0 for the six months ended June 30, 1998 and 1999,
respectively. The Company paid no income taxes for the years ended December 31,
1996, 1997 and 1998 or for the six months ended June 30, 1998 and 1999.
Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of
trade accounts receivable which are unsecured. The Company's risk is limited
due to the fact that there is no significant concentration with one particular
customer. The Company uses the allowance method of accounting for uncollectible
accounts receivable. The provision for uncollectible accounts was $4.8 million
and $5.3 million as of December 31, 1997 and 1998, respectively.
Advertising Expense -- In accordance with Statement of Position 93-7
"Reporting on Advertising Costs," the Company capitalized $.5 million in direct
response advertising costs in 1997, the total of which is completely amortized
as of December 31, 1998. All other advertising costs are expensed as incurred.
The Company expensed $.6 million, $1.1 million and $3.1 million in advertising
costs during 1996, 1997 and 1998, respectively.
Basic and Diluted Earnings (Loss) Per Share -- Basic earnings (loss) per
share is calculated by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. Diluted earnings (loss) per
share includes any dilutive effects of options, warrants and convertible
securities. At December 31, 1997 and 1998 and June 30, 1998 and 1999, common
stock equivalents were excluded from the earnings (loss) per share calculations
due to their anti-dilutive effect as a result of the Company's net loss for
these years. There were no options issued or other common stock equivalents as
of December 31, 1996. The Company had no warrants or convertible securities
outstanding at December 31, 1996, 1997 and 1998 or June 30, 1998 and 1999.
Revenue Recognition -- Revenue for telecommunications services is
recognized as services are provided. Due to the timing of the Company's billing
cycles, at any point in time certain services have been provided to customers
which have not yet been billed. Revenue which has been earned but not yet
billed to customers, amounts to $5.4 million, $5.0 million and $6.1 million at
December 31, 1997 and 1998 and June 30, 1999, respectively, and is recorded as
accounts receivable in the Company's consolidated balance sheets. Additionally,
the Company invoices customers one month in advance for certain recurring
services resulting in advance billings of $1.0 million, $3.9 million and $6.6
million at December 31, 1997 and 1998 and June 30, 1999, respectively.
Accounting for Stock Options -- In 1996, the Company adopted Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," which gives companies the option to adopt the fair
value method for expense recognition of employee stock options and other
stock-based awards or to continue to account for such items using the
F-8
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
intrinsic value method as outlined under Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" with pro forma
disclosures of net income (loss) and net income (loss) per share as if the fair
value method had been applied. The Company has elected to continue to apply APB
25 for stock options and other stock based awards and has disclosed pro forma
net loss and net loss per share as if the fair value method had been applied.
Income Taxes -- Deferred tax assets and liabilities are determined based
on differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws anticipated
to be in effect when those differences are expected to reverse. The Company
provides a valuation allowance for its deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Prior to the Company's reorganization in 1997 (Note 2), the Company had
elected to be taxed for federal and state purposes as an S corporation under
the provisions of the Internal Revenue Code. Consequently, income, losses and
credits were passed through directly to the shareholders, rather than being
taxed at the corporate level.
Segment Reporting -- In June 1997, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 uses a management approach to report financial and descriptive
information about a Company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally for the Company's management. Under this
definition, the Company operated, for all periods presented, as a single
segment.
Comprehensive Income -- In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires that total comprehensive income and comprehensive
income per share be disclosed with equal prominence as net income and earnings
per share. Comprehensive income is defined as changes in shareholder's equity
exclusive of transactions with owners such as capital contributions and
dividends. The Company adopted this Standard in 1998. The Company did not
report any comprehensive income items in any of the periods presented because
comprehensive income (loss) would not be significantly different from net
income (loss) as presented.
Recently Issued Accounting Standards -- In June 1998, the FASB issued
Statement of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt the new
Statement effective January 1, 2000. The Statement will require the recognition
of all derivatives on the Company's consolidated balance sheet at fair value.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
Reclassifications -- Certain amounts in the December 31, 1996 and 1997 and
June 30, 1998 (unaudited) financial statements have been reclassified to
conform to the December 31, 1998 presentation.
Unaudited Interim Financial Statements -- The unaudited interim financial
statements include all adjustments (consisting of normal recurring adjustments)
that are, in the opinion of management, necessary for a fair presentation of
the financial position of the Company as of June 30, 1999 and the results of
operations and cash flows for the six month periods ended June 30, 1998 and
1999.
F-9
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for future interim periods or the
entire year. All interim financial data presented is unaudited.
NOTE 2: ISSUANCE OF SENIOR NOTES AND RELATED TRANSACTIONS
In September 1997, the Company issued ten-year notes (the "Initial Notes")
with a principal value of $250.0 million. The Initial Notes bear interest at
the rate of 10 1/2% per annum and mature in 2007. In January 1998, the Company
exchanged all of the Initial Notes outstanding in $1,000 principal amounts for
$250.0 million in $1,000 principal amounts of Senior Notes. The Senior Notes
have been registered under the Securities Act of 1933, as amended, and are
identical in all material respects to the terms of the Initial Notes for which
they were exchanged, except for certain transfer restrictions and registration
rights relating to the Initial Notes. Pursuant to the pledge agreement executed
in connection with the issuance of the Initial Notes, the Company utilized
$74.1 million of the proceeds to purchase a portfolio of pledged securities.
These securities continue to be held in escrow for the payment of the first six
scheduled interest payments due on the Senior Notes; the first two of such
interest payments have been made as of December 31, 1998. The pledged
securities are included in the "Restricted cash" captions of the consolidated
balance sheets.
In connection with the issuance of the Initial Notes during September
1997, the Company also consummated the following transactions:
(i) The Company, which began operations through Business Telecom, Inc.
("BTI") in 1983, was reorganized into a new corporate structure
consisting of BTI Telecom Corp. as the parent company and BTI as a wholly
owned subsidiary and converted from an S corporation to a C corporation
subject to income tax.
(ii) BTI entered into an amended and restated revolving credit facility (the
"Credit Facility") guaranteed by the Company, which will provide up to
$60.0 million of availability to be used for working capital and other
purposes, including capital expenditures. BTI repaid all indebtedness
outstanding under its then existing credit agreement together with
accrued interest thereon. (The Credit Facility has been subsequently
amended. See Note 4).
(iii) BTI repurchased 50% of its outstanding common stock not held by its
Chairman and Chief Executive Officer under the terms of the Common Stock
Repurchase Agreement (Note 6).
(iv) The Company acquired certain fiber optic assets and the related business
of FiberSouth, Inc. ("FiberSouth"), a Company related through common
ownership, for cash and assumption of debt. The acquisition was accounted
for using the historical basis of the assets acquired under the
provisions of AIN No. 39 of APB No. 16, "Business Combinations." As a
result, the net assets acquired were recorded at their historical basis
of approximately $3.1 million and the remainder of the purchase price,
$32.2 million, was recorded as a distribution in the statement of
shareholder's equity. Accordingly, the acquisition is reflected in the
Company's financial statements at September 30, 1997. The operations of
FiberSouth are included in the Company's operations since the date of the
acquisition.
(v) The Company's Board of Directors approved an increase in the number of no
par value common stock authorized from 200,000 shares to 100,000,000
shares. (In April, 1998 a 10-for-1 split of the Company's Common Stock
was effected. See Note 6.) The Board of Directors also authorized
10,000,000 shares $.01 par value preferred stock. As of December 31, 1997
and 1998, there were no shares of preferred stock outstanding.
F-10
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3: EQUIPMENT, FURNITURE AND FIXTURES
Major classes of equipment, furniture and fixtures are summarized below:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- ------------
1997 1998 1999
(In thousands) --------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Data processing equipment ....................... $ 6,683 $ 9,864 $ 11,777
Telephone service equipment ..................... 31,560 57,239 64,774
Fiber optic network ............................. 7,550 24,517 38,683
Paging equipment ................................ 1,687 2,892 2,714
Office furnishings and equipment ................ 3,071 3,651 4,027
Leasehold improvements .......................... 2,937 4,970 6,860
Vehicles ........................................ 256 283 291
Construction in progress ........................ 10,154 27,052 46,944
Less: accumulated depreciation .................. 19,321 28,508 35,886
------- -------- --------
Total equipment, furniture and fixtures ......... $44,577 $101,960 $140,184
======= ======== ========
</TABLE>
NOTE 4: LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------- ------------
1997 1998 1999
----------- ----------- ------------
(In thousands) (Unaudited)
<S> <C> <C> <C>
Unsecured 10 1/2% Senior Notes, due 2007 ......... $250,000 $250,000 $250,000
Revolving Credit Facilities, due 2002 ............ -- 4,119 31,863
-------- -------- --------
$250,000 $254,119 $281,863
======== ======== ========
</TABLE>
Senior Notes -- On September 22, 1997, the Company issued $250.0 million
of 10 1/2% Initial Notes which were exchanged for Senior Notes in January 1998.
The entire original principal balance is due September 2007, with interest
payable semi-annually on March 15th and September 15th of each year (Note 2).
The Senior Notes contain various financial and administrative covenants with
which the Company must comply, including certain restrictions on the incurrence
of additional indebtedness and payment of dividends under circumstances
specified in the debt agreement.
Revolving Credit Facilities -- In 1998, the Company amended and restated
its existing $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 based upon a percentage of
eligible accounts receivable and eligible capital expenditures, respectively,
as defined in the loan agreement. Borrowings under the Facilities can be used
for working capital and other purposes. Borrowings outstanding at December 31,
1998 are under the revolving credit facility. In addition, there was $.2
million outstanding in letters of credit at December 31, 1998. The Facilities
agreement expires and amounts outstanding are due in September 2002. The
amounts outstanding under 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 (5.06%, 5.07%, and 5.07% at December 31, 1998,
respectively) or the prime rate (7.75% at December 31, 1998), plus
F-11
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4: LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES -- Continued
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. The Facilities
contain various financial and administrative covenants with which the Company
must comply on a monthly and quarterly basis, including certain restrictions on
the payment of dividends.
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," the Company estimates
that the fair value of the long-term debt at December 31, 1998 and June 30,
1999 was $192.8 million and $246.9 million as compared to the carrying value of
$254.1 million and $281.9 million, respectively. The fair value of long-term
debt is determined based on negotiated trades for the securities or is
estimated using rates currently available to the Company for debt with similar
terms and maturities.
NOTE 5: 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 and adopted the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). The
cumulative effect of adopting FAS 109 is reflected in the Company's financial
statements for the year ended December 31, 1997.
The significant components of the Company's deferred tax assets and
liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation .............. $ 1,437 $ 3,123
Line access costs ....................... 744 826
FiberSouth asset purchase ............... 555 624
Other ................................... 10 134
-------- ---------
Total deferred tax liabilities ............ 2,746 4,707
Deferred tax assets:
Stock options ........................... 660 678
Net operating loss carryforward ......... 2,770 19,761
Accounts receivable reserve ............. 1,930 2,108
Other ................................... 422 638
-------- ---------
Total deferred tax assets ................. 5,782 23,185
Less: valuation allowance ................. (3,609) (19,051)
-------- ---------
Net deferred tax liabilities .............. $ (573) $ (573)
======== =========
</TABLE>
For the years ended December 31, 1997 and 1998 and for the six months
ended June 30, 1998 and 1999, the Company generated net operating losses
("NOLs") that may be used to offset future taxable income. The Company has
established a valuation allowance for the net deferred tax assets associated
with these net operating losses. The Company will reduce the valuation
allowance when,
F-12
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5: INCOME TAXES -- Continued
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.
At December 31, 1998 and June 30, 1999, the Company had net operating loss
carryforwards of approximately $49.4 million and $69.5 million, respectively,
for federal and state income tax purposes which will begin to expire in the
year 2012.
The reconciliation of the federal statutory income tax rate with the
effective income tax rate reflected in the financial statements is as follows
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Federal income tax benefit at statutory rate ............... 35.0% 35.0%
State income tax benefit (net of federal benefit) .......... 5.0% 5.0%
Change in valuation allowance .............................. (40.0%) (40.0%)
----- -----
0.0% 0.0%
===== =====
</TABLE>
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the Company had been a C Corporation subject to
federal and state income taxes for 1996. Accordingly, all deferred tax assets
and liabilities associated with the adoption of SFAS 109 are reflected in the
Company's balance sheet and statement of operations as of and for the years
ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
December 31, 1996
------------------
(In thousands)
<S> <C>
Earnings before pro forma adjustments ................. $2,606
Pro forma adjustment:
Provision for income taxes to increase tax expense to
estimated effective rate of 42.0% .................. 1,094
------
Pro forma net income ................................ $1,512
======
</TABLE>
NOTE 6: SHAREHOLDER'S EQUITY
Stock Split -- In April 1998, the Board of Directors 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
common shares authorized from 100 million to 500 million. Historical share and
per share data have been retroactively adjusted to reflect these changes.
Common Stock Repurchase Agreement -- In July 1992, the Company entered
into an agreement with one of its shareholders (the "Retiring Shareholder") to
purchase the outstanding common shares held by his estate upon his death. The
agreement was amended in June 1996, at which time a purchase price for the
common shares held by the Retiring Shareholder was agreed upon and provision
was made for the shares to be repurchased at any time. In 1997, the Company
exercised its option to purchase the Retiring Shareholder's outstanding shares
for $28.3 million (Note 2).
Pursuant to the agreement, the Company was required to make monthly
distributions to each shareholder of $61,700 beginning in July 1992 until
closing of the repurchase. The 1992 agreement required that an escrow account
be established into which the non-Retiring Shareholder was required to deposit
his pro rata share of these distributions. Under the provisions of the 1992
F-13
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 6: SHAREHOLDER'S EQUITY -- Continued
agreement, the non-Retiring Shareholder remitted those funds back to the
Company in exchange for subordinated notes payable. The 1996 amended agreement
allowed the non-Retiring Shareholder to retain his pro rata share of the
monthly distributions. During 1997, the subordinated note agreement was amended
to include a 24-month repayment schedule. The balance in shareholder note
payable at December 31, 1997 and 1998 of $1.7 million and $.8 million,
respectively, represents the amounts remitted back to the Company by the
non-Retiring Shareholder under the original agreement, plus accrued interest at
8.5%.
Stock and Option Repurchase Agreements -- 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 (Note 7). In
addition, the Company assumed certain stock repurchase obligations in
connection with its acquisition of the fiber optic assets of 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.
Dividends -- 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 income
earned by BTI while it was an S corporation. The Company paid dividends of $.6
million, $.4 million and $.6 million in 1996, 1997 and 1998 to shareholders for
the reimbursement of these tax obligations. The Company believes that any such
future reimbursements will not have a material effect on the Company's
financial condition or results of operations.
NOTE 7: STOCK-BASED COMPENSATION
In 1994, BTI formalized the 1994 Stock Plan (the "1994 Plan"). The 1994
Plan provided that an aggregate of 4,998,900 of the Company's authorized shares
be reserved for future issuance. Under the terms of the 1994 Plan, BTI
committed to grant certain options to an officer and two former employees of
BTI effective at the time BTI purchased the outstanding shares of the Retiring
Shareholder. The measurement date for compensation related to these options did
not occur until the repurchase of the shares from the Retiring Shareholder in
September 1997. Accordingly, the Company recognized compensation expense of
approximately $2.1 million coincident with the measurement date. Because
certain of the employees to whom the options were committed were no longer
employed by the Company, the accrued compensation included provisions for the
estimated amounts to be paid to these former employees in connection with their
option commitments. Included in the $2.1 million is $.7 million in non-cash
compensation expense representing the difference in the fair value of the
options and the exercise price at the date of grant (September, 1997) for
1,666,300 options granted to an existing officer.
In 1997, the Company assumed the obligations of BTI under the 1994 Plan
and incorporated these obligations into the 1997 Stock Plan (the "1997 Plan")
which will terminate in August 2007,
F-14
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7: STOCK-BASED COMPENSATION -- Continued
unless sooner terminated by the Board of Directors, for the purpose of
attracting and retaining certain key employees of the Company. The 1997 Plan
provided that an aggregate of 5,000,000 of the Company's authorized shares be
reserved for future issuance. In the case of initial grants, the exercise price
and vesting terms will be fixed by the compensation committee on the date of
grant. The 1997 Plan permits the grant of options for a term of up to ten
years. The Company granted options to purchase 1,866,280, 989,481 and 462,000
common shares under the 1994 and 1997 Plans during the years ended December 31,
1997 and 1998 and the six months ended June 30, 1999, respectively. Outstanding
options vest at various times from the date of issuance to 2 to 3 years after
the date of issuance. The Company recognized $47,040 in compensation expense
during 1998 representing the difference between the estimated fair value of the
options and the exercise price at the date of grant.
The Company has elected to account for its stock-based compensation plan
under the provisions of APB Opinion No.25, which requires compensation cost to
be measured by the quoted market price at the measurement date less the amount,
if any, an employee is required to pay. The required pro forma-disclosures in
accordance with SFAS No. 123, are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------- ------------
1997 1998 1999
------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
In thousands, except per share data:
Net loss
Actual ........................... $ (10,639) $ (38,233) $ (20,446)
Pro forma ........................ (10,649) (38,375) (20,460)
Loss per share
Actual ........................... $ (.06) $ (.38) $ (.20)
Pro forma ........................ (.06) (.38) (.20)
</TABLE>
Option activity under the Company's plans is summarized below:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------------------- --------------------
1997 1998 1999
--------------------- --------------------- --------------------
(unaudited)
--------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
In thousands, except per share amounts
Outstanding at beginning of year ........... -- $ -- 1,866 $ .13 2,855 $ 1.10
Options granted ............................ 1,866 .13 989 2.89 450 3.00
Options cancelled .......................... -- -- -- -- (29) 3.00
----- ----- ----- ------ ----- -------
Outstanding at end of year ................. 1,866 $ .13 2,855 $ 1.10 3,276 $ 1.33
===== ===== ===== ====== ===== =======
Options exercisable at end of year ......... 1,720 2,106 2,357
Shares available for future grant .......... 3,134 2,145 1,724
</TABLE>
The weighted-average remaining contractual life of options as of December
31, 1998 and June 30, 1999 is 7.59 years and 7.32 years, respectively.
The per share weighted average fair value of stock options granted by the
Company during 1997, 1998 and 1999 was approximately $.45, $.22 and $3.45,
respectively, on the dates of grant.
F-15
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7: STOCK-BASED COMPENSATION -- Continued
In connection with the 1997 Plan, the Company has recorded unearned
compensation of $1.4 million (unaudited), which represents the amount by which
the deemed fair value of the Company's common stock exceeded the exercise price
on the date of the grant. The deferred compensation is amortized to
compensation expense over the vesting period, which is two to three years. Such
compensation expense amounted to $.3 million (unaudited) for the six month
period ended June 30, 1999.
The following assumptions were used by the Company to determine the fair
value of stock options granted using the minimum value option-pricing model:
<TABLE>
<CAPTION>
Six months
Year ended ended
December 31, June 30,
------------------------- ----------------
1997 1998 1999
----------- ----------- ----------------
(unaudited)
----------------
<S> <C> <C> <C>
Dividend yield .................. 0% 0% 0%
Expected option life ............ 1.5 years 1.5 years 1.5 - 3 years
Risk-free interest rate ......... 5.46% 5.0% 4.41%
</TABLE>
At December 31, 1998 and June 30, 1999, the Company has reserved 5,000,000
shares of common stock for future issuance related to the stock option plans.
In July 1999, the Company increased the common stock reserved for future
issuance to 7,500,000 shares.
NOTE 8: EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan and Trust covering substantially all
employees. Participants were allowed to elect to defer up to 15% of their
salary, not to exceed $10,000 annually, which was the maximum allowed by the
Internal Revenue Service in 1998. The Company matched 50% of employee
contributions in 1996, 1997 and 1998, up to a maximum of 6% of each employee's
annual salary. Employer contributions for the years ended December 31, 1996,
1997 and 1998 were $.3 million, $.2 million and $.2 million, respectively.
NOTE 9: RELATED PARTY TRANSACTIONS
The Company has historically funded certain operating expenses on behalf
of two affiliates related through common ownership. Accounts receivable from
these affiliates included $.6 million and $.6 million at December 31, 1997 and
1998, respectively. In 1996 and up until the date of acquisition in 1997, the
Company paid approximately $1.4 million and $1.0 million, respectively, to
FiberSouth, a Company related through common ownership, for local access
services.
During 1995, the Company entered into an operating lease for an airplane
with a company under common ownership. Rent expense related to this lease was
approximately $.3 million for the years ending December 31, 1996, 1997 and
1998. The Company also leases certain facilities from its shareholder (Note
10).
Effective July 15, 1998, the Company purchased a multi-media franchise
from FiberSouth for $1.5 million, subject to approval for the right to operate
by the City of Raleigh. As a result, the Company will have the right to offer
multi-media services in Raleigh. The Company anticipates that the transaction
will be approved in the first quarter of 1999.
In 1997 and 1998, the Company sold certain integrated telecommunications
services to agents and customers of an affiliate related through common
ownership. The Company pays the affiliate a
F-16
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9: RELATED PARTY TRANSACTIONS -- Continued
commission on all sales made through the affiliate. The commissions totaled $.2
million and $.5 million in 1997 and 1998, respectively.
NOTE 10: COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Legal Matters -- On September 14, 1998, Gulf Communications, LLC (the
"Plaintiff") filed a lawsuit which is now pending in the United States District
Court for the Northern District of Texas. The Plaintiff alleges breach of
contract, negligent misrepresentation and fraud in the inducement. The
Plaintiff seeks monetary damages, although a specific amount has not been
plead. The Company is vigorously defending this litigation. Because discovery
is ongoing, and due to the uncertainties inherent in the litigation process,
the Company is unable to predict the likelihood of an unfavorable outcome. The
costs of defense and final resolution of this issue could result in the Company
recording an obligation which could have an adverse effect on the Company.
The Company is subject to various legal proceedings, including regulatory,
judicial and administrative matters, all of which have arisen in the ordinary
course of business. The Company's management believes that the ultimate
resolution of these matters will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
Operating leases -- The Company rents its facilities and certain office
and other equipment under operating leases which contain certain escalating
clauses and various renewal and buy-out provisions. Future minimum lease
payments under the leases, which have remaining terms in excess of one year,
are as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 Thereafter
--------- --------- --------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
$4,038 $3,703 $3,079 $2,995 $8,931
====== ====== ====== ====== ======
</TABLE>
Total rent expense was $3.9 million, $4.1 million and $5.1 million
(including facilities rent of $65,000, $60,000 and $60,000, respectively, paid
to a related party) in 1996, 1997 and 1998,
respectively.
Other Matters -- 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
$50.1 million, $27.4 million and $30.6 million of which was fulfilled through
December 31, 1998 and June 30, 1999, respectively. The remaining commitments
extend through the end of 1999.
During 1997, the Company signed a commitment with a municipality to
finalize the terms of the Company's $3.1 million contribution to partially fund
the construction of a performing arts center. The contribution will be paid
over a ten year period commencing in 1998 and is payable in cash and in-kind
service (telephone and data transmission service). As of December 31, 1998, the
Company has paid $.3 million of this commitment.
Significant Customer -- During 1997, one customer accounted for
approximately 12% of consolidated revenue. There were no significant customer
concentrations in 1996 or 1998.
F-17
<PAGE>
NOTE 11: SUBSEQUENT EVENT -- UNAUDITED
The Company has executed a commitment letter with a bank for a $60.0
million credit facility. The assets to be financed with the facility are a
3,300-mile fiber optic network and associated infrastructure. Borrowings under
the facility are to be secured by the fiber optic network and infrastructure
and will bear interest at the 30-, 60- or 90-day LIBOR rate or the prime rate,
plus an applicable spread based on the Company's financial performance. The
facility will also require compliance with various financial and administrative
covenants.
F-18
<PAGE>
BTI TELECOM CORP.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning of Costs and from End
Period Expenses Reserves of Period
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts ......... $2,335 $3,440 $ (2,741) $3,034
====== ====== ======== ======
Year ended December 31, 1997:
Allowance for doubtful accounts ......... $3,034 $4,362 $ (2,571) $4,825
====== ====== ======== ======
Year ended December 31, 1998:
Allowance for doubtful accounts ......... $4,825 $4,183 $ (3,737) $5,271
====== ====== ======== ======
Six months ended June 30, 1999 (unaudited):
Allowance for doubtful accounts ......... $5,271 $2,042 $ (1,012) $6,301
====== ====== ======== ======
</TABLE>
F-19
<PAGE>
[Map of southeastern United States, LOCAL AND
showing local and long distance LONG DISTANCE
switches and DLC sites] SWITCHES
& DLC SITES
[Key]
Lucent 5ESS 2000 Local Switch
(Existing)
Lucent 5ESS 2000 Local Switch
(Planned)
ILEC Co-Locations/DLCs (Existing)
ILEC Co-Locations/DLCs (Planned)
Alcatel USA 600E Long Distance Switch
[Map of southeastern United States, FRAME
showing frame relay and ATM sites] RELAY
& ATM
SITES
[Key]
Ascent 9000 Frame Relay
Switch (Existing)
Ascend 9000 Frame Relay
Switch (Planned)
Ascend ATM Switch (Planned)
OCn
DS3
<PAGE>
[BTI LOGO]
<PAGE>
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the NASDAQ National
Market listing fee.
<TABLE>
<S> <C>
SEC registration fee ....................... $34,750
NASD filing fee ............................ 13,000
NASDAQ National Market listing fee ......... *
Printing and engraving expenses ............ *
Legal fees and expenses .................... *
Accounting fees and expenses ............... *
Blue sky fees and expenses ................. *
Transfer agent fees ........................ *
Miscellaneous fees and expenses ............ *
--------
Total ...................................... $
========
</TABLE>
- --------
* To be completed by amendment.
Item 14. Indemnification of Officers and Directors.
The Registrant's Articles of Incorporation and Bylaws include provisions
to (1) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the fullest extent permitted
by Section 55-8-30(e) of the North Carolina Business Corporation Act (the
"Business Corporation Act"), and (2) require the Registrant to indemnify its
directors and officers to the fullest extent permitted by Sections 55-8-50
through 55-8-58 of the Business Corporation Act, including circumstances in
which indemnification is otherwise discretionary. Pursuant to Sections 55-8-51
and 55-8-57 of the Business Corporation Act, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Business
Corporation Act. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant, for
acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its shareholders, for any transaction from which
the director deprived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
shareholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its shareholders, for acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Registrant or its shareholders, for
improper transactions between the director and the Registrant and for improper
distributions to shareholders and loans to directors and officers. These
provisions do not affect a director's responsibilities under any other laws,
such as the federal securities laws or state or federal environmental laws.
II-1
<PAGE>
The Registrant's Bylaws require the Registrant to indemnify its directors
and officers against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interest of the Registrant and,
with respect to any proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The Registrant's Bylaws also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
See Item 17 for a statement of the Registrant's undertaking as to the
Commission's position respecting indemnification arising under the Securities
Act.
Item 15. Recent Sales of Unregistered Securities.
Since the Registrant's inception on August 19, 1997, the Registrant has
issued and sold the following securities:
1. In September 1997, the Registrant issued 100,000,000 shares to Peter T.
Loftin in exchange for all of the issued and outstanding shares of Business
Telecom Inc. The offering of these securities was deemed to be exempt from
registration under Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
2. In September 1997, the Registrant sold $250,000,000 in aggregate
principal amount of 10 1/2% Senior Notes due 2007 to qualified institutional
buyers. The Registrant relied upon Section 4(2) of 144A promulgated under the
Securities Act for an exemption from registration for the sale of these
securities. Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner
& Smith Incorporated were the initial purchasers and received a purchase price
discount of 2.75%.
3. The Registrant granted options to purchase an aggregate of 3,276,461
shares of Common Stock to 85 employees and three non-employee directors. The
offering of these securities was deemed to be exempt from registration under
Section 4(2) of the Securities Act or Rule 701 promulgated thereunder as
transactions by an issuer not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------------------------------
<S> <C>
1.1 Underwriting Agreement (to be filed by amendment).
2.1* Agreement and Plan of Merger dated as of September 17, 1997, among Business Telecom, Inc.,
BTI Telecom Corp., and BTI OpCo Inc.
2.2* Asset Purchase Agreement dated September 17, 1997, between FiberSouth, Inc. and Business
Telecom, Inc.
3.1 Articles of Incorporation of BTI Telecom Corp., as amended.
3.2 Bylaws of BTI Telecom Corp., as amended.
4.1* Indenture dated as of September 22, 1997, among BTI Telecom Corp., Business Telecom, Inc.
and First Trust of New York, National Association, as Trustee, relating to the 10 1/2% Senior Notes
due 2007 of BTI Telecom Corp.
4.2* Registration Rights Agreement dated September 22, 1997, between BTI Telecom Corp. and
Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- --------------------------------------------------------------------------------------------------
<S> <C>
4.3* Pledge and Security Agreement dated as of September 22, 1997, from BTI Telecom Corp., as
Pledgor, and Business Telecom, Inc., as Guarantor, to First Trust of New York, National
Association, as Trustee.
5.1 Opinion of Wyrick Robbins Yates & Ponton LLP (to be filed by amendment).
10.1* 1994 Stock Plan.
10.2 1997 Stock Plan, as amended.
10.3* Second Amended and Restated Loan Agreement dated September 22, 1997, between Business
Telecom, Inc. and General Electric Capital Corporation and the other financial institutions party
thereto from time to time as Lenders and General Electric Capital Corporation as Agent (the
"GE Capital Agreement").
10.4* Future Advance Promissory Note, dated June 30, 1997, made by ComSouth Cable International,
Inc. in favor of Business Telecom, Inc.
10.5* Subordinated Promissory Note, dated August 31, 1997, made by Business Telecom, Inc. in favor
of Peter T. Loftin.
10.6* Employment Letter Agreement, dated March 20, 1997 and March 26, 1997, between FiberSouth,
Inc. and H.A. (Butch) Charlton, as amended effective October 1, 1997.
10.7* Interconnection Agreement, dated November 5, 1997, between Business Telecom, Inc. and
BellSouth Telecommunications, Inc.
10.8* Lease, dated May 13, 1994, between RBC Corporation and Business Telecom, Inc., as amended
March 1, 1995, November 30, 1995 and May 15, 1997 (the "Lease").
10.9*+ IRU Agreement dated October 31, 1997, between Qwest Communications Corporation and
Business Telecom, Inc.
10.10++ First and Second Amendments to the GE Capital Agreement.
10.11++ Amendments Four, Five and Six to the Lease.
10.12 First Amendment to IRU Agreement, entered into on April 19, 1999, between Qwest Communi-
cations Corporation and Business Telecom, Inc.
10.13 Commitment Letter and Summary of Indicative Terms and Conditions between Business Telecom,
Inc. and Bank of America, dated July 16, 1999.
10.14 Employee Stock Purchase Plan.
10.15 Third Amendment to the GE Capital Agreement.
10.16 Form of Executive Severance Agreement.
21.1** Subsidiaries of BTI Telecom Corp.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Wyrick Robbins Yates & Ponton LLP (contained in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule
</TABLE>
- --------
* Filed as an exhibit to the Registration Statement on Form S-4 (File No.
333-41723).
** Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997.
+ Confidential treatment requested.
++ Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1998.
(b) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts (see page F-19)
All other financial statement schedules for which provision is made in
Regulation S-X are omitted because they are not required under the related
instructions, are inapplicable, or the required information is given in the
financial statements, including the notes thereto and, therefore, have been
omitted.
II-3
<PAGE>
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense or any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of the registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereto.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Raleigh, State of North
Carolina, on this day of , 1999.
BTI TELECOM CORP.
/S/ PETER T. LOFTIN
-----------------------------------
Peter T. Loftin
Chairman and Chief Executive
Officer
----------------
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Peter
T. Loftin and
Brian K. Branson, and each of them, his true and lawful attorney-in-fact and
agent, with full powers of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and any related Registration Statements filed pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------------------------------------- ------------------------------ -----------
<S> <C> <C>
/S/ PETER T. LOFTIN Chairman, Chief Executive , 1999
---------------------------------
Peter T. Loftin Officer and Director
(Principal Executive Officer)
/S/ BRIAN K. BRANSON Chief Financial Officer and , 1999
---------------------------------
Brian K. Branson Director (Principal Financial
and Accounting Officer)
/S/ R. MICHAEL NEWKIRK President, Chief Operating , 1999
---------------------------------
R. Michael Newkirk Officer and Director
/S/ THOMAS F. DARDEN Director , 1999
---------------------------------
Thomas F. Darden
/S/ WILLIAM M. MOORE, JR. Director , 1999
---------------------------------
William M. Moore, Jr.
/S/ PAUL J. RIZZO Director , 1999
---------------------------------
Paul J. Rizzo
</TABLE>
II-5
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
BTI TELECOM CORP.
Pursuant to Section 55-10-07 of the General Statutes of North Carolina,
the undersigned corporation hereby submits the following for the purpose of
amending and restating its Articles of Incorporation.
1. The name of the corporation is BTI Telecom Corp. (the "Corporation").
2. The text of the Amended and Restated Articles of Incorporation
is attached hereto as Exhibit A.
3. These Amended and Restated Articles of Incorporation effected
a 10 for 1 increase in the authorized and issued shares of
Common Stock of the Corporation and were duly adopted by the
Board of Directors and the sole Shareholder of the Corporation
effective the 14th day of April 1998.
4. These Amended and Restated Articles of Incorporation will be
effective upon filing.
This the 14th day of April 1998.
BTI Telecom Corp.
By: /s/ R. Michael Newkirk
---------------------------
R. Michael Newkirk,
President
<PAGE>
EXHIBIT "A"
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
BTI TELECOM CORP.
1. The name of the corporation is BTI Telecom Corp.
2. The corporation shall have the authority to issue Five Hundred
Million (500,000,000) shares, no par value, of Common Stock,
and Ten Million (10,000,000) shares, $0.01 par value, of
Preferred Stock.
3. The Board of Directors is authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock,
and within the limitations and restrictions stated in any
resolution or resolutions of the Board originally fixing the
number of shares constituting any series, to increase or
decrease (but not below the number of shares of any such
series then outstanding) the number of shares of any such
series subsequent to the issue of shares of that series, to
determine the designation of any series and to fix the number
of shares of any series.
4. The street address and county of the initial registered office
of the corporation are 4101 Lake Boone Trail, Suite 300,
Raleigh, Wake County, North Carolina and the name of the
initial registered agent at such address is Larry E. Robbins.
The mailing address of the initial registered office of the
corporation is Post Office Drawer 17803, Raleigh, North
Carolina 27619.
5. Except to the extent that the North Carolina General Statutes
prohibit such limitation or elimination of liability of
directors for breaches of duty, no director of the corporation
shall be liable to the corporation or to any of its
shareholders for monetary damages for breach of duty as a
director. No amendment to or repeal of this provision or
adoption of a provision inconsistent herewith shall apply to
or have any effect on the liability or alleged liability of
any director of the corporation for or with respect to any
acts or omissions of such director occurring prior to such
amendment or repeal or adoption of an inconsistent provision.
The provisions of this Article shall not be deemed to limit or
preclude indemnification of a director by the corporation for
any liability that has not been eliminated by the provisions
of this Article.
IN WITNESS WHEREOF, I have executed these Amended and Restated Articles
of Incorporation this the 14th day of April, 1998.
BTI Telecom Corp.
By: /s/ R. Michael Newkirk
---------------------------
R. Michael Newkirk,
President
<PAGE>
ARTICLES OF CORRECTION
OF
BTI TELECOM CORP.
The undersigned corporation hereby submits these Articles of Correction
for the purpose of correcting a document filed with the Secretary of State:
1. The name of the corporation is BTI Telecom Corp.
2. The Amended and Restated Articles of Incorporation of BTI
Telecom Corp. were filed with the North Carolina Secretary of
State on April 14, 1998.
3. Paragraph 3 of the Amended and Restated Articles of Amendment
contains the following statement that is inconsistent and
therefore incorrect: "These Amended and Restated Articles of
Incorporation effected a 10 for 1 increase in the authorized
and issued shares of Common Stock of the Corporation and were
duly adopted by the Board of Directors and the sole
Shareholder of the Corporation effective the 14th day of April
1998."
4. Paragraph 3 should be corrected as follows: "These Amended and
Restated Articles of Incorporation effected an increase in the
authorized shares of the Common Stock of the Corporation to
Five Hundred Million (500,000,000) shares and were duly
adopted by the Board of Directors and the sole Shareholder of
the Corporation effective the 14th day of April 1998."
5. Pursuant to Section 55-1-24 of the North Carolina Business
Corporation Act, these Articles of Correction are effective as
of April 14, 1998, the date of filing of the Amended and
Restated Articles of Incorporation.
This __22nd___ day of June, 1999.
BTI Telecom Corp.
By: Anthony M. Copeland
-------------------------
Title: Secretary
---------------------
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
BTI TELECOM CORP.
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of the corporation
shall be located at such place as the Board of Directors may
fix from time to time.
Section 2. Registered Office. The registered office of the corporation
required by law to be maintained in the State of North
Carolina may be, but need not be, identical with the principal
office.
Section 3. Other Offices. The corporation may have offices at such other
places, either within or without the State of North Carolina,
as the Board of Directors may designate or as the affairs of
the corporation may require from time to time.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. All meetings of shareholders shall be held
at the principal office of the corporation, or at such other
place, whether within or without the State of North Carolina,
as shall be designated in the notice of the meeting or agreed
upon by the Board of Directors.
Section 2. Annual Meeting. The annual meeting of shareholders shall be
held during the fourth full month following the end of the
corporation's fiscal year at a time and on any day (except
Saturday, Sunday or a legal holiday) in that month as
determined by the Board of Directors for the purpose of
electing directors of the corporation and for the transaction
of such other business as may be properly brought before the
meeting.
Section 3. Substitute Annual Meetings. If the annual meeting shall not be
held on the day designated by these Bylaws, a substitute
annual meeting may be called in accordance with the provisions
of Section 4 of this Article II. A meeting so called shall be
designated and treated for all purposes as the annual meeting.
<PAGE>
Section 4. Special Meetings. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by
statute, may be called by the President, the Chief Executive
Officer, the Chairman of the Board or a majority of the
members of the Board of Directors then in office.
Any person or persons entitled to call a special meeting of
shareholders shall do so by delivering written notice to the
Secretary of the corporation stating that a special meeting
has been called and certifying to facts establishing that the
person or persons delivering the notice are entitled to call a
special meeting.
Section 5. Notice of Meetings. Written or printed notice stating the time
and place of the meeting shall be delivered not less than ten
(10) nor more than sixty (60) days before the date of any
shareholders' meeting, either personally or by telegraph,
teletype or other form of wire or wireless communication, or
by facsimile, by or at the direction of the Chairman of the
Board, the President, the Secretary or other person calling
the meeting, to each shareholder of record entitled to vote at
such meeting; provided that such notice must be given to all
shareholders with respect to any meeting at which a merger,
share exchange, sale of assets other than in the regular
course of business or voluntary dissolution is to be
considered and in such other instances as required by law. If
mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the
shareholder at his address as it appears on the record of
shareholders of the corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the
meeting is called; but, in the case of an annual or substitute
annual meeting, the notice of meeting need not specifically
state the business to be transacted thereat unless such a
statement is required by the provisions of the North Carolina
Business Corporation Act.
When a meeting is adjourned to a different date, time or
place, notice need not be given of the new date, time or place
if the new date, time or place is announced at the meeting
before adjournment. If, however, a new record date for the
adjourned meeting is fixed, notice of the adjourned meeting
will be given to all persons who are shareholders as of the
new record date in accordance with this Section 5.
Section 6. Waiver of Notice. Any shareholder may waive notice of any
meeting. The waiver must be in writing, signed by the
shareholder and delivered to the corporation for inclusion in
the minutes or filing with the corporate records. A
shareholder's attendance at a meeting (a) waives objection to
lack of notice or defective notice of the meeting, unless the
shareholder at the
2
<PAGE>
beginning of the meeting objects to holding the meeting or
transacting business at the meeting; and (b) waives objection
to consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the
matter before it is voted upon.
Section 7. Shareholder Lists. Before each meeting of shareholders, the
Secretary of the corporation shall prepare an alphabetical
list of the shareholders entitled to notice of such meeting.
The list shall be arranged by voting group (and within each
voting group by class or series of shares) and show the
address and number of shares held by each shareholder. The
list shall be kept on file at the principal office of the
corporation, or at a place identified in the meeting notice in
the city where the meeting will be held, for the period
beginning two business days after notice of the meeting is
given and continuing through the meeting, and shall be subject
to inspection by any shareholder at any time during regular
business hours. This list shall also be produced and kept open
at the time and place of the meeting and shall be subject to
inspection by any shareholder during the meeting or any
adjournment thereof.
Section 8. Quorum. A majority of the outstanding shares of the
corporation entitled to vote, represented in person or by
proxy, shall be required for, and shall constitute a quorum at
all meetings of shareholders. Shares entitled to vote as a
separate voting group may take action on a matter only if a
quorum of those shares exists; a majority of the votes
entitled to be cast on the matter by the voting group
constitutes a quorum of that voting group. The shareholders
present at a duly organized meeting may continue to do
business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time
by a vote of a majority of the shares voting on the motion to
adjourn; and at any adjourned meeting at which a quorum is
present, any business may be transacted that might have been
transacted at the original meeting.
Section 9. Organization. Each meeting of shareholders shall be presided
over by the Chairman of the Board, and in his absence or at
his request by the President, and in their absence or at their
request by any person selected to preside by vote of the
holders of a majority of the shares present and entitled to
vote at the meeting. The Secretary, or in his absence or at
his request, any person designated by the person presiding at
the meeting, shall act as secretary of the meeting.
3
<PAGE>
Section 10. Proxies. Shares may be voted either in person or by one or
more agents authorized by a written proxy executed by the
shareholder or by his duly authorized attorney-in-fact. A
proxy is not valid after the expiration of eleven months from
the date of its execution, unless the person executing it
specifies therein the length of time for which it is to
continue in force, or limits its use to a particular meeting.
Any proxy shall be revocable by the shareholder unless the
written appointment expressly and conspicuously provides that
it is irrevocable and the appointment is coupled with an
interest as required by law.
Section 11. Voting of Shares. Subject to the provisions of Section 4 of
Article III and the corporation's Articles of Incorporation,
each outstanding share entitled to vote shall be entitled to
one vote on each matter submitted to a vote at a meeting of
shareholders. All shares entitled to vote shall be counted
together collectively on a matter as provided by the Articles
of Incorporation or by the North Carolina Business Corporation
Act shall constitute a single voting group. Additional
required voting groups shall be determined in accordance with
the Articles of Incorporation and these Bylaws of this
corporation and the North Carolina Business Corporation Act.
Except in the election of directors as governed by the
provisions of Section 3 of Article III, the vote of a majority
of the shares voted on any matter at a meeting of shareholders
at which a quorum is present shall be the act of the
shareholders on that matter, unless the vote of a greater
number is required by law or by the Articles of Incorporation
or Bylaws of this corporation. Further, except in the election
of directors, action on a matter by a voting group shall be
approved if the votes cast within the voting group favoring
the action exceed the votes cast opposing the action, unless
the vote by a greater number is required by law or by the
Articles of Incorporation or Bylaws of this corporation.
Corporate action on such matters shall be taken only when
approved by each and every voting group entitled to vote as a
separate voting group on such matters as provided by the
Articles of Incorporation or Bylaws of this corporation or by
the North Carolina Business Corporation Act.
Voting on all matters except the election of directors shall
be by voice vote or by a show of hands unless the holders of
one-tenth (1/10th) of the shares represented at the meeting
shall, prior to the voting on any matter, demand a ballot vote
on that particular matter. Abstentions shall not be treated as
negative votes.
Shares of the corporation's stock are not entitled to vote if
they are owned, directly or indirectly, by a second
corporation and the corporation owns, directly or indirectly,
a majority of the shares entitled to vote for directors of
4
<PAGE>
the second corporation, except that shares held in a fiduciary
capacity, including the corporation's own shares, may be
voted.
Section 12. Informal Action by Shareholders. Any action that is required
or permitted to be taken at a meeting of the shareholders may
be taken without a meeting if one or more written consents,
describing the action so taken, shall be signed by all of the
persons who would be entitled to vote upon such action at a
meeting, and delivered to the corporation for inclusion in the
minutes or filing with the corporate records. Such consent
shall have the same force and effect as a unanimous vote of
shareholders. Any shareholder may retract his consent until
the last shareholder entitled to vote has signed the
appropriate written consent and all consents have been
delivered to the Secretary of the corporation. When notice of
a proposed action is required to be given to nonvoting
shareholders as provided in Section 5 of Article II of these
Bylaws, the corporation shall give the nonvoting shareholders
notice at least ten (10) days before action is taken in lieu
of a meeting by unanimous consent of the voting shareholders.
Such notice to nonvoting shareholders shall contain or be
accompanied by any material that would have been required to
be sent to the nonvoting shareholders in a notice of meeting
at which the proposed action would have been submitted to the
shareholders for action.
Section 13. Inspectors of Election.
(a) Appointment of Inspectors of Election. In advance of any
meeting of shareholders, the Board of Directors may appoint
any persons, other than nominees for office, as inspectors of
election to act at such meeting or any adjournment thereof. If
inspectors of election are not so appointed, the chairman of
any such meeting may appoint inspectors of election at the
meeting. The number of inspectors shall be either one or
three. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled
by appointment by the Board of Directors in advance of the
meeting or at the meeting by the person acting as chairman.
(b) Duties of Inspectors. The inspectors of election shall
determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the
existence of a quorum, the authenticity, validity and effect
of proxies, receive votes, ballots or consents, hear and
determine all challenges and questions in any way arising in
connection with the right to vote, count and tabulate all
votes or consents, determine the result and do such acts as
may be proper to conduct the election or vote with fairness to
all shareholders. The inspectors of election shall perform
their duties impartially, in good faith, to the best of their
ability and as expeditiously as is practical.
5
<PAGE>
(c) Vote of Inspectors. If there are three inspectors of
election, the decision, act or certificate of a majority shall
be effective in all respects as the decision, act or
certificate of all.
(d) Report of Inspectors. On a request of the chairman of the
meeting, the inspectors shall make a report in writing of any
challenge or question or matter determined by them and shall
execute a certificate of any fact found by them. Any report or
certificate made by them shall be a prima facie evidence of
the facts stated therein.
Section 14. Shareholder Proposals. Any shareholder wishing to bring any
other business before a meeting of the shareholders must
provide notice to the corporation not more than ninety (90)
and not less than fifty (50) days before the meeting in
writing by registered mail, return receipt requested, of the
business to be presented by such shareholder at the
shareholders meeting. Any such notice shall set forth the
following as to each matter the shareholder proposes to bring
before the meeting: (A) a brief description of the business
desired to be brought before the meeting and the reasons for
conducting such business at the meeting and, if such business
includes a proposal to amend the Bylaws of the corporation,
the language of the proposed amendment; (B) the name and
address, as they appear on the corporation's books, of the
shareholder proposing such business; (C) the class and number
of shares of the corporation which are beneficially owned by
such shareholder; (D) a representation that the shareholder is
a holder of record of stock of the corporation entitled to
vote at such meeting and intends to appear in person or by
proxy at the meeting to propose such business; and (E) any
material interest of the shareholder in such business.
Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements
of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder with respect to
the matters set forth in this Section. In the absence of such
notice to the corporation meeting the above requirements, a
shareholder shall not be entitled to present any business at
any meeting of shareholders.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the
corporation managed under the direction of, its Board of
Directors or by such executive or other committees as the
Board may establish pursuant to these Bylaws.
Section 2. Number and Qualifications. The number of directors
constituting the initial Board of Directors shall be not less
than five (5) nor more than ten (10) as
6
<PAGE>
may be fixed or changed from time to time, within the minimum
and maximum, by the shareholders or by the Board of Directors.
Directors need not be residents of the State of North Carolina
or shareholders of the corporation.
Section 3. Nomination and Election of Directors. Nominations for the
election of directors may only be made by the Board of
Directors, by the Nominating Committee of the Board of
Directors (or, if none, any other committee serving a similar
function) or by any shareholder entitled to vote generally in
elections of directors where the shareholder complies with the
requirements of this Section. Any shareholder of record
entitled to vote generally in elections of directors may
nominate one or more persons for election as directors at a
meeting of shareholders only if written notice of such
shareholder's intent to make such nomination or nominations
has been given, either by personal delivery or by United
States certified mail, postage prepaid, to the Secretary of
the corporation (i) with respect to an election to be held at
an annual meeting of shareholders, not more than ninety (90)
days nor less than fifty (50) days in advance of such meeting
and (ii) with respect to an election to be held at a special
meeting of shareholders called for the purpose of the election
of directors, not later than the close of business on the
tenth business day following the date on which notice of such
meeting is first given to shareholders. Each such notice of a
shareholder's intent to nominate a director or directors at an
annual or special meeting shall set forth the following: (A)
the name and address, as they appear on the corporation's
books, of the shareholder who intends to make the nomination
and the name and residence address of the person or persons to
be nominated; (B) the class and number of shares of the
corporation which are beneficially owned by the shareholder;
(C) a representation that the shareholder is a holder of
record of stock of the corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the
notice; (D) a description of all arrangements or
understandings between the shareholder 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 shareholder; (E) such other information regarding each
nominee proposed by such shareholder as would be required to
be disclosed in solicitations of proxies for election of
directors, or as would otherwise be required, in each case
pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended, including any information that would be
required to be included in a proxy statement filed pursuant to
Regulation 14A had the nominee been nominated by the Board of
Directors; and (F) the written consent of each nominee to be
named in a proxy statement and to serve as director of the
corporation if so elected. No person shall be eligible to
serve as a director of the corporation unless nominated in
accordance with the procedures set forth in this Section. If
the chairman of the shareholders
7
<PAGE>
meeting shall determine that a nomination was not made in
accordance with the procedures described by these bylaws, he
shall so declare to the meeting, and the defective nomination
shall be disregarded. Notwithstanding the foregoing provisions
of this Section, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated
thereunder with respect to the matters set forth in this
Section.
Except as provided in Section 6 of this Article III, the
directors shall be elected at the annual meeting of
shareholders; and those persons who receive the highest number
of votes at a meeting at which a quorum is present shall be
deemed to have been elected. Every shareholder entitled to
vote at an election of directors shall have the right to vote
the number of shares standing of record in his name for as
many persons as there are directors to be elected and for
whose election he has a right to vote, or, if cumulative
voting rights have been provided for in the corporation's
Articles of Incorporation, to cumulate his vote by giving one
candidate as many votes as the number of such directors
multiplied by the number of his shares shall equal, or by
distributing such votes on the same principle among any number
of such candidates. This right of cumulative voting, if
available to the shareholders, shall not be exercised unless
(a) the meeting notice or proxy statement accompanying the
notice states conspicuously that shareholders are entitled to
cumulate their votes, or (b) a shareholder or proxy holder who
has the right to cumulate his votes announces in open meeting,
before the voting for the directors starts, his intention so
to vote cumulatively; and if such announcement is made, the
chair shall declare that all shares entitled to vote have the
right to vote cumulatively and shall announce the number of
shares present in person and by proxy and shall thereupon
grant a recess of not less than one nor more than four hours,
as he shall determine, or of such other period of time as is
unanimously then agreed upon.
Section 4. Term of Directors. Each initial director shall hold office
until the first shareholders' meeting at which directors are
elected, or until such director's death, resignation or
removal. The terms of every other director shall expire at the
next annual shareholders' meeting following a director's
election or upon such director's death, resignation or
removal. The term of a director elected to fill a vacancy
expires at the next shareholders' meeting at which directors
are elected. Despite the expiration of a director's term, such
director shall continue to serve until a qualified successor
shall be elected. A decrease in the number of directors does
not shorten an incumbent director's term.
Section 5. Removal. Any director may be removed at any time with or
without cause by a vote of the shareholders if the number or
votes cast to remove such
8
<PAGE>
director exceeds the number of votes cast not to remove him.
However, if cumulative voting is authorized, a director shall
not be removed when the number of shares voting against the
proposal for removal would be sufficient to elect a director
if such shares were voted cumulatively at an annual election.
If a director is elected by a voting group of shareholders,
only the shareholders of that voting group may participate in
the vote to remove him. If any directors are so removed, new
directors may be elected at the same meeting. A director may
not be removed by the shareholders at a meeting unless the
notice of the meeting states that the purpose, or one of the
purposes, of the meeting, is removal of the director.
Section 6. Vacancies. Any vacancy occurring in the Board of Directors,
including, without limitation, a vacancy resulting from an
increase in the number of directors or from the failure by the
shareholders to elect the full authorized number of directors,
may be filled by the shareholders or the Board of Directors,
whichever group shall act first. If the directors remaining in
office do not constitute a quorum of the Board, the directors
may fill the vacancy by the affirmative vote of a majority of
the remaining directors.
Section 7. Chairman of the Board. There may be a Chairman of the Board of
Directors elected by the directors from their number at any
meeting of the Board. The Chairman shall preside at all
meetings of the Board of Directors and perform such other
duties as may be directed by the Board. He shall be an ex
officio member of all committees. He shall make a report in
writing at the annual meeting of the Board of Directors
stating the condition of the corporation and shall make such
suggestions and recommendations as he shall deem proper for
the best interests of the corporation. He shall appoint
delegates and representatives to the organizations with which
the corporation is affiliated. He shall have the power to call
the regular and any special meetings of the Board of
Directors. Until a Chairman is elected, the President of the
corporation shall preside at the meetings of the Board of
Directors and shareholders.
Section 8. Compensation. The Board of Directors, in its discretion, may
compensate directors for their services as such and may
provide for the payment of all expenses incurred by directors
in attending regular and special meetings of the Board or of
the Executive Committee. Nothing herein contained, however,
shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation
therefor.
Section 9. Executive Committees. The Board of Directors, by resolution
adopted by a majority of the number of directors in office
when the action is taken or, if greater, the number of
directors required to take action pursuant to Section 6 of
Article IV, may designate two or more directors to constitute
an Executive Committee and other committees, each of which, to
the extent
9
<PAGE>
authorized by law and provided in such resolution, shall have
and may exercise all of the authority of the Board of
Directors in the management of the corporation. Each committee
member serves at the pleasure of the Board of Directors. The
provisions in these Bylaws that govern meetings, action
without meetings, notice and waiver of notice, and quorum and
voting requirements of the Board of Directors apply to
committees established by the Board.
ARTICLE IV
MEETINGS OF DIRECTORS
Section 1. Regular Meetings. A regular meeting of the Board of Directors
shall be held immediately after, and at the same place as, the
annual meeting of shareholders. In addition, the Board of
Directors may provide, by resolution, the time and place,
either within or without the State of North Carolina, for the
holding of additional regular meetings.
Section 2. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the
Board of Directors, if any, by the President or any two
directors. Such meetings may be held either within or without
the State of North Carolina, as fixed by the person or persons
calling the meeting.
Section 3. Notice of Meetings. Regular meetings of the Board of Directors
may be held without notice.
The person or persons calling a special meeting of the Board
of Directors shall, at least two days before the meeting, give
notice thereof by any usual means of communication. Such
notice need not specify the purpose for which the meeting is
called.
Section 4. Waiver of Notice. Any director may waive notice of any
meeting. The waiver must be in writing, signed by the director
entitled to the notice and delivered to the corporation for
inclusion in the minutes or filing with the corporate records.
A director's attendance at or participation in a meeting shall
constitute a waiver of notice of such meeting, unless the
director at the beginning of the meeting (or promptly on
arrival) objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
Section 5. Quorum. A majority of the directors fixed by these Bylaws
shall be required for, and shall constitute, a quorum for the
transaction of business at any meeting of the Board of
Directors unless the Articles of Incorporation or these Bylaws
provide otherwise.
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Section 6. Manner of Acting. Except as otherwise provided in the Articles
of Incorporation or these Bylaws, the act of the majority of
the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 7. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors or a committee
of the Board of Directors when corporate action is taken is
deemed to have assented to the action taken unless (a) he
objects at the beginning of the meeting (or promptly upon his
arrival) to holding it or transacting business at the meeting,
or (b) his dissent or abstention from the action taken is
entered in the minutes of the meeting, or (c) he files written
notice of his dissent or abstention with the presiding officer
of the meeting before its adjournment or with the corporation
immediately after the adjournment. Such right to dissent shall
not apply to a director who voted in favor of such action.
Section 8. Action Without Meeting. Action required or permitted to be
taken at a meeting of the Board of Directors may be taken
without a meeting if the action is taken by all members of the
Board. The action must be evidenced by one or more written
consents signed by each director before or after such action,
describing the action taken, and included in the minutes or
filed with the corporate records. Such action will become
effective when the last director signs the consent, unless the
consent specifies a different date.
Section 9. Conference Telephone Meetings. Any one or more directors or
members of a committee may participate in a meeting of the
Board of Directors or committee by means of a conference
telephone or similar communications device that allows all
persons participating in the meeting to hear each other, and
such participation in a meeting shall be deemed presence in
person at such meeting.
ARTICLE V
OFFICERS
Section 1. Officers of the Corporation. The officers of the corporation
shall consist of a Chairman of the Board, President, a
Secretary, a Treasurer and such Vice-Presidents, Assistant
Secretaries, Assistant Treasurers, and other officers
(including Controllers and Assistant Controllers) as the Board
of Directors may from time to time elect. Any two or more
offices may be held by the same person, but no officer may act
in more than one capacity where action of two or more officers
is required.
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Section 2. Appointment and Term. The officers of the corporation shall be
appointed by the Board of Directors and each officer shall
hold office until his death, resignation, retirement, removal,
disqualification, or his successor shall have been appointed
and qualified.
Section 3. Removal. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board at any time
with or without cause; but such removal shall be without
prejudice to the contract rights, if any, of the person so
removed.
Section 4. Resignation. An officer may resign at any time by
communicating his resignation to the corporation, orally or in
writing. A resignation is effective when communicated unless
it specifies in writing a later effective date. If a
resignation is made effective at a later date that is accepted
by the corporation, the Board of Directors may fill the
pending vacancy before the effective date if the Board
provides that the successor does not take office until the
effective date. An officer's resignation does not affect the
corporation's contract rights, if any, with the officer.
Section 5. Compensation of Officers. The compensation of all officers of
the corporation shall be fixed by the Board of Directors and
no officer shall serve the corporation in any other capacity
and receive compensation therefor unless such additional
compensation be authorized by the Board of Directors.
Section 6. Chairman of the Board. Unless otherwise specified by
resolution of the Board, the Chairman of the Board shall be
the Chief Executive Officer of the corporation (and may be
identified as such in his title) and, subject to the direction
and control of the Board of Directors, shall supervise and
control the management of the corporation. The Chairman of the
Board shall, when present, preside at all meetings of the
directors and shareholders and, in general, shall perform all
duties incident to the office of Chairman of the Board and
such other duties as may be prescribed from time to time by
the Board of Directors.
Section 7. President. Unless otherwise specified by resolution of the
Board, the President shall be the Chief Operating Officer of
the corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the
business and affairs of the corporation. He shall, in the
absence of the Chairman of the Board, preside at all meetings
of the shareholders. He shall sign, with the Secretary, an
Assistant Secretary, or any other proper officer of the
corporation thereunto authorized by the Board of Directors,
certificates for shares of the corporation, any deeds,
mortgages, bonds, contracts, or other instruments that the
Board of Directors has authorized to be executed, except in
cases where the signing
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and execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or
agent of the corporation, or shall be required by law to be,
otherwise signed or executed; and, in general, he shall
perform all duties incident to the office of President and
such other duties as may be prescribed by the Board of
Directors from time to time.
Section 8. Vice-Presidents. In the absence of the President or in the
event of his death, inability or refusal to act, the
Vice-Presidents in the order of their length of service as
such, unless otherwise determined by the Board of Directors,
shall perform the duties of the President, and when so acting
shall have all the powers of and be subject to all the
restrictions upon the President. Any Vice-President may sign,
with the Secretary or an Assistant Secretary, certificates of
shares of the corporation; and shall perform such other duties
as from time to time may be assigned to him by the President
or Board of Directors. The Board of Directors may designate
one or more Vice-Presidents to be responsible for certain
functions, including, without limitation, Marketing, Finance,
Manufacturing and Personnel.
Section 9. Secretary. The Secretary shall: (a) keep the minutes of the
meetings of shareholders, of the Board of Directors and of all
Executive Committees in one or more books provided for that
purpose; (b) see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law; (c)
be custodian of the corporate records and of the seal of the
corporation and see that the seal of the corporation is
affixed to all documents the execution of which on behalf of
the corporation under its seal is duly authorized; (d) keep a
register of the post office address of each shareholder which
shall be furnished to the Secretary by such shareholder; (e)
sign with the President, or a Vice-President, certificates for
shares of the corporation, the issuance of which shall have
been authorized by resolution of the Board of Directors; (f)
maintain and have general charge of the stock transfer books
of the corporation; (g) prepare or cause to be prepared
shareholder lists prior to each meeting of shareholders as
required by law; (h) attest the signature or certify the
incumbency or signature of any officer of the corporation; and
(i) in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be
assigned to him by the President or by the Board of Directors.
Section 10. Assistant Secretaries. In the absence of the Secretary or in
the event of his death, inability or refusal to act, the
Assistant Secretaries in the order of their lengths of service
as Assistant Secretaries, unless otherwise determined by the
Board of Directors, shall perform the duties of the Secretary,
and when so acting shall have all the powers of and be subject
to all the restrictions upon the Secretary. They shall perform
such other duties as may be assigned to them by the Secretary,
by the President, or by the Board of
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Directors. Any Assistant Secretary may sign, with the
President or a Vice-President, certificates for shares of the
corporation.
Section 11. Treasurer. The Treasurer shall: (a) have charge and custody of
and be responsible for all funds and securities of the
corporation; receive and give receipts for monies due and
payable to the corporation from any source whatsoever, and
deposit all such monies in the name of the corporation in such
depositories as shall be selected in accordance with the
provisions of Section 4 of Article VI of these Bylaws; (b)
maintain appropriate accounting records as required by law;
(c) prepare, or cause to be prepared, annual financial
statements of the corporation that include a balance sheet as
of the end of the fiscal year and an income and cash flow
statement for that year, which statements, or a written notice
of their availability, shall be mailed to each shareholder
within One Hundred Twenty (120) days after the end of such
fiscal year; and (d) in general perform all of the duties
incident to the office of Treasurer and such other duties as
from time to time may be assigned to him by the President or
by the Board of Directors, or by these Bylaws.
Section 12. Assistant Treasurers. In the absence of the Treasurer or in
the event of his death, inability or refusal to act, the
Assistant Treasurers in the order of their length of service
as such, unless otherwise determined by the Board of
Directors, shall perform the duties of the Treasurer, and when
so acting shall have all the powers of and be subject to all
the restrictions upon the Treasurer. They shall perform such
other duties as may be assigned to them by the Treasurer, by
the President, or by the Board of Directors.
Section 13. Controller and Assistant Controllers. The Controller, if one
has been appointed, shall have charge of the accounting
affairs of the corporation and shall have such other powers
and perform such other duties as the Board of Directors shall
designate. Each Assistant Controller shall have such powers
and perform such duties as may be assigned by the Board of
Directors and the Assistant Controller shall exercise the
powers of the Controller during that officer's absence or
inability to act.
Section 14. Delegation of Duties of Officers. In case of the absence of
any officer of the corporation or for any other reason that
the Board may deem sufficient, the Board may delegate the
powers or duties of such officer to any other officer or to
any director for the time being provided a majority of the
entire Board of Directors concurs herein.
Section 15. Bonds. The Board of Directors may by resolution, require any
or all officers, agents or employees of the corporation to
give bond to the corporation, with sufficient sureties,
conditioned on the faithful performance of the duties of their
respective offices or positions, and to comply with such
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other conditions as may from time to time be required by the
Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or
execute and deliver any instrument in the name of and on
behalf of the corporation, and such authority may be general
or confined to specific instances. Any resolution of the Board
of Directors authorizing the execution of documents by the
proper officers of the corporation or by the officers
generally shall be deemed to authorize such execution by the
Chairman of the Board, the President, any Vice-President, or
the Treasurer, or any other officer if such execution is
generally within the scope of the duties of his office. The
Board of Directors may by resolution authorize such execution
by means of one or more facsimile signatures.
Section 2. Loans. No loans shall be contracted on behalf of the
corporation and no evidence of indebtedness shall be issued in
its name unless authorized by a resolution of the Board of
Directors. Such authority may be general or confined to
specific instances.
Section 3. Checks and Drafts. All checks, drafts or other orders for the
payment of money issued in the name of the corporation shall
be signed by such officer or officers, agent or agents of the
corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
Section 4. Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the
corporation in such depositories as the Board of Directors may
select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. The Board of Directors may authorize
the issuance of some or all of the shares of the corporation's
classes or series without issuing certificates to represent
such shares. If shares are represented by certificates, the
certificates shall be in such form as required by law and
shall be determined by the Board of Directors. Certificates
shall be signed (either manually or in facsimile) by the
Chairman of the Board, President or a Vice-President and by
the Secretary or Treasurer or an Assistant Secretary
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or an Assistant Treasurer. The signatures of any such officers
upon a certificate may be facsimiles or may be engraved or
printed. In case any officer who has signed or whose facsimile
or other signature has been placed upon such certificate shall
have ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same
effect as if he were such officer at the date of its issue.
All certificates for shares shall be consecutively numbered or
otherwise identified and entered into the stock transfer books
of the corporation. When shares are represented by
certificates, the corporation shall issue and deliver to each
shareholder to whom such shares have been issued or
transferred, certificates representing the shares owned by
him. When shares are not represented by certificates, then
within a reasonable time after the issuance or transfer of
such shares, the corporation shall send the shareholder to
whom such shares have been issued or transferred a written
statement of the information required by law to be on
certificates.
Section 2. Stock Transfer Books. The corporation shall keep a book or set
of books, to be known as the stock transfer books of the
corporation, containing the name of each shareholder of
record, together with such shareholder's address and the
number and class or series of shares held by him. Transfer of
shares shall be made only on the stock transfer books of the
corporation by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of authority
to transfer, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary, and on
surrender for cancellation of the certificate for such shares
(if the shares are represented by certificates). All
certificates surrendered for transfer (if the shares are
represented by certificates) shall be cancelled before new
certificates (or written statements in lieu thereof) for the
transferred shares shall be issued or delivered to the
shareholder.
Section 3. Restrictions on Transfer.
(a) If the corporation has elected Subchapter S status under
Section 1362 of the Internal Revenue Code of 1986, as amended,
no shareholder or involuntary transferee shall dispose of or
transfer any shares of the corporation that he now owns or may
hereafter acquire if such disposition or transfer would result
in the termination of such Subchapter S status, unless such
disposition or transfer is consented to by all shareholders of
the corporation. Any such disposition or transfer that does
not comply with the terms of this section shall be void and
have no legal force or effect and shall not be recognized on
the share transfer books of the corporation as effective.
(b) If the corporation has elected Subchapter S status under
Section 1362 of the Code, every certificate representing
shares of the corporation shall bear a
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legend prominently displayed that notes the restrictions on
transfer contained in these Bylaws.
(c) The restrictions contained in this Section 3 shall
automatically terminate on the effectiveness of the
corporation's initial registration statement for a public
offering of its securities.
Section 4. Fixing Record Date. The Board of Directors may fix a future
date as the record date for one or more voting groups in order
to determine the shareholders entitled to notice of or to vote
at any meeting of shareholders or any adjournment thereof, or
entitled to receive payment of any distribution, or in order
to make a determination of shareholders for any other proper
purpose. Such record date may not be more than seventy (70)
days before the meeting or date on which the particular action
requiring such determination of shareholders is to be taken. A
determination of shareholders entitled to notice of or to vote
at a shareholders' meeting is effective for any adjournment of
the meeting unless the Board of Directors fixes a new record
date for the adjourned meeting, which it must do if the
meeting is adjourned to a date more than One Hundred Twenty
(120) days after the date fixed for the original meeting.
If no record date is fixed for the determination of
shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a
distribution, the close of business on the day before the
first notice of the meeting is delivered to shareholders or
the date on which the resolution of the Board of Directors
declaring such distribution is adopted, as the case may be,
shall be the record date for such determination of
shareholders.
Section 5. Lost or Destroyed Certificate. The Board of Directors may
direct a new certificate to be issued in place of any
certificate theretofore issued by the corporation claimed to
have been lost, destroyed or wrongfully taken, upon receipt of
an affidavit of such fact from the person claiming the
certificate of stock to have been lost or destroyed. When
authorizing such issue of a new certificate, the Board of
Directors shall require that the owner of such lost or
destroyed certificate, or his legal representative, give the
corporation a bond in such sum as the Board may direct as
indemnity against any claim that may be made against the
corporation with respect to the certificate claimed to have
been lost or destroyed, except where the Board of Directors by
resolution finds that in the judgment of the directors the
circumstances justify omission of a bond.
Section 6. Holder of Record. Except as otherwise required by law, the
corporation may treat as absolute owner of shares the person
in whose name the shares stand of record on its books just as
if that person had full competency,
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capacity and authority to exercise all rights of ownership
irrespective of any knowledge or notice to the contrary or any
description indicating a representative, pledge or other
fiduciary relation or any reference to any other instrument or
to the rights of any other person appearing upon its record or
upon the share certificate except that any person furnishing
to the corporation proof of his appointment as a fiduciary
shall be treated as if he were a holder of record of its
shares.
Section 7. Shares Held By Nominees.
(a) The corporation shall recognize the beneficial owner of
shares registered in the name of a nominee as the owner and
shareholder of such shares for certain purposes if the nominee
in whose name such shares are registered files with the
Secretary of the corporation a written certificate in a form
prescribed by the corporation, signed by the nominee and
indicating the following: (1) the name, address and taxpayer
identification number of the nominee; (2) the name, address
and taxpayer identification number of the beneficial owner;
(3) the number and class or series of shares registered in the
name of the nominee as to which the beneficial owner shall be
recognized as the shareholder; and (4) the purposes for which
the beneficial owner shall be recognized as the shareholder.
(b) The purposes for which the corporation shall recognize a
beneficial owner as the shareholder may include the following:
(1) receiving notice of, voting at and otherwise participating
in shareholders' meetings; (2) executing consents with respect
to the shares; (3) exercising dissenters' rights under Article
13 of the North Carolina Business Corporation Act; (4)
receiving distributions and share dividends with respect to
the shares; (5) exercising inspection rights; (6) receiving
reports, financial statements, proxy statements and other
communications from the corporation; (7) making any demand
upon the corporation required or permitted by law; and (8)
exercising any other rights or receiving any other benefits of
a shareholder with respect to the shares.
(c) The certificate shall be effective ten (10) business days
after its receipt by the corporation and until it is changed
by the nominee, unless the certificate specifies a later
effective time or an earlier termination date.
(d) If the certificate affects less than all of the shares
registered in the name of the nominee, the corporation may
require the shares affected by the certificate to be
registered separately on the books of the corporation and be
represented by a share certificate that bears a conspicuous
legend stating that there is a nominee certificate in effect
with respect to the shares represented by that share
certificate.
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Section 8. Acquisition by Corporation of its Own Shares. The corporation
may acquire its own shares and shares so acquired shall
constitute authorized but unissued shares. Unless otherwise
prohibited by the Articles of Incorporation, the corporation
may reissue such shares. If reissue is prohibited, the
Articles of Incorporation shall be amended to reduce the
number of authorized shares by the number of shares so
acquired. Such required amendment may be adopted by the Board
of Directors without shareholder action.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Distributions. The Board of Directors may from time to time
authorize, and the corporation may make distributions to its
shareholders pursuant to law and subject to the provisions of
its Articles of Incorporation.
Section 2. Seal. The corporate seal of the corporation shall consist of
two concentric circles between which is the name of the
corporation and in the center of which is inscribed CORPORATE
SEAL; and such seal, as impressed on the margin hereof, is
hereby adopted as the corporate seal of the corporation.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed
by the Board of Directors.
Section 4. Amendments. Except as otherwise provided herein and by law,
these Bylaws may be amended or repealed and new bylaws may be
adopted by the affirmative vote of a majority of the directors
then holding office at any regular or special meeting of the
Board of Directors.
No bylaw adopted or amended or repealed by the shareholders
shall be readopted, amended or repealed by the Board of
Directors, unless the Articles of Incorporation or a bylaw
adopted by the shareholders authorizes the Board of Directors
to adopt, amend or repeal that particular bylaw or the Bylaws
generally.
Section 5. Salary and Other Compensation. Any payments made to an officer
of the corporation such as salary, commission, bonus,
interest, rent or entertainment expense incurred by him, that
shall be disallowed in whole or in part as a deductible
expense by the Internal Revenue Service, shall be reimbursed
by such officer of the corporation to the full extent of such
disallowance.
Section 6. Indemnification. Any person who at any time serves or has
served as a director or officer of the corporation or in such
capacity at the request of the corporation or officer of the
corporation, partnership, joint venture, trust or
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other enterprise, shall have a right to be indemnified by the
corporation to the fullest extent permitted by law against (a)
reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with any threatened,
pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (and any
appeal therein), and whether or not brought by or on behalf of
the corporation, seeking to hold him liable by reason of the
fact that he is or was acting in such capacity, and (b)
reasonable payments made by him in satisfaction of any
judgment, money decree, fine, penalty or settlement for which
he may have become liable in any such action, suit or
proceeding.
The Board of Directors of the corporation shall take all such
action as may be necessary and appropriate to authorize the
corporation to pay the indemnification required by this bylaw,
including without limitation, to the extent needed, making a
good faith evaluation of the manner in which the claimant for
indemnity acted and of the reasonable amount of indemnity due
him and giving notice to, and obtaining approval by, the
shareholders of the corporation.
Any person who at any time after the adoption of this bylaw
serves or has served in any of the aforesaid capacities for or
on behalf of the corporation shall be deemed to be doing or to
have done so in reliance upon, and as consideration for, the
right of indemnification provided herein. Such right shall
inure to the benefit of the legal representatives of any such
person and shall not be exclusive of any other rights to which
such person may be entitled apart from the provision of this
bylaw.
Section 7. Advance Payment of Expenses. The corporation shall (upon
receipt of an undertaking by or on behalf of the director or
officer involved to repay the expenses described herein unless
it shall ultimately be determined that he is entitled to be
indemnified by the corporation against such expenses) pay
expenses (including attorneys' fees) incurred by such
director, officer, employee or agent in defending any
threatened, pending or completed action, suit or proceeding
and any appeal therein whether civil, criminal,
administrative, investigative or arbitrative and whether
formal or informal or appearing as a witness at a time when he
has not been named as a defendant or a respondent with respect
thereto in advance of the final disposition of such
proceeding.
Section 8. Directors and Officers Liability Insurance. The Board of
Directors may cause the corporation to purchase and maintain
"Directors and Officers Liability Insurance" for the benefit
of any person who is or was serving as a director, officer,
employee or agent of this corporation or for the benefit of
any person who is or was serving at the request of this
corporation as a director, officer, employee, or agent of
another corporation, partnership,
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joint venture, trust or other enterprise. This insurance may
cover any liability incurred by such person in any capacity
arising out of this status as such even if the corporation
would not otherwise have the power to indemnify him against
that liability.
Section 9. Effective Date of Notice. Except as provided in Section 5 of
Article II, written notice shall be effective at the earliest
of the following: (1) when received; (2) five days after its
deposit in the United States mail, as evidenced by the
postmark, if mailed with postage thereon prepaid and correctly
addressed; or (3) on the date shown on the return receipt, if
sent by registered or certified mail, return receipt requested
and the receipt is signed by or on behalf of the addressee.
Section 10. Corporate Records. Any records maintained by the corporation
in the regular course of its business, including its stock
ledger, books of account and minute books, may be kept on or
be in the form of punch cards, magnetic tape, photographs,
microphotographs or any other information storage device;
provided that the records so kept can be converted into
clearly legible form within a reasonable time. The corporation
shall so convert any records so kept upon the request of any
person entitled to inspect the same. The corporation shall
maintain at its principal office the following records: (1)
Articles of Incorporation or Restated Articles of
Incorporation and all amendments thereto; (2) Bylaws or
restated Bylaws and all amendments thereto; (3) resolutions by
the Board of Directors creating classes or series of shares
and affixing rights, preferences or limitations to shares; (4)
minutes of all shareholder meetings or action taken without a
meeting for the past three years; (5) all written
communications to shareholders for the past three years,
including financial statements; and (6) the corporation's most
recent annual report filed with the North Carolina Secretary
of State.
Section 11. Amendments to Articles of Incorporation. To the extent
permitted by law, the Board of Directors may amend the
Articles of Incorporation without shareholder approval to (1)
delete the initial directors' names and addresses; (2) change
the initial registered agent or office in any state in which
it is qualified to do business, provided such change is on
file with the applicable Secretary of State; (3) change each
issued and unissued share of an outstanding class into a
greater number of whole shares, provided that class is the
corporation's only outstanding share class; (4) change the
corporate name by substituting "corporation," "incorporated,"
"company," "limited" or the abbreviations therefor for a
similar word or abbreviation or by adding, deleting or
changing a geographic designation in the name; (5) make any
other change expressly permitted by the North Carolina
Business Corporation Act to be made without shareholder
action. All other
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amendments to the Articles of Incorporation must be approved
by the appropriate voting group or groups as required by law.
22
Exhibit 10.2
BTI TELECOM CORP.
1997 STOCK OPTION PLAN,
AS AMENDED THROUGH JULY 1999
<PAGE>
BTI TELECOM CORP.
1997 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Stock Option Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants of the Company and its Subsidiaries, and to promote the success of
the Company's business. Options granted under the Plan may be incentive stock
options (as defined under Section 422 of the Code) or non-statutory stock
options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code, as amended,
and the regulations promulgated thereunder. Stock purchase rights may also be
granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means BTI Telecom Corp., a North Carolina
corporation.
(g) "Consultant" means any person, including an advisor, who
is engaged by the Company or any Parent or Subsidiary of the Company to render
services and is compensated for such services, and any director of the Company
whether compensated for such services or not.
(h) "Continuous Status as an Employee or Consultant" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status from an Employee to a Consultant or from a Consultant
to an Employee will not constitute a termination of employment or consulting
relationship; provided that a change from an Employee to a Consultant may cause
an Incentive Stock Option to become a Nonstatutory Stock Option under the Code.
(i) "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
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(j) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(k) "Fair Market Value" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including, without limitation, the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported), as quoted on such system or exchange, or the exchange with the
greatest volume of trading in Common Stock for the last market trading day prior
to the time of determination, as reported in THE WALL STREET JOURNAL or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System
(but not on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock for the last market trading day prior to the time of determination,
as reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, or any successor provision.
(m) "Nonstatutory Stock Option" means an Option not intended
to qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the
Plan.
(o) "Optioned Stock" means the Common Stock subject to an
Option or a Stock Purchase Right.
(p) "Optionee" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
(q) "Parent" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any successor
provision.
(r) "Plan" means this 1997 Stock Option Plan.
(s) "Reporting Person" means an officer, director, or greater
than ten percent shareholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act, or any successor provision.
(t) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(u) "Rule 16b-3" means Rule 16b-3 promulgated under the
Exchange Act, as the same may be amended from time to time, or any successor
provision.
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(v) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(w) "Stock Exchange" means any stock exchange or consolidated
stock price reporting system on which prices for the Common Stock are quoted at
any given time.
(x) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 10 below.
(y) "Subsidiary" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 7,500,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares that were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. If the
Company shall repurchase unvested shares of Restricted Stock, such repurchased
Shares that were subject thereto shall, unless the Plan shall have been
terminated, become available for future grant under the Plan. In addition, any
shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by (A) the Board or
(B) a committee designated by the Board, which committee shall be constituted in
such a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of applicable state and
federal corporate and securities laws, of the Code and of any applicable Stock
Exchange (collectively, the "Applicable Laws"). Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the Committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies, however
caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
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(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to accelerate the exercisability of any Option or Stock
Purchase Right;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights;
(x) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs;
(xi) to accelerate the vesting of any Option or Stock Purchase
Right or waive forfeiture restrictions with respect thereto; and
(xii) to make all other determinations, not inconsistent with
the terms of the Plan, deemed necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if he or she is otherwise eligible, be granted
additional Options or Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares subject to an Incentive Stock Option shall be determined as
of the date of the grant of such Option.
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(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant; and
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of: (1) cash; (2)
check; (3) promissory note; (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised; (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised; (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes; (7) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than 12 months after the date of delivery of the
subscription agreement; (8) any combination of the foregoing methods of payment;
or (9) such other consideration and method of payment for the issuance of Shares
to the extent
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permitted under Applicable Laws. In making its determination as to the type of
consideration to accept, the Administrator shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan. An Option may not be exercised for a fraction of a Share. An Option
shall be deemed to be exercised when written notice of such exercise has been
given to the Company in accordance with the terms of the Option by the person
entitled to exercise the Option and the Company has received full payment for
the Shares with respect to which the Option is exercised. Full payment may, as
authorized by the Board, consist of any consideration and method of payment
allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Option. No adjustment will be made for a dividend
or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three (3) months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if:
(i) the Optionee is a Consultant who becomes an Employee within the time
specified herein; or (ii) the Optionee is an Employee who becomes a Consultant
within the time specified herein.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee as a result of his or her total and permanent disability
(as defined in Section 22(e)(3) of the Code, or any successor provision), the
Optionee may, but only within six (6) months (or such other period of time not
exceeding twelve (12) months as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
the grant of the option) from the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
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(d) Death of Optionee. In the event of the death of an Optionee (i)
during the period of Continuous Status as an Employee or Consultant or (ii)
within thirty (30) days following the termination of the Optionee's Continuous
Status as an Employee or Consultant, the Option may be exercised, at any time
within six (6) months (or such other period of time not exceeding twelve (12)
months as is determined by the Board, with such determination in the case of an
Incentive Stock Option being made at the time of the grant of the option)
following the date of death (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death or, if earlier, the date of termination or
Continuous Status as an Employee or Consultant. To the extent that Optionee was
not entitled to exercise the Option at the date of death or termination, as the
case may be, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(e) Rule 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption from Section 16
of the Exchange Act with respect to Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's Continuous Status as an Employee or Consultant for any reason
(including death or disability). The purchase price for Shares repurchased
pursuant to the Restricted Stock purchase agreement shall be the original
purchase price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company.
(c) Other Provisions. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No
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adjustment will be made for a dividend or other right for which the record date
is prior to the date the Stock Purchase Right is exercised, except as provided
in Section 12 of the Plan.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment; (b) out of Optionee's
current compensation; (c) if permitted by the Administrator, in its discretion,
by surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or greater than Optionee's marginal tax rate times the
ordinary income recognized; or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option, or the Shares to be issued
in connection with the Stock Purchase Right, if any, that number of Shares
having a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
Date").
Any surrender by a Reporting Person of previously owned Shares
to satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
All elections by an Optionee to have Shares withheld to
satisfy tax withholding obligations shall be made in writing in a form
acceptable to the Administrator and shall be subject to the following
restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator; and
(d) if the Optionee is a Reporting Person, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by
an Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
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12. Adjustments Upon Changes in Capitalization, Merger or Certain Other
Transactions.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale of all
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's shareholders (excluding any transaction with a majority-owned
or wholly-owned subsidiary), each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation
(and such assumed or substituted Option or Stock Purchase Right shall provide
that such Option or Stock Purchase Right shall vest in its entirety in the event
that the Consultant or Employee holding such Option or Stock Purchaser Right is
terminated without cause within the twelve (12) month period following the
consummation of the merger or sale of assets). If the successor corporation does
not agree to so assume an Option or Stock Purchase Right or to so substitute an
equivalent option or right, such Option or Stock Purchase Right shall vest in
its entirety and become exercisable prior to the consummation of the merger or
sale of assets. If an Option becomes fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets as provided in the
preceding two sentences, the Board shall notify the Optionee within a reasonable
time prior to the consummation of such transaction, and the Option shall be
fully exercisable for a period of ten (10) days from the date of such notice,
and will terminate upon the expiration of such period.
(d) Certain Distributions. In the event of any distribution to the
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. Non-Transferability of Options, Stock Purchase Rights and
Restricted Stock. To the extent required by any Applicable Law, Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
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descent or distribution and may be exercised or purchased during the lifetime of
the Optionee only by the Optionee.
14. Time of Granting Options and Stock Purchase Rights. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 or with Section 422
of the Code, or any successor provision (or any other applicable law or
regulation, including the requirements of any Stock Exchange), the Company shall
obtain shareholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
of the Plan shall adversely affect Options or Stock Purchase Rights already
granted, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange. As a condition to the exercise of an Option,
the Company may require the person exercising such Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approve from time to
time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company in the degree and manner required
under applicable state and federal law and the rules of any Stock Exchange.
20. Lock-up Agreement. Each recipient of securities hereunder agrees,
in connection with the first registration with the United States Securities and
Exchange Commission under the Securities Act of 1933, as amended, of the public
sale of the Company's Common Stock, upon request of the
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Company or any underwriters managing such offering, not to sell, make any short
sale of, loan, grant any option for the purchase of or otherwise dispose of any
securities of the Company (other than those included in the registration)
without the prior written consent of the Company or such underwriters, as the
case may be, for such period of time not to exceed 180 days from the effective
date of such registration as the Company or the underwriters, as the case may
be, shall specify. Each such recipient agrees that the Company may instruct its
transfer agent to place stop-transfer notations in its records to enforce this
Section 20.
11
FIRST AMENDMENT TO IRU AGREEMENT
This Amendment to IRU Agreement ("Amendment") is made and entered into as
of the __ day of December, 1998, by and between Qwest Communications Corporation
("Qwest") and Business Telecom, Inc. ("BTI").
RECITALS
A. Qwest and BTI previously entered into an IRU Agreement dated as of October
31, 1997 (the "Agreement").
B. Qwest and BTI wish to amend the Agreement to add additional Dark Fibers and
make certain modifications to the Agreement.
AGREEMENT
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Qwest and BTI agree as follows:
1. Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings given to them in the Agreement.
2. The parties agree to amend the route of Segment 44 from Lake City to
Tampa as described in Section 1.02 in accordance with the map attached hereto as
Exhibit A, and to include the spur from Bellview, Florida to Orlando, Florida as
part of Segment 44. The Segment shall be subdivided in Subsegments as follows:
Segment 44A, Lake City to Bellview, Segment 44B, Bellview to Tampa, and Segment
44C, Bellview to Orlando. The total estimated route mileage for the new Segment
44, including the spur, remains estimated at 269 route miles. Further, in
accordance with Section 1.01(a) and subject to the provisions of the Agreement,
Qwest hereby grants BTI an IRU in an additional four (4) fibers in Segment 44C
from Bellview to Orlando and an IRU eight (8) Dark Fibers in a new Segment 52
from Orlando, Florida to Titusville, Florida. Segment 52 contains an estimated
42 route miles and shall be included within the QWEST System for purposes of the
Agreement:
3. BTI agrees to pay QWEST an IRU Fee of $20,000 per route mile for the
eight (8) Dark Fibers in Segment 52. The parties agree that no additional
consideration under Section 2.01 shall be payable by BTI for the additional four
(4) Dark Fibers in Segment 44C.
<PAGE>
4. The Estimated Delivery Date for Segment 52 from Orlando to Titusville
is December 31, 1998.
5. The parties agree to amend paragraph 7.02 of the Agreement to provide
that space provided to BTI in the regeneration site at Talavara, Florida only
shall be provided at 50% of the price set forth in paragraph 7.02.
6. Except as modified in the Amendment, all other provisions of the
Agreement shall be applicable to the Florida Reroute Fibers.
Qwest and BTI have executed this Amendment effective as of the day first
written above:
QWEST COMMUNICATIONS BTI TELECOM, INC.
CORPORATION
By /s/ A.D. Wandry By /s/ R.Michael Newkirk
------------------- ----------------------
Name: A.D. Wandry Name: R. Michael Newkirk
Title: SRVP Title: Pres/Co.
Date: 4/19/99 Date: 4/13/99
COMMITMENT LETTER
CONFIDENTIAL
July 16, 1999
Brian K. Branson
Chief Financial Officer
Business Telecom, Inc.
4300 Six Forks Road
Raleigh, NC 27609
Dear Brian:
You have advised Banc of America Securities LLC ("Banc of America Securities")
that you wish to obtain up to $60 million senior secured multiple draw
amortizing loan facility ("Facility") for Business Telecom, Inc. (the
"Company"). In connection with the foregoing, Bank of America, National
Association (the "Bank") is pleased to advise you that it is willing, subject to
the terms and conditions contained in this letter and in the attached Indicative
Summary of Terms and Conditions (the "Term Sheet"), together with other
institutions mutually agreed by the Company (collectively with the Bank, the
"Lenders") and Banc of America Securities to provide the Facility, and for the
Bank to serve as administrative agent for the Facility. Banc of America
Securities is pleased to advise you that it is willing to structure and arrange
the Facility.
As previously discussed, Banc of America Securities is a wholly-owned, indirect
subsidiary of BankAmerica Corporation, the parent company of Bank of America,
National Association, and is a registered broker-dealer. Please refer to the
attached "Special Disclosure Statement" for important additional information on
this relationship.
It is agreed that the Bank will act as the sole and exclusive Administrative
Agent for the Facility, and that Banc of America Securities will act as the sole
and exclusive advisor and arranger for the Facility. Upon acceptance and
allocation of commitments in respect of the Facility from Lenders (other than
the Bank) the Bank's commitment under the Facility will be reduced in accordance
with such allocation. Each of Banc of America Securities and the Bank will, in
such capacities, perform the duties and exercise the authority customarily
performed and exercised in such roles. You agree that no other agent, co-agents
or co-purchasers or arrangers will be appointed, no other titles will be awarded
and no compensation (other than that expressly contemplated by the Term Sheet,
the engagement letter with Banc of America Securities (the "Engagement Letter")
and the Fee Letter referred to below) will be paid in connection with the
<PAGE>
Facility unless you and we shall so agree.
The fees payable to Banc of America Securities and to the Bank in connection
with the Facility are set forth in the Fee Letter referred to below.
In addition to the conditions to funding and closing set forth in the Term
Sheet, the Bank's commitment to provide the Facility is subject to: (i) the
satisfactory completion of due diligence with respect to the Company, including
a satisfactory review of its assets and liabilities, businesses and operations,
proposed organization and legal structure, tax, labor, environmental, financial,
ERISA, significant contracts, and other matters, (ii) the negotiation and
execution of definitive documentation satisfactory to Banc of America Securities
and the Bank, (iii) there being no material adverse change in the financial
condition, business, operations, or properties of BTI Telecom Corp. or the
Company, from the date of the most recent audited financial statements to the
date the Credit Documentation is consummated, and (iv) Banc of America
Securities' and the Bank's satisfaction that BTI Telecom Corp. has taken all
necessary steps to ascertain the extent of, and to quantify and successfully
address, business and financial risks facing BTI Telecom Corp. and the Company
as described in the "Year 2000 Issues" section of its Form 10-Q filing for the
quarterly period ended March 31, 1999. In addition, from the date of acceptance
of the offer set forth in this letter until the closing of the primary
syndication for the Facility, there shall be no financing for the Company or BTI
Telecom Corp., syndicated or privately placed, which would have a detrimental
effect upon the Facility.
Whether or not the transaction contemplated hereby is consummated, the Company
hereby agrees to indemnify and hold harmless each of Banc of America Securities,
the Bank and their respective directors, officers, employees, affiliates and
agents (each, an "indemnified person") from and against any and all losses,
claims, damages, liabilities (or actions or other proceedings commenced or
threatened in respect thereof) and expenses that arise out of, result from or in
any way relate to this commitment letter or the providing or structuring of the
Facility, and to reimburse each indemnified person, upon its demand, for any
legal or other expenses (including the allocated cost of internal legal counsel)
incurred in connection with investigating, defending or participating in any
such loss, claim, damage, liability or action or other proceeding (whether or
not such indemnified person is a party to any action or proceeding out of which
any such expenses arise), other than any of the foregoing claimed by an
indemnified person to the extent incurred by reason of the gross negligence or
willful misconduct of such person. Neither of Banc of America Securities nor the
Bank or any of their affiliates, shall be responsible or liable to the Company
or any other person for any consequential damages which may be alleged. The
obligation contained in this paragraph will survive the closing of the Facility
and the termination of this letter.
In addition, the Company hereby agrees to reimburse the Bank and Banc of America
Securities from time to time upon demand all reasonable legal and out of pocket
expenses, including
2
<PAGE>
expenses related to due diligence and other expenses (including the allocated
cost of Banc of America Securities' and Bank's internal counsel) incurred by the
Bank or Banc of America Securities in connection with the Facility, regardless
of whether the legal documentation is executed or the Facility closes.
The Company hereby authorizes the preparation of all legal documentation (the
"Credit Documentation") relating to the proposed transaction. The terms and
conditions of the Credit Documentation and associated documents will be based
substantially on the terms presented in the Term Sheet, provided that it is
understood that the Term Sheet does not constitute a detailed description of the
Facility and that issues may arise which are not covered by the Term Sheet. The
Company acknowledges that the Term Sheet contains a number of proposed
conditions precedent to the close of the Facility and neither Banc of America
Securities nor the Bank has provided the Company with any assurances that the
Bank will agree with the Company on the terms of such conditions precedent.
The Company hereby acknowledges that Banc of America Securities, the Bank and
their affiliates may share among themselves any information relating to the
Company, its affiliates or the transactions contemplated hereby (including,
without limitation, any non-public information regarding the creditworthiness of
such entities).
In accordance with market practice, an information package containing relevant
information concerning the Facility and the Company will be provided, on a
confidential basis, to potential lenders. Banc of America Securities will be
pleased to assist the Company in the preparation of such a package. The
management of the Company will cooperate with Banc of America Securities in
effecting the prompt syndication of the Facility, including participation in a
reasonable number of lender meetings which may be held in connection with such
syndication, and will arrange for representatives of the Company to cooperate
with such syndication process.
The terms contained in this letter, the Engagement Letter, the Fee Letter and
the Term Sheet are confidential and, except for disclosure to your board of
directors, officers and employees, to professional advisors retained by you in
connection with this transaction, or as may be required by law, may not be
disclosed in whole or in part to any other person or entity without our prior
written consent. No such consent shall create any third-party beneficiary as to
our commitment. Banc of America Securities hereby consents to the Company
attaching the Commitment Letter and the Term Sheet to BTI Telecom Corp.'s Form
S-1 to be filed with the Securities and Exchange Commission on July 16, 1999.
This offer will terminate on July 23, 1999 unless on or before that date you
sign and return an enclosed counterpart of this letter, the Engagement Letter,
and the Fee Letter. This commitment will expire on August 31, 1999 if the
Facility has not closed on or before that date. Banc of America Securities will
not postpone the closing of the Facility with respect to BTI Telecom
3
<PAGE>
Corp.'s initial public offering and will endeavor to minimize the Company's
management's involvement in the primary syndication of the Facility to Lenders
(other than Bank). Banc of America Securities may, at its sole discretion,
change the pricing and structure of the Facility and may notify the Company that
such changes are advisable to secure a successful primary syndication,
regardless of the timing of the primary syndication. If the Company fails to
agree with such changes, the Bank may cancel its commitment under the Facility
and all fees due and payable under the Fee Letter and all amounts due and
payable under the Facility shall be paid by the Company within 120 days of the
Company's response (or deemed response, if the Company does not respond within
14 days of such notice from Bank of America Securities) regarding the Company's
determination that such changes to pricing and structure are not acceptable to
the Company. In the event the Company makes all payments due and owing under the
Facility and the Fee Letter within such 120 day period, the Bank shall refund
two-thirds of the Arrangement Fee.
If the foregoing is satisfactory to you, please indicate your agreement and
acceptance below and return a copy of this letter to us. Upon your delivery to
us of a signed copy of this Commitment Letter, the Engagement Letter and the Fee
Letter, this Commitment Letter, the Engagement Letter and the Fee Letter shall
become a binding agreement, under California law, as of the date so accepted.
Delivery of an executed counterpart of the signature page to this letter by
telecopier shall be as effective as delivery of a manually executed counterpart
thereof. This letter may be executed in any number of counterparts which, when
executed shall be deemed to be an original and all of which, taken together,
shall constitute one and the same agreement. This letter (together with the Fee
Letter, the Term Sheet and the Engagement Letter) sets forth the entire
agreement between the parties with respect to the matters addressed herein and
supersedes all prior communications, written or oral, with respect thereto.
We are pleased to have this opportunity and look forward to working with you.
Sincerely,
BANC OF AMERICA SECURITIES LLC
By:
Title:
4
<PAGE>
BANK OF AMERICA, NATIONAL ASSOCIATION
By:
Title:
Accepted and Agreed to:
BTI Telecom Corp., as Parent and Guarantor to the Company
By:
Title:
Business Telecom, Inc.
By:
Title:
5
<PAGE>
BANC OF AMERICA SECURITIES LLC
SPECIAL DISCLOSURE STATEMENT
Banc of America Securities LLC ("Banc of America Securities") is a wholly-owned,
direct subsidiary of BankAmerica Corporation, the parent company of Bank of
America, National Association ("BofA"). Banc of America Securities is a
broker-dealer registered with the Securities and Exchange Commission, and is a
member of the National Association of Securities Dealers, Inc. and the
Securities Investor Protection Corporation.
Banc of America Securities is NOT a bank. The securities and financial
instruments sold, offered or recommended by Banc of America Securities are not
bank deposits, are not guaranteed by, and are not otherwise obligations of, any
bank, thrift or other subsidiary of BankAmerica Corporation, and are not insured
by the Federal Deposit Insurance Corporation or any other governmental agency.
From time to time, BofA's affiliates may lend to one or more issuers whose
securities are underwritten, dealt in, or placed by Banc of America Securities.
You are referred to the relevant prospectus, offering statement or other
disclosure document for material information to any such lending relationship,
and whether the proceeds of an issue will be used to repay any such loans.
Furthermore, the obligations of Banc of America Securities are not those of any
affiliated bank or thrift, and no such affiliated bank or thrift is responsible
for securities underwritten, dealt in, or placed by Banc of America Securities.
Banc of America Securities also may participate from time to time in a primary
or secondary distribution of securities offered or sold to you by it. Further,
Banc of America Securities may act as an investment adviser to issuers whose
securities may be offered or sold to you by it.
<PAGE>
BUSINESS TELECOM, INC. ("BTI")
PROJECT DEBT FACILITY
JULY 16, 1999
SUMMARY OF INDICATIVE TERMS AND CONDITIONS
This Summary of Indicative Terms and Conditions is not a committed offer from
Bank of America in any form and the information contained herein is given
without any liability whatsoever to Bank of America. This Summary of Terms and
Conditions should not be considered as a commitment unless it is attached to a
letter evidencing such a commitment from Bank of America. The terms and
conditions set out below are subject to, among other matters, agreement on the
final structure between BTI and Bank of America, credit approval by Bank of
America, due diligence and documentation. This Summary of Indicative Terms and
Conditions is for the confidential use of only those persons to whom it is
transmitted by Bank of America or its designates and is not to be reproduced or
used for any other purpose and is not to be disseminated to any other parties
without the prior consent of Bank of America.
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
Business Telecom, Inc., a wholly owned subsidiary
Borrower of BTI Telecom Corp.
- ------------------------------------------------------- -----------------------------------------------------
Purpose 1) To finance the payments due under
the IRU Agreement dated October 31,
1997 by and between Qwest
Communications Corporation
("Qwest") and BTI (as amended, "Qwest
Agreement") as well as refinance any
payments already made or financed
under previous agreements.
2) To finance the payments due under
the Network Products Purchase
Agreement dated July 2, 1998 by and
between Northern Telecom Inc.
("Nortel") and BTI ("Nortel
Agreement") and /or invoices presented
and accepted by and between BTI and
Nortel as well as refinance any
payments already made or financed
under previous acceptable agreements.
- ------------------------------------------------------- -----------------------------------------------------
Project The fiber optic communications system
and associated optronics with the segments,
fibers, and mileage set out on Exhibit A, either
delivered or to be delivered in all
material respects as set forth in the completion
plan referred to in Exhibit A. Borrower
needs to provide completion plan with the
assumption that all segments will be
delivered within six (6) months of closing.
- ------------------------------------------------------- -----------------------------------------------------
Underwriter and Arranger Banc of America Securities LLC
- ------------------------------------------------------- -----------------------------------------------------
Lenders Bank of America, N.A. and other institutions agreed
by the Arranger and Borrower
- ------------------------------------------------------- -----------------------------------------------------
Facility A senior secured multiple draw amortizing
loan that is full recourse to Borrower,
PARI PASSU to all debt under the GECC Loan
Agreement and any other senior debt permitted
by Lenders ("Senior Debt").
- ------------------------------------------------------- -----------------------------------------------------
Amount $60 million.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Maturity Date September 22, 2002
- ------------------------------------------------------- -----------------------------------------------------
Availability Subject to typical conditions precedent,
amounts to be drawn under the Facility at
closing evidenced by spending or
refinancing of spending under the Purpose
and amounts thereafter to be drawn within
six (6) months of closing for the
Purpose; provided, however, that prior to
the completion of BTI Telecom Corp.'s
initial public offering, availability
under the Facility is limited to the
lesser of fifty percent (50%) of the
spending or refinancing of the spending
under the Purpose and $37.5 million, and
after completion of such initial public
offering, to the lesser of one hundred
percent (100%) of the spending or
refinancing of the spending under the
Purpose and $60 million.
- ------------------------------------------------------- -----------------------------------------------------
Security Pledge of all Project assets including
fiber, optronics, contracts, and IRU's.
Cash flows from customer contracts will
be shared PARI PASSU with GECC. Following
a default and exercise of remedies,
existing receivables from the customer
contracts will be for the sole benefit of
GECC; the customer contracts and future
revenues from them will be for the sole
benefit of Lenders.
- ------------------------------------------------------- -----------------------------------------------------
Guarantors The Facility will be guaranteed to the extent
permitted by BTI Telecom Corp. and all existing and
future direct and indirect subsidiaries of BTI
Telecom Corp. and Borrower.
- ------------------------------------------------------- -----------------------------------------------------
Interest Rate LIBOR plus Applicable Margin based upon a Leverage
Ratio as set out in Exhibit B.
- ------------------------------------------------------- -----------------------------------------------------
Commitment Fee Payable on any undrawn available
commitments as set out in Exhibit B (if
Borrower elects to reduce the commitment,
there will be an appropriate adjustment
to the commitment fee thereafter).
- ------------------------------------------------------- -----------------------------------------------------
Amortization 80% at Maturity
5% over each of the prior 4 calendar quarters
- ------------------------------------------------------- -----------------------------------------------------
Cancellation Any undrawn amounts at the end of the
Availability period will be cancelled.
The Borrower may cancel undrawn commitments upon
giving 10 days notice and upon Lenders'
satisfaction that Project will be
completed in all material respects.
- ------------------------------------------------------- -----------------------------------------------------
Voluntary Prepayments At anytime upon 60 days notice and upon Lenders'
satisfaction that the Project will be completed
unless the Facility is fully prepaid.
- ------------------------------------------------------- -----------------------------------------------------
Mandatory Prepayments On a pro-rata basis with existing secured
indebtedness and typical for a facility of this
type including:
1) From the permitted sale of assets after
amount to be agreed.
2) From the sale of equity, other than
as contemplated by the proposed IPO,
or alternative equity sources that
are closed within four (4) months
from closing of the Facility.
3) From cash balances in excess of $30 million
measured as of each quarter end date starting
September 30, 2001 provided that as of such
date and thereafter there has not been an IPO
or alternative equity source closed, and
further provided that such requirement will
not apply once outstanding amounts are
$10 million or below.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
Insurance Typical for a transaction of this type.
- ------------------------------------------------------- -----------------------------------------------------
Conditions Precedent 1) Amendment to existing Loan Agreement dated
September 22, 1997 between BTI and
General Electric Capital Corporation
("GECC") ("GECC Loan Agreement")
and associated agreements acceptable to
Lenders and consistent with this facility.
2) Execution of an intercreditor agreement among
Lenders and GECC, satisfactory to Lenders.
3) Notice to Qwest of the assignment of the
Qwest Agreement to the Lenders.
4) Consent of Nortel to the assignment
of the Nortel Agreement to Lenders if required
or applicable and any associated consent required
to allow assignment by the Lenders to third party or
parties.
5) Certificate from an officer of Borrower to Lenders
stating the Project expenditures are according to
industry standards and BTI plans in all respects.
6) No Material Adverse Effect.
7) Completion of all documents, due diligence, consents,
licenses, and other approvals required for completion
of the Project.
8) Satisfactory Security Documentation.
9) Satisfactory Insurance policies for the Project
assets and Borrower as a whole.
10) Payment of all reasonable fees and expenses of
the Arranger.
11) No material litigation.
12) Delivery of financial statements and projections
satisfactory to the Arranger.
13) Progress with the planned IPO to the Arranger's
satisfaction.
14) Legal opinions satisfactory to Lenders.
15) Others customary for a facility of this type.
- ------------------------------------------------------- -----------------------------------------------------
Representations and Warranties Typical of a transaction of this type.
- ------------------------------------------------------- -----------------------------------------------------
Affirmative Covenants Typical for a transaction of this type including
1) Delivery of Financial Statements
2) Delivery of Annual budget and comparison
to plan
3) Maintenance of Insurance
4) Maintenance of Interest rate hedging
policy acceptable to Arranger
5) Performance of Qwest Agreement and Nortel
Agreement
6) Construction of Project, materially in accordance
with Exhibit A and the Borrower's plan, as amended
with Lenders' consent
7) Maintenance of Project
8) Each of Borrower and BTI Telecom Corp. will conduct
all of its business on an arm's length basis
9) Others customary for a facility of this type.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
Financial Covenants Certain financial and other covenants will be
determined by the Lenders to be consistent with the
GECC Loan Agreement and satisfactory to Lenders.
- ------------------------------------------------------- -----------------------------------------------------
Negative Covenants Typical for a transaction of this type including
limitations on:
1) Mergers
2) Change of Control
3) Indebtedness other than the Facility, the
GECC Facility, the Notes and an additional $1
million basket in the aggregate.
4) Liens
5) Restricted Payments
6) Sale of Assets in an amount to be agreed,
satisfactory to Lenders
7) ERISA
8) Others Customary for a facility of this type.
- ------------------------------------------------------- -----------------------------------------------------
Events of Default 1) Failure to make any payment under the
Facility documentation
2) Bankruptcy of BTI or BTI Telecom
3) Final Judgement in excess of $5,000,000
4) Defaults under Qwest Agreement, Nortel
Agreement, or other material agreements.
5) Change of Control
6) Cross default to GECC Agreement and 1997
Senior Unsecured Notes and any other future
Indebtedness
7) Material Adverse Effect
8) Loss of any material license or permit
9) Delay in construction of Project materially
beyond the completion plan referred to in
Exhibit A, as amended by the parties to the
Qwest Agreement, with consent of Lenders
10) Others customary for a facility of this type.
- ------------------------------------------------------- -----------------------------------------------------
Illegality, Capital Adequacy In the event that it becomes illegal for any
Lender to lend or maintain its commitment,
the Borrower will repay the Lender and/or the
Lender's commitment will be cancelled.
- ------------------------------------------------------- -----------------------------------------------------
Voting Majority of Lenders (66 2/3%) except where unanimity
is usually required in facilities of this nature.
- ------------------------------------------------------- -----------------------------------------------------
Increased Costs Typical for a transaction of this type.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
Indemnity The Borrower shall indemnify the Arranger and the
Lenders and their respective affiliates from and
against all losses liabilities, claims, damages
or expenses arising out of or relating to the
Facility, the Borrower's use of loan proceeds or
the commitments, including, but not limited to,
environmental liability and reasonable attorneys'
fees (including the allocated cost of internal
counsel) and settlement costs. This indemnification
shall survive and continue for the benefit of the
indemnitees at all times after the Borrower's
acceptance of the Lenders' commitments for
the Facility, notwithstanding any failure of the
Facility to close. This indemnity is not intended to
enable the Lenders to receive duplicate repayment of
the principal or to compensate Lenders for losses
attributable to subsequent Lender assignments or
participations.
- ------------------------------------------------------- -----------------------------------------------------
Clear Market During the period between delivery of the commitment
and a close of syndication no other debt facilities
will be brought to market by Borrower or BTI Telecom
Corp., which would have a detrimental effect on the
Facility.
- ------------------------------------------------------- -----------------------------------------------------
Expenses All reasonable legal and out of pocket expenses
incurred by Bank of America and Banc of America
Securities LLC in connection with the negotiation,
documentation, and syndication of the Facility will
be for the account of the Borrower including costs
of counsel.
- ------------------------------------------------------- -----------------------------------------------------
Governing Law State of California
- ------------------------------------------------------- -----------------------------------------------------
Syndication Strategy Bank of America will underwrite the entire Facility
and intends to close and fund by Borrower's timeline.
Bank of America intends to hold less than the
full amount of theFacility. Banc of America Securities
will not postpone commitment or closing of the Facility
with respect to the initial public offering of BTI
Telecom Corp. and will endeavor to minimize the
Borrower's management's involvement in the primary
syndication of the Facility to Lenders. Banc of
America Securities expects a total of 2-4 lenders,
including Bank of America. Assignments are permitted
by any Lender in minimum amounts of $5 million with
Borrower's consent which shall not be unreasonably
withheld.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
Market Conditions Banc of America Securities LLC shall be entitled
to change the pricing and structure of the
Facility if the Arranger determines that such
changes are advisable to secure a successful
primary syndication regardless of the timing of
the primary syndication. Such changes would be
accepted by Borrower or any commitments would be
cancelled and any outstanding amounts would become
payable within 120 days after the Borrower has
notified the Lenders that such changes to pricing
and structure are not acceptable to Borrower. If
Borrower has not responded to Lenders'
notification of such changes within 14 days of
receipt of such notice of the Arranger's
determination, Borrower will be deemed to have
responded in the negative. In the event of such a
cancellation, 2/3 of the Arrangement Fee will be
refunded to Borrower upon repayment in full of the
outstanding amounts owed by Borrower under the
Facility and under the Fee Letter.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
6
<PAGE>
Exhibit A Project Description
The Project consists of fiber IRU's and associated optronics for the following
network segments:
Segment No. of Estimated
Fibers Mileage
Philadelphia to Washington DC 4 136
Atlanta to Charlotte 4 261
Charlotte to Raleigh 18 174
Raleigh to Rocky Mount 8 53
Rocky Mount to Washington DC 4 392
New York City to Philadelphia 4 93
Tallahassee to Jacksonville 8 165
Atlanta to Tallahassee 4 321
Lake City to Tampa 4 269
Tampa to Miami 4 285
Miami to Jacksonville 4 345
Jacksonville to Augusta 4 278
Augusta to Columbia 4 85
Columbia to Charlotte 8 105
Nashville to Chattanooga 4 147
Chattanooga to Atlanta 4 137
NOTE: Borrower to deliver notice to Lenders at closing as to which segments have
been completed and setting forth the completion plan of any other segments,
including which milestones have been achieved with respect to such segments.
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
7
<PAGE>
Exhibit B Pricing Grid
The pricing below is indicative only and is subject to change if in Banc of
America Securities LLC's opinion, adjustments are required in order to complete
a primary syndication.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------- -------------------------- -------------------------- --------------------------
Leverage Ratio* LIBOR Option %** Prime Rate % Commitment Fee %
- ---------------------------- -------------------------- -------------------------- --------------------------
Greater than 6.0x 3.50 2.50 1.50
- ---------------------------- -------------------------- -------------------------- --------------------------
Greater than 5.0x and less
than or equal to 6.0x 3.00 2.00 1.50
- ---------------------------- -------------------------- -------------------------- --------------------------
Greater than 4.0x and less
than or equal to 5.0x 2.75 1.75 1.50
- ---------------------------- -------------------------- -------------------------- --------------------------
Greater than 3.0x and less
than or equal to 4.0x 2.50 1.50 1.50
- ---------------------------- -------------------------- -------------------------- --------------------------
Less than 3.0x 2.25 1.25 1.50
- ---------------------------- -------------------------- -------------------------- --------------------------
</TABLE>
- --------
* The Leverage Ratio is calculated based on Senior Debt, which does not include
BTI Telecom Corp.'s $250 million high yield note offering dated September 22,
1997.
** Each margin will be reduced by 25 basis points upon occurrence of the IPO, or
other equity infusion to BTI Telecom Corp., in an amount satisfactory to the
Lenders (but such amount shall not less than $100 million).
- --------------------------------------------------------------------------------
BANK OF AMERICA [LOGO]
8
Exhibit 10.14
BTI TELECOM CORP.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The BTI Telecom Corp. Employee Stock Purchase Plan (the
"Plan") is established to provide eligible employees of BTI Telecom Corp., a
North Carolina corporation, and any successor corporation thereto (collectively,
the "Company"), and any current or future parent corporation or subsidiary
corporations of the Company as the Board of Directors of the Company (the
"Board") shall from time to time designate (collectively referred to as the
"Company" and individually referred to as a "Participating Company"), with an
opportunity to acquire a proprietary interest in the Company by the purchase of
shares of the Common Stock of the Company (the "Common Stock"). For purposes of
the Plan, a parent corporation and a subsidiary corporation shall be as defined
in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of
1986, as amended (the "Code").
The Company intends that the Plan shall qualify as an "employee stock
purchase plan" under Section 423 of the Code (as such section may hereafter be
amended or replaced by a successor section), and the Plan shall be so construed.
Any term not expressly defined in the Plan but defined for purposes of Section
423 of the Code shall have the same definition herein.
Except as provided in Section 11(d) hereof, an employee participating
in the Plan (a "Participant") may withdraw such Participant's accumulated
payroll deductions (if any) and terminate participation in any Offering (as
defined below) at any time during an Offering Period (as defined below).
Accordingly, except as provided in Section 11(d) hereof, each Participant is, in
effect, granted an option pursuant to the Plan (a "Purchase Right"), which may
or may not be exercised at the end of an Offering Period.
2. Administration. The Plan shall be administered by the Board
or a duly appointed committee of the Board (the "Committee"), which shall be
comprised of at least two members of the Board who are "Nonemployee Directors"
as defined in Rule 16b-3 or any successor rule or regulation ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All questions of interpretation of the Plan or of any Purchase Right
shall be determined by the Board or the Committee (which shall collectively be
referred to herein as the "Administrator"), and such determination shall be
final and binding upon all persons having an interest in the Plan and/or any
Purchase Right. Subject to the provisions of the Plan, the Administrator shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted Purchase
Rights pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. The Administrator may delegate the
duty to perform administrative functions for the Plan. All expenses incurred in
connection with the administration of the Plan shall be paid by the Company.
3. Share Reserve. The maximum number of shares that may be
issued under the Plan shall be Two Hundred Fifty Thousand (250,000) shares of
the Company's authorized but unissued
<PAGE>
Common Stock (the "Shares"). In the event that any Purchase Right for any reason
expires or is canceled or terminated, the Shares allocable to the unexercised
portion of such Purchase Right may again be subjected to a Purchase Right.
4. Eligibility. Any employee of a Participating Company is
eligible to participate in the Plan except employees who:
(a) have been in the employ of a Participating Company for
less than 6 months as of the start of an Offering;
(b) customarily work less than 20 hours per week;
(c) customarily work not more than five months in any
calendar year;
(d) as of the start of an Offering, own stock of the
Company (or its parent or subsidiary corporations) and/or own or hold options to
purchase or who, as a result of participation in the Plan, would own or hold
options to purchase, stock of the Company (or its parent or subsidiary
corporations), possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company (or its parent or
subsidiary corporations) within the meaning of Section 423(b)(3) of the Code; or
(e) are members of the Administrator.
Notwithstanding anything herein contained to the contrary, any
individual performing services for a Participating Company solely through a
leasing agency or employment agency shall not be deemed an "employee" of such
Participating Company.
5. Offering Dates.
(a) Offering Periods. Except as otherwise set forth below,
the Plan shall be implemented by offerings (individually, an "Offering") of
approximately six (6) months duration (an "Offering Period"). Offerings shall
commence on January 1st and July 1st and end on the June 30th or December 31st
next occurring thereafter. Notwithstanding the foregoing, the first offering
period shall commence on the effective date of the Company's registration
statement on Form S-1 filed with the Securities and Exchange Commission for the
Company's initial public offering of Common Stock, and shall end on the June
30th next occurring thereafter. In addition, the Administrator may establish a
different term for one or more Offerings and/or different commencing and/or
ending dates for such Offerings. An employee who becomes eligible to participate
in the Plan after an Offering Period has commenced shall not be eligible to
participate in such Offering but may participate in any subsequent Offering. The
first day of an Offering Period shall be the "Offering Date" for such Offering
Period. In the event the first and/or last day of an Offering Period is not a
business day, the Company shall specify the business day that will be deemed the
first or last day, as the case may be, of the Offering Period.
(b) Purchase Date. The last day of each Offering Period
shall be the "Purchase Date" for such Offering Period. In the event the first
and/or last day of an Offering
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<PAGE>
Period is not a business day, the Company shall specify the business day that
will be deemed the last day of the Offering Period.
(c) Governmental Approval; Shareholder Approval.
Notwithstanding any other provision of the Plan to the contrary, any Purchase
Right granted pursuant to the Plan shall be subject to (i) obtaining all
necessary governmental approvals and/or qualifications of the sale and/or
issuance of the Purchase Rights and/or the Shares, and (ii) obtaining
shareholder approval of the Plan. Notwithstanding the foregoing, shareholder
approval shall not be necessary in order to grant any Purchase Right granted in
the Plan's first Offering Period; provided, however, that the exercise of any
such Purchase Right shall be subject to obtaining subsequent shareholder
approval of the Plan within twelve (12) months of the Board's adoption of the
Plan.
6. Participation in the Plan.
(a) Initial Participation. An eligible employee shall
become a Participant on the first Offering Date after satisfying the eligibility
requirements and delivering to the Company's payroll office not later than five
(5) days before such Offering Date (the "Subscription Date") a subscription
agreement indicating the employee's election to participate in the Plan and
authorizing payroll deductions. An eligible employee who does not deliver a
subscription agreement to the Company's payroll office on or before the
Subscription Date shall not participate in the Plan for that Offering Period or
for any subsequent Offering Period unless such employee subsequently enrolls in
the Plan by filing a subscription agreement with the Company by the Subscription
Date for such subsequent Offering Period. The Administrator may, from time to
time, change the Subscription Date as deemed advisable by the Administrator in
its sole discretion for proper administration of the Plan.
(b) Continued Participation. An eligible employee who has
enrolled in the Plan shall automatically continue to participate in each
successive Offering under the Plan thereafter unless such Participant (i) ceases
to be eligible as provided in Section 4, (ii) withdraws from an Offering under
the Plan pursuant to Section 11(a), or (iii) terminates employment as provided
in Section 12. The Participant's most recent subscription agreement on file with
the Company shall constitute his or her election for each successive Offering
under the Plan; provided, however, a Participant may file, on or before the
applicable Subscription Date for any Offering, a new subscription agreement if
the Participant desires to change his or her elections contained in the
Participant's then effective subscription agreement.
7. Right to Purchase Shares. Except as set forth below, during
an Offering Period each Participant in the Plan for such Offering Period shall
have a Purchase Right consisting of the right to purchase the number of Shares
determined by dividing the Participant's payroll deductions accumulated during
the Offering Period and retained in the Participant's account as of the Purchase
Date by the Offering Exercise Price (as defined below). Unless the Administrator
establishes a policy to the contrary, fractional Shares shall be purchased for a
Participant to the extent there would otherwise be a balance remaining in the
Participant's account after the application of his or her accumulated payroll
deductions for an Offering Period to the purchase of a whole number of Shares.
Shares may only be purchased through a Participant's payroll withholding
pursuant to Section 9 below. In no event shall a Participant's
3
<PAGE>
Purchase Right permit such Participant to acquire more Shares in any calendar
year than is permitted under Section 10(a) hereof.
8. Purchase Price. The purchase price at which Shares may be
acquired at the end of a given Offering Period pursuant to the exercise of a
Purchase Right granted under the Plan (the "Offering Exercise Price") shall be
set by the Administrator; provided, however, that the Offering Exercise Price
shall not be less than eighty-five percent (85%) of the lesser of (i) the fair
market value of the Shares on the Offering Date of the Offering Period or (ii)
the fair market value of the Shares on the Purchase Date for such Offering
Period. Unless otherwise provided by the Administrator prior to the commencement
of an Offering Period, the Offering Exercise Price for each Offering Period
shall be eighty-five percent (85%) of the lesser of (i) the fair market value of
the Shares on the Offering Date of such Offering Period, or (ii) the fair market
value of the Shares on the Purchase Date for such Offering Period. The fair
market value of the Shares on the applicable dates shall be the closing sales
price as reported on the NASDAQ National Market System (or the average of the
closing bid and asked prices if the Shares are so quoted instead) or as reported
on such other national or regional securities exchange or market system if the
Shares are traded on such other exchange or system instead, or as determined by
the Administrator if the Shares are not so reported. If the relevant date does
not fall on a day on which the Common Stock is quoted on the NASDAQ National
Market System or such other national or regional securities exchange or market,
the date on which the fair market value per Share shall be established shall be
the last day on which the Common Stock was so quoted prior to such relevant
date.
9. Payment of Purchase Price. Shares that are acquired
pursuant to the exercise of a Purchase Right may be paid for only through
payroll deductions from the Participant's Compensation during the Offering
Period. A Participant may not make any additional payments to his or her account
under the Plan. For purposes of the Plan, a Participant's "Compensation" with
respect to an Offering shall mean a Participant's base salary or annual "salary
of record" and shall exclude commissions (to the extent not already taken into
consideration in establishing the Participant's salary of record), bonuses,
annual awards, other incentive payments, shift premiums, long-term disability,
worker's compensation or any other payments. Except as set forth below, the
amount of Compensation to be withheld from a Participant's Compensation during
each pay period shall be determined by the Participant's subscription agreement.
(a) Election to Decrease or Stop Withholding. During an
Offering Period, a Participant may elect to decrease the amount withheld, or
stop withholding, from his or her Compensation by filing a new subscription
agreement with the Company on or before the "Change Notice Date." The Change
Notice Date shall initially be the first (1st) day of the first pay period for
which such election is to be effective; the Administrator, however, may change
such Change Notice Date from time to time. A Participant may not elect to
increase the amount withheld from the Participant's Compensation during an
Offering Period.
(b) Limitations on Payroll Withholding. Payroll
withholdings shall be made in such whole dollar amounts elected by the
Participant; provided, however, each election made by a Participant shall be for
at least $10.00 of withholdings per semi-monthly payroll period or, if the
Participant is paid on a monthly basis, at least $20.00 of withholdings per
4
<PAGE>
monthly payroll period. Notwithstanding the foregoing, the Administrator may
impose limits on payroll withholding effective as of a future Offering Date, as
determined by the Administrator. Amounts withheld shall be reduced by any
amounts contributed by the Participant and applied to the purchase of Company
stock pursuant to any other employee stock purchase plan qualifying under
Section 423 of the Code.
(c) Payroll Withholding. Payroll deductions shall commence
on the first payday following the Offering Date and shall continue to the end of
the Offering Period unless sooner altered or terminated as provided in the Plan.
(d) Participant Accounts. Individual accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such account and shall be deposited with the
general funds of the Company. All payroll deductions received or held by the
Company may be used by the Company for any corporate purpose.
(e) No Interest Paid. Interest shall not be paid on sums
withheld from a Participant's Compensation, unless the Administrator elects to
make such payments to all Participants on a non-discriminatory basis.
(f) Exercise of Purchase Right. On each Purchase Date of an
Offering Period, the Purchase Right of each Participant who has not withdrawn
from the Offering or whose participation in the Offering has not terminated on
or before such Purchase Date shall automatically be exercised and the maximum
number of whole and fractional Shares subject to such Purchase Right pursuant to
Section 7 shall be purchased for such Participant at the Option Exercise Price
with his or her accumulated payroll deductions for the Offering Period;
provided, however, in no event shall the number of Shares purchased by the
Participant exceed the limitations imposed by Section 10(a) hereof. No Shares
shall be purchased on a Purchase Date on behalf of a Participant whose
participation in the Offering has terminated on or before such Purchase Date.
(g) Tax Withholding. At the time the Purchase Right is
exercised or at the time some or all of the Shares are disposed of, the
Participant shall make adequate provision for the foreign, federal, state and
local tax withholding obligations of the Company, if any, that arise upon
exercise of the Purchase Right and/or upon disposition of Shares, respectively.
The Company may, but shall not be obligated to, withhold from the Participant's
Compensation the amount necessary to meet such withholding obligations.
(h) Committee Established Procedures. The Administrator
may, from time to time, establish or change (i) minimum required withholding
amounts for participation in an Offering, (ii) limitations on the frequency
and/or number of changes in the amount withheld during an Offering, (iii) an
exchange ratio applicable to amounts withheld in a currency other than U.S.
dollars, (iv) payroll withholding in excess of or less than the amount
designated by a Participant in order to adjust for delays or mistakes in the
Company's processing of subscription agreements, (v) the date(s) and manner by
which the fair market value of the Shares is determined for purposes of
administration of the Plan, and/or (vi) such other limitations or
5
<PAGE>
procedures as deemed advisable by the Administrator, in the Administrator's sole
discretion, that are consistent with the Plan and in accordance with the
requirements of Section 423 of the Code.
10. Limitations on Purchase of Shares; Rights as a
Stockholder.
(a) Fair Market Value Limitation. Notwithstanding any other
provision of the Plan, no Participant shall be entitled to purchase Shares under
the Plan (and under all other employee stock purchase plans that are intended to
meet the requirements of Section 423 of the Code sponsored by the Company or a
parent or subsidiary corporation of the Company) at a rate exceeding $25,000 in
fair market value, which fair market value is determined for Shares purchased
during a given Offering Period as of the Offering Date for such Offering Period
(or such other limit as may be imposed by the Code), for each calendar year in
which such Participant's Purchase Right with respect to such Offering Period
remains outstanding under the Plan (and under all other employee stock purchase
plans described in this sentence).
(b) Pro Rata Allocation. In the event the number of Shares
that might be purchased by all Participants in the Plan exceeds the number of
Shares available in the Plan, the Administrator shall make a pro rata allocation
of the remaining Shares in as uniform a manner as shall be practicable and as
the Administrator shall determine to be equitable.
(c) Rights as a Shareholder and Employee. Until the
exercise of the Participant's Purchase Right, a Participant shall have no rights
as a shareholder by virtue of the Participant's participation in the Plan. No
adjustment shall be made for cash dividends or distributions or other rights for
which the record date is prior to the date the Participant exercises his or her
Purchase Right. NOTHING HEREIN SHALL CONFER UPON A PARTICIPANT ANY RIGHT TO
CONTINUE IN THE EMPLOY OF THE COMPANY OR INTERFERE IN ANY WAY WITH ANY RIGHT OF
THE COMPANY TO TERMINATE THE AT ANY TIME PARTICIPANT'S EMPLOYMENT.
11. Withdrawal.
(a) Withdrawal From an Offering. A Participant may withdraw
from an Offering by signing and delivering to the Company's payroll office a
written notice of withdrawal on a form provided by the Company for such purpose.
Such withdrawal may be elected at any time prior to the Purchase Date of an
Offering Period. A Participant is prohibited from again participating in an
Offering at any time upon withdrawal from such Offering and may not resume
participation in any succeeding Offerings unless the Participant continues to
satisfy the requirements of Section 4 and delivers a new subscription agreement
to the Company pursuant to Section 6(a) above. The Administrator may impose,
from time to time, a requirement that the notice of withdrawal be on file with
the Company's payroll office for a reasonable period prior to the effectiveness
of the Participant's withdrawal from an Offering.
(b) Return of Payroll Deductions. Upon withdrawal from an
Offering pursuant to Section 11(a), the withdrawn Participant's accumulated
payroll deductions that have not been applied toward the purchase of Shares
shall be returned as soon as practicable after the withdrawal, without the
payment of any interest thereon (unless the Administrator decides
6
<PAGE>
otherwise pursuant to Section 9(e) above) to the Participant, and the
Participant's interest in the Offering shall terminate. Such accumulated payroll
deductions may not be applied to any other Offering under the Plan.
(c) Participation Following Withdrawal. An employee who is
also an officer or director of the Company subject to Section 16 of the Exchange
Act and who is deemed to "cease participation" in the Plan within the meaning of
Rule 16b-3 promulgated under the Exchange Act, or any successor rule or
regulation ("Rule 16b-3"), as a consequence of his or her withdrawal from an
Offering pursuant to Section 11(a) above shall not again participate in the Plan
for at least six months after the date of such withdrawal.
(d) Waiver of Withdrawal Right. The Administrator may, from
time to time, establish a procedure pursuant to which a Participant may elect
(an "Irrevocable Election"), at least six (6) months prior to a Purchase Date,
(i) to waive his or her right to withdraw from the Offering, and (ii) to waive
his or her right to increase, decrease or cease payroll deductions under the
Plan during the Offering Period ending on such Purchase Date. Such election
shall be made in writing on a form provided by the Company for such purpose and
must be delivered to the Company not later than the close of business on the day
preceding the date that is six (6) months before the Purchase Date for which
such election is to first be effective.
12. Termination of Employment. Termination of a Participant's
employment with the Company for any reason, including retirement, disability or
death, or the failure of a Participant to remain an employee eligible to
participate in the Plan shall terminate the Participant's participation in the
Plan immediately. In such event, the payroll deductions credited to the
Participant's account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the Participant's
death, to the Participant's legal representative, and all of the Participant's
right under the Plan shall terminate. Interest shall not be paid on sums
returned to a Participant pursuant to this Section 12 unless the Administrator
elects otherwise pursuant to Section 9(e) above. A Participant whose
participation has been so terminated may again become eligible to participate in
the Plan by again satisfying the requirements of Sections 4 and 6(a) above;
provided, however, the Participant's service with a Participating Company prior
to his or her termination of employment shall be counted for purposes of Section
4(a).
13. Transfer of Control. A "Transfer of Control" shall be
deemed to have occurred in the event any of the following occurs with respect to
the Company:
(a) a merger or consolidation in which the Company is not
the surviving corporation;
(b) a merger or consolidation in which the Company is the
surviving corporation where the shareholders of the Company before such merger
or consolidation do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company;
7
<PAGE>
(c) the sale, exchange or transfer of all or substantially
all of the Company's assets other than a sale, exchange or transfer to one (1)
or more subsidiary corporations of the Company;
(d) the direct or indirect sale or exchange by the
shareholders of the Company of all or substantially all of the stock of the
Company where the shareholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange; or
(e) the liquidation or dissolution of the Company.
In the event of a Transfer of Control, the Board, in its sole
discretion, may arrange with the surviving, continuing, successor or purchasing
corporation, as the case may be (the "Acquiring Corporation"), for the Acquiring
Corporation to assume the Company's rights and obligations under the Plan. All
Purchase Rights shall terminate effective as of the date of the Transfer of
Control to the extent that the Purchase Right is neither exercised as of the
date of the Transfer of Control nor assumed by the Acquiring Corporation.
14. Capital Changes. In the event of changes in the Common
Stock due to a stock split, reverse stock split, stock dividend,
recapitalization, combination, reclassification, or like change in the Company's
capitalization, or in the event of any merger (including a merger effected for
the purpose of changing the Company's domicile), sale or other reorganization,
appropriate adjustments shall be made by the Company in the securities subject
to purchase under a Purchase Right, the Plan's share reserve, the number of
Shares subject to a Purchase Right, and in the purchase price per Share.
15. Transferability. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of a Purchase
Right or to receive Shares under the Plan may be assigned, transferred, pledged
or disposed of in any manner otherwise than by will or the laws of descent and
distribution and Purchase Rights shall be exercisable during the lifetime of the
Participant only by the Participant. Any attempted assignment, transfer, pledge
or other disposition shall be without effect, except that the Company may treat
such act as an election to withdraw from an Offering pursuant to Section 11(a).
16. Reports. Each Participant who exercised all or part of his
or her Purchase Right for an Offering Period shall receive, as soon as
practicable after the Purchase Date of such Offering Period, a report of such
Participant's account setting forth the total payroll deductions accumulated,
the number of whole and fractional Shares purchased, the purchase price and fair
market value of such Shares and the date of purchase. In addition, each
Participant shall be provided information concerning the Company equivalent to
that information generally made available to holders of Common Stock.
17. Plan Term. This Plan shall continue until terminated by
the Board or until all of the Shares reserved for issuance under the Plan have
been issued.
18. Restriction on Issuance of Shares. The issuance of Shares
under the Plan shall be subject to compliance with all applicable requirements
of foreign, federal or state law
8
<PAGE>
with respect to such securities. A Purchase Right may not be exercised if the
issuance of Shares upon such exercise would constitute a violation of any
applicable foreign, federal or state securities laws or other law or
regulations. In addition, no Purchase Right may be exercised unless (i) a
registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
Shares issuable upon exercise of the Purchase Right, or (ii) in the opinion of
legal counsel to the Company, the Shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
19. Legends. The Company may at any time place legends or
other identifying symbols referencing any applicable foreign, federal and/or
state securities law restrictions or any provision convenient in the
administration of the Plan on some or all of the certificates representing
Shares issued under the Plan. The Participant shall, at the request of the
Company, promptly present to the Company any and all certificates representing
Shares acquired pursuant to a Purchase Right in the possession of the
Participant in order to carry out the provisions of this Section.
20. Notification of Sale of Shares. The Company may require
the Participant to give the Company prompt notice of any disposition of Shares
acquired by exercise of a Purchase Right within two years from the date of
granting such Purchase Right or one year from the date of exercise of such
Purchase Right. The Company may require that until such time as a Participant
disposes of Shares acquired upon exercise of a Purchase Right, the Participant
shall hold all such Shares in the Participant's name (and not in the name of any
nominee) until the lapse of the time periods with respect to such Purchase Right
referred to in the preceding sentence. The Company may direct that the
certificates evidencing Shares acquired by exercise of a Purchase Right refer to
such requirement to give prompt notice of disposition.
21. Amendment or Termination of the Plan. The Board may at any
time amend or terminate the Plan, except that such termination shall not affect
Purchase Rights previously granted under the Plan, nor may any amendment make
any change in a Purchase Right previously granted under the Plan that would
adversely affect the right of any Participant (except to the extent permitted by
the Plan or as may be necessary to qualify the Plan as an employee stock
purchase plan pursuant to Section 423 of the Code or to obtain qualification or
registration of the Shares under applicable foreign, federal or state securities
laws). In addition, an amendment to the Plan must be approved by the
shareholders of the Company within twelve (12) months of the adoption of such
amendment if required under any applicable law, including Rule 16b-3 and Section
423 of the Code.
[SIGNATURE PAGE FOLLOWS]
9
<PAGE>
The foregoing BTI Telecom Corp. Employee Stock Purchase Plan was duly
adopted by the Board of Directors and sole shareholder of the Company on the ___
day of July 1999.
IN WITNESS WHEREOF, the BTI Telecom Corp. Employee Stock Purchase Plan
is hereby executed by the undersigned duly authorized officer of the Company
this ____ day of July 1999.
BTI TELECOM CORP.
By:
------------------------
Name:
----------------------
Title:
---------------------
THIRD AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT
THIS THIRD AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT (the
"Agreement") is made and entered into as of this 15th day of July, 1999, between
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation having an office at
3379 Peachtree Road, N.E., Suite 600, Atlanta, Georgia 30326, as lender and
agent ("Lender"), and BUSINESS TELECOM, INC., a North Carolina corporation
having an office at 4300 Six Forks Road, Raleigh, North Carolina 27609
("Borrower").
W I T N E S S E T H:
WHEREAS, Lender and Borrower are party to that certain Second Amended
and Restated Loan Agreement, dated as of September 22, 1997 (as the same has
been amended by (i) that certain First Amendment to Second Amended and Restated
Loan Agreement, dated May 6, 1998 and (ii) that certain Second Amendment to
Second Amended and Restated Loan Agreement, dated June 30, 1998, as so amended,
the "Loan Agreement;" all capitalized terms used herein and not otherwise
expressly defined herein shall have the respective meanings given to such terms
in the Loan Agreement); and
WHEREAS, Lender and Borrower desire to amend the Loan Agreement as set
forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:
Amendments to the Loan Agreement. The Loan Agreement is hereby amended
as follows:
(a) The Loan Agreement is hereby amended by making the
following changes to Section 6.11 thereof:
(i) Section 6.11(d) is hereby amended by
deleting the reference to the number "($1,000,000)" therefrom and inserting
in lieu thereof the number "($2,000,000)".
(ii) Section 6.11(e) is hereby deleted in
its entirety and the following is inserted in lieu thereof:
(e) Accounts Payable. Borrower shall not
permit as of the end of any Fiscal Month its Accounts Payable
Outstanding to exceed 85 days; provided, however, that for the
<PAGE>
Fiscal Months of April 1999, May 1999, June 1999 and July
1999, Borrower shall not permit its Accounts Payable
Outstanding to exceed 140 days.
Representations, Warranties, Covenants and Acknowledgments;
Release. To induce Lender to enter into this Agreement:
a. Borrower does hereby represent and warrant that (i) as of the date hereof,
all of the representations and warranties made or deemed to be made under the
Loan Documents are true and correct, except such representations and warranties
which, by their express terms, are applicable only to the Closing Date, (ii) as
of the date hereof, after giving effect to the terms hereof, there exists no
Default or Event of Default under the Loan Agreement or any of the Loan
Documents, (iii) Borrower has the power and is duly authorized to enter into,
deliver and perform this Agreement, and (iv) this Agreement and each of the Loan
Documents is the legal, valid and binding obligation of the Borrower enforceable
against it in accordance with its terms; and
b. Borrower does hereby reaffirm each of the agreements, covenants, and
undertakings set forth in the Loan Agreement and each and every other Loan
Document executed in connection therewith or pursuant thereto as if Borrower
were making said agreements, covenants and undertakings on the date hereof; and
c. Borrower does hereby acknowledge and agree that no right of offset, defense,
counterclaim, claim, causes of action or objection in favor of Borrower against
Lender exists arising out of or with respect to (i) the Obligations, this
Agreement, the Loan Agreement or any of the other Loan Documents, (ii) any other
documents now or heretofore evidencing, securing or in any way relating to the
foregoing or (iii) the administration or funding of the Revolving Credit Loans
or the Capex Facility; and
d. Borrower does hereby expressly waive, release and relinquish any and all
defenses, setoffs, claims, counterclaims, causes of action or objections, if
any, against Lender.
Conditions Precedent. The effectiveness of this Agreement is subject to the
following conditions precedent:
e. Delivery of Documents. Borrower shall have delivered to Lender, all in form
and substance acceptable to Lender in its sole discretion, (i) executed
counterpart originals of this Agreement, (ii) an Acknowledgment and Consent of
Guarantor, in form and substance satisfactory to Lender, and (iii) such other
documentation as Lender may reasonably require in connection herewith; and
f. Accuracy of Representations and Warranties. All of the representations and
warranties made or deemed to be made in this Agreement and under the Loan
Documents shall be true and correct as of the date of this Agreement, except
such representations and warranties which, by their terms, are applicable to a
prior specific date or period; and
g. Expenses. Borrower shall have paid to Lender the costs and expenses referred
to in
<PAGE>
Section 5 hereof.
Effect of this Agreement. As expressly amended hereby, the Loan
Agreement shall be and remain in full force and effect as originally
written, and shall constitute the legal, valid, binding and enforceable
obligations of Borrower to Lender.
Expenses. Borrower agrees to pay on demand all reasonable costs and
expenses of Lender in connection with the preparation, execution,
delivery and enforcement of this Agreement and all other documents and
any other transactions contemplated hereby, including, without
limitation, the reasonable fees and out-of-pocket expenses of legal
counsel to Lender. Borrower authorizes Lender, as Agent, to charge the
foregoing expenses to the Borrower's loan account by increasing the
principal amount of the Revolving Credit Loans by the amount of such
expenses owed by Borrower in connection herewith.
Miscellaneous. Borrower agrees to take such further action as Lender
shall reasonably request in connection herewith to evidence the
amendments herein contained to the Loan Agreement. This Agreement may
be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which, when so executed and
delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same
instrument. This Agreement shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties hereto.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Georgia.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have caused this
Agreement to be duly executed as of the date first above written.
BUSINESS TELECOM, INC.
By:____________________________________
Name:
Title:
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
GENERAL ELECTRIC CAPITAL
CORPORATION, AS AGENT AND LENDER
By:____________________________________
Elaine L. Moore
Senior Vice President as duly authorized
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT
The undersigned hereby acknowledges and agrees to the foregoing
Third Amendment to Second Amended and Restated Loan Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands
and seals this ___ day of July, 1999.
BTI TELECOM CORP.
By:_________________________________
Its:________________________________
ACKNOWLEDGMENT AND AGREEMENT
The undersigned hereby acknowledges that the foregoing Third
Amendment to Second Amended and Restated Loan Agreement shall not
affect the enforceability or validity of any Loan Document executed by
the undersigned.
________________________________(Seal)
Peter T. Loftin
Exhibit 10.16
SENIOR EXECUTIVE
SEVERANCE AGREEMENT
-------------------
THIS SEVERANCE AGREEMENT (the "Agreement") is made as of December 21, 1998
between BUSINESS TELECOM, INC., a North Carolina corporation (the "Company"),
and __________ ("Employee").
Recitals
A. Employee is employed by the Company as an executive officer, and as such,
the Company recognizes the valuable services performed by Employee for the
Company and wishes to encourage his continued employment.
B. Employee desires to be assured that he or his family will be entitled to a
certain amount of compensation and benefits for some definite period of
time upon the occurrence of various events.
C. The parties desire to enter into this agreement to provide the terms and
conditions upon which the Company will pay severance benefits to Employee
or his family upon the occurrence of various events.
Statement of Agreement
In consideration of the foregoing and the promises and covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
1. Definitions. Whenever used in this Agreement, the following terms shall
have the meanings respectively assigned to them in this Section 1:
(a) "BTI Telecom" shall mean BTI Telecom Corp., a North Carolina
corporation.
(b) "Cause" shall mean the occurrence of any one or more of the following
events:
(i) Falsification of Company and/or BTI Telecom documents and
records, including, without limitation, financial/revenue
reports of all types, employment applications, time sheets, or
sales agreements;
(ii) Revealing proprietary Company or BTI Telecom information or
customer account information to unauthorized Company or
non-Company personnel, except as may otherwise be required by
law;
(iii) Reporting to work under the influence of any controlled
substance, or the use of any controlled substance on Company
property, except for alcohol provided by or on behalf of the
Company at Company-sponsored events;
(iv) Misuse, misappropriation or unauthorized removal of Company
property or the property of any Company personnel; or
(v) The making of a bona fide charge of discrimination or sexual
harassment by another employee of the Company or by an attendee
while at a Company-sponsored event or at any event at which
Employee served as a representative of the Company.
<PAGE>
(c) "Change in Control of BTI Telecom" shall mean the occurrence of one of
the following events: (i) the date Mr. Loftin is no longer the
"beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of securities of BTI Telecom representing at
least 50% of the combined voting power of BTI Telecom's then
outstanding securities if, but only if, such date is prior to the date
upon which the Company registers its equity securities under the 1933
Securities Act; (ii) the date Mr. Loftin is no longer the chairman of
the board of BTI Telecom; or (iii) the closing date with respect to
the sale of the Company to a third party, whether such sale is
structured as an asset, stock, merger, or other similar type of
transaction.
(d) "Mr. Loftin" shall mean Peter T. Loftin.
(e) "Separation Event" shall mean the termination of Employee's employment
with the Company for any reason within three (3) years after the date
of a Change in Control of BTI Telecom (the "Termination Period").
Other terms used in this Agreement are defined in other provisions of this
Agreement and shall have the respective meanings given such terms in those
provisions.
2. Employment. Employee shall, so long as he remains in the active employment
of the Company, devote his full business time, attention, energy and skill
to the Company's business and not actively engage, either directly or
indirectly, in any business or other activity which is or may be deemed in
any way competitive with or adverse to the best interest of the Company's
business.
3. Severance Benefits. In consideration of Employee remaining an employee of
the Company, if there is a Separation Event, then Employee shall receive
the following:
(a) Severance pay in an amount equal to three (3) times the sum of the
following received by Employee in the most recent full calendar year
prior to the date of the Separation Event (except for commissions,
which shall be calculated in the manner set forth below):
(i) annual base salary, plus
(ii) all cash bonuses, plus
(iii) the average of all commissions received by Employee in the most
recent full two (2) calendar years prior to the date of the
Separation Event; less
(iv) all applicable withholding taxes and deductions.
Such foregoing sum shall be payable over the three (3) year period
following the date of the Separation Event in accordance with the
Company's general policies for the payment of compensation to its
personnel.
(b) Fringe benefits and perquisites provided by the Company to Employee
immediately prior to the date of the Separation Event until the
earlier of three (3) years from the date of the Separation Event or
the date any such fringe benefit or perquisite is provided by another
employer to Employee; provided, however, that Employee shall have no
right to participate in any pension, profit sharing, 401(k), or
similar plan offered by the Company.
(c) The continued use of the Company vehicle then used by the Employee in
his employment until the earlier of twelve (12) months from the date
of the Separation Event or the date another vehicle is provided by
another employer to the Employee (the "Vehicle Period"). During the
Vehicle Period, the Company shall be responsible for all
2
<PAGE>
applicable insurance, personal property tax and all repairs and
maintenance required to maintain such vehicle in proper working order
and condition (ordinary wear and tear excepted).
(d) The payment or reimbursement of all reasonable expenses incurred by
Employee for executive out-placement services for no more than a
twelve (12) month period from the date of the Separation Event;
provided, however, that the Company's obligation of payment or
reimbursement of such expenses is limited to Ten Thousand Dollars
($10,000.00).
In the event the Separation Event is the death of Employee or in the
event of Employee's death prior to the expiration of the three (3) year
payment period set forth in Subsection 3(a), above, the Company shall make
or continue to make, as the case may be, the payments set forth in
Subsection 3(a), above, during the three (3) year payment period or the
remainder of the three (3) year payment period, as the case may be, to
Employee's beneficiary designated by Employee on Exhibit A, which is
attached hereto and incorporated herein by reference. If Employee fails to
designate any such beneficiary, the payments shall be made to Employee's
surviving spouse, or if no surviving spouse, then to Employee's estate.
4. Other Termination of Employment. If Employee terminates his employment with
the Company at any time other than during the Termination Period or the
Company terminates the Employee at any time for Cause, no benefits shall
become due and payable under Section 3, above, and this Agreement shall be
considered terminated with respect to Employee.
5. Corporate Assets. No provision in this Agreement, or any action taken
pursuant to its provisions by either party, shall create, or be construed
to create, a trust of any kind, or a fiduciary relationship between the
Company and the Employee, his designated beneficiary, other beneficiaries
of Employee, or any other person. The payments to Employee, his designated
beneficiary, or any other beneficiary shall be made from assets which shall
continue to be a part of the general assets of the Company. No person shall
have, by virtue of the provisions of this Agreement, any interest in the
Company's assets. To the extent that any person acquires a right to receive
payments or benefits from the Company under this Agreement, the right shall
be no greater than the right of any unsecured general creditor of the
Company.
6. No-Employment Contract. Nothing contained in this Agreement shall be
construed as a contract of employment for any term of years, nor as
conferring upon Employee the right to continue as an employee of the
Company in any capacity. It is understood by the parties that this
Agreement relates exclusively to severance benefits payable after
termination of Employee's employment with the Company, and is not intended
to be an employment contract.
7. Employee's Capacity. Employee represents and warrants to the Company that
he has the capacity and right to enter into this Agreement without any
restriction whatsoever by any other agreement, other document or otherwise.
8. Complete Agreement. This document contains the entire agreement between the
parties regarding severance arrangements and supersedes any prior
discussions, negotiations, representations, or agreements between them
relating to severance arrangements for Employee. No additions or other
changes to this Agreement shall be made or be binding on either party
unless made in writing and signed by each party to this Agreement.
3
<PAGE>
9. Notices. All notices and other communications under this Agreement to any
party shall be in writing and shall be deemed given when delivered
personally, via facsimile (which is confirmed) to that party at the
telecopy number for that party set forth below, mailed by certified mail
(return receipt requested) to that party at the address for that party set
forth below (or at such other address for such party as such party shall
have specified in notice to the other party), or delivered to Federal
Express, UPS, or any similar express delivery service for delivery to that
party at that address:
(a) If to the Company:
Business Telecom, Inc.
4300 Six Forks Road
Raleigh, North Carolina 27609
Attention: Anthony M. Copeland, Secretary
Facsimile No.: (919) 863-7098
(b) If to the Employee:
___________________________________
___________________________________
___________________________________
Facsimile No.: (___) _____-_______
10. Governing Law. All questions concerning the validity, intention, or meaning
of this Agreement or relating to the rights or obligations of the parties
with respect to performance hereunder shall be construed and resolved under
the laws of North Carolina.
11. Severability. The intention of the parties to this Agreement is to comply
fully with all laws and public policies, and this Agreement shall be
construed consistently with all laws and public policies to the extent
possible. If and to the extent that any court of competent jurisdiction
determines that it is impossible or violative of any legal prohibition to
construe any provision of this Agreement consistently with any law, legal
prohibition, or public policy and consequently holds that provision to be
invalid or prohibited, that shall in no way affect the validity of the
other provisions of this Agreement which shall remain in full force and
effect.
12. Nonwaiver. No failure by any party to insist upon strict compliance with
any term of this Agreement, to exercise any option, enforce any right, or
seek any remedy upon any default of any other party shall affect, or
constitute a waiver of, the first party's right to insist upon such strict
compliance, exercise that option, enforce that right, or seek that remedy
with respect to that default or any prior, contemporaneous, or subsequent
default; nor shall any custom or practice of the parties at variance with
any provision of this Agreement affect or constitute a waiver of, any
party's right to demand strict compliance with all provisions of this
Agreement.
13. Captions. The captions of the various sections of this Agreement are not
part of the context of this Agreement, but are only labels to assist in
locating those sections, and shall be ignored in construing this Agreement.
4
<PAGE>
14. Successors. This Agreement shall be personal to Employee and no rights or
obligations of Employee under this Agreement may be assigned by him. Except
as described in the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by and against the
respective heirs, legal representatives, successors, and assigns of each
party to this Agreement.
BUSINESS TELECOM, INC.
By:/s/ Peter T. Loftin, Chairman
-----------------------------
Peter T. Loftin, Chairman
5
<PAGE>
EXHIBIT A
DESIGNATION OF BENEFICIARY
- --------------------------
I,_____________, hereby designate the following individual or individuals
as my beneficiary(ies) to receive payments in the event of my death in the
following percentages (which must total 100%) in accordance with Section 3 of
the Severance Agreement to which this Exhibit A is attached:
Beneficiary(ies) Percentage of Payment
---------------- ---------------------
(1) Name: ______________________ ______%
Address: ______________________
______________________
______________________
SS No.: ______________________
Telephone: (_____)_______-_______
(2) Name: ______________________ ______%
Address: ______________________
______________________
______________________
SS No.: ______________________
Telephone: (_____)______-________
(3) Name: ______________________ ______%
Address: ______________________
______________________
______________________
SS No.: ______________________
Telephone: (_____)_____-_________
(4) Name: ______________________ ______%
Address: ______________________
______________________
______________________
SS No.: ______________________
Telephone: (_____)____-__________
____________________________
(signature)
____________________________
(print name)
____________________________
(date)
6
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 17, 1999, in the Registration Statement (Form
S-1 No. 333- ) and related Prospectus of BTI Telecom Corp. dated July 16,
1999.
/s/ Ernst & Young LLP
Raleigh, North Carolina
July 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 46,249
<SECURITIES> 0
<RECEIVABLES> 36,435
<ALLOWANCES> 6,301
<INVENTORY> 0
<CURRENT-ASSETS> 65,872
<PP&E> 176,070
<DEPRECIATION> 35,886
<TOTAL-ASSETS> 233,364
<CURRENT-LIABILITIES> 79,652
<BONDS> 281,863
0
0
<COMMON> 2,280
<OTHER-SE> (132,298)
<TOTAL-LIABILITY-AND-EQUITY> 233,364
<SALES> 0
<TOTAL-REVENUES> 119,179
<CGS> 0
<TOTAL-COSTS> 77,313
<OTHER-EXPENSES> 48,843
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,474
<INCOME-PRETAX> (20,451)
<INCOME-TAX> (5)
<INCOME-CONTINUING> (20,446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,446)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
