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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-41723
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BTI Telecom Corp.
(Exact name of registrant as specified in our charter)
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North Carolina 56-2047220
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
4300 Six Forks Road Suite 500 Raleigh, 27609
North Carolina (Zip Code)
(Address of principal executive
offices)
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Registrant's telephone number, including area code: 800-849-9100
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
No stock is held by non-affiliates of the registrant. As of February 29,
2000, the registrant had outstanding 92,397,661 shares of Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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NOTE RELATING TO FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report that are not historical
facts, including some statements made in the sections of this report entitled
"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 21E of the Securities Exchange
Act of 1934. 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:
. the rate of expansion of our network and/or customer base;
. inaccuracies in our forecasts of telecommunications traffic or
customers;
. loss of a customer that provides us with significant revenues;
. loss of sales representatives, dealers or agents;
. highly competitive market conditions;
. changes in or developments under laws, regulations, licensing
requirements or telecommunications standards;
. changes in technology;
. changes in the availability of transmission facilities;
. changes in retail or wholesale telecommunications rates;
. 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
. general economic conditions.
PART I
Item 1. 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 December 31, 1999, we had
sold 94,000 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. In August 1999, we began the process of rolling out
high-speed data and Internet access services using digital subscriber line, or
DSL, technology. By leveraging our existing 48 co-locations in incumbent local
exchange carrier central offices, our two stand-alone digital loop carrier, or
DLC, sites and our network of frame relay switches, we have the infrastructure
in place to rapidly penetrate the market for DSL services in our target
region. As of December 31, 1999, we had sold approximately 300 DSL lines.
In addition to our retail services, we offer wholesale services, including
switched, private line, special access and prepaid calling card services, to
other telecommunications carriers and end-user customers.
As of December 31, 1999, we had approximately 50,000 customers including
30,000 small and medium-sized businesses.
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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:
. offer higher margin services, such as data and private line services;
. improve our margins by transitioning large portions of our traffic onto
our network; and
. control the quality of service and improve the delivery of services to
our customers.
As of December 31, 1999, we had:
. approximately 2,900 route miles of fiber optic network in operation,
equipped with Nortel OC-48 and DWDM, or dense wavelength division
multiplexing, technology;
. a 100-mile local fiber optic network equipped with Nortel optronics,
operating in the Raleigh and Research Triangle Park area of North
Carolina;
. 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;
. five long distance switching centers equipped with Alcatel MegaHub 600E
switching systems in Atlanta, Dallas, New York, Orlando and Raleigh;
. Alcatel network equipment colocated in 48 incumbent local exchange
carrier central offices and at two stand-alone sites;
. fourteen Lucent frame relay switches located in Raleigh (2), Charlotte,
Wilmington, Greensboro and Rocky Mount, North Carolina; Orlando, Tampa
and Jacksonville, Florida; Atlanta, Georgia; Dallas, Texas; Columbia and
Greenville, South Carolina; and New York, New York.
We lease additional network capacity primarily through our membership in the
Associated Communication Companies of America ("ACCA"), a 10-member trade
association which we co-founded 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.
To leverage our regional network infrastructure, we offer wholesale switched
and dedicated access telecommunications services. Our wholesale business
provides services to other telecommunications carriers including Nextel, GTE,
Sprint, BellSouth Mobility, UUNet, PSI Net, CCI (McLeod), Intermedia, ITC
DeltaCom and MCI WorldCom. In addition, during 1999 we significantly expanded
our offerings of prepaid calling card services to wholesale distributors and
service providers.
Business Strategy
Our objective is to strengthen our market position as a leading integrated
communications provider in the southeastern United States. We believe that the
southeastern United States has attractive demographics that should provide
significant opportunities to increase revenues and gain market share in the
region. As part of our expansion strategy, we may make acquisitions and enter
into joint ventures or strategic alliances with businesses that are related or
complementary to our current operations; however, we have no current
understanding, commitment or agreement with respect to any material
transactions.
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The principal elements of our business strategy include:
. Continue to penetrate the local exchange market. We began deploying our
own local switches and colocating digital loop carriers in incumbent
local exchange carrier central offices in the first quarter of 1998. As
of December 31, 1999, we offered local services over our own facilities
in nine markets. We intend to continue deploying our own infrastructure
in key southeastern markets.
. Leverage local network infrastructure to exploit the DSL services
opportunity. We now have 48 co-locations in incumbent local exchange
carrier central offices and two stand-alone DLC sites. With our
infrastructure and extensive technical expertise, we are well positioned
to rapidly deploy DSL to meet the growing demand for high-speed data
services.
. Accelerate the deployment of frame relay and ATM switches. We are in the
process of deploying additional frame relay and asynchronous transfer
mode ("ATM") switches to meet the needs of existing and new business
customers. These switching technologies provide more efficient and
secure transmission of large volumes of data typically sent in bursts
from one site to another.
. 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.
. Leverage our existing customer base and brand name. We currently have
30,000 small and medium-sized business customers. As a result of our 16-
year history of providing high-quality telecommunications services, we
are recognized as a premier alternative provider of a full suite of
integrated voice and data services. Our large customer base and widely
recognized name provide us the opportunity to further penetrate our
existing customer base with additional services and attract new
customers.
. 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.
. Build market share through personalized sales, marketing and customer
service. We provide our customers with personalized contact for sales,
marketing and customer service that we believe improves customer
acquisition and retention.
. 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.
. 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.
. 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.
Services
We offer (1) integrated retail voice services, which currently include long
distance, local, paging, advanced intelligent network ("AIN") applications,
operator and other enhanced services; (2) data services, which include dial-up
and dedicated Internet service, DSL high-speed Internet access, private line,
frame relay and ATM services; and (3) wholesale voice services, including
switched/dedicated access, and prepaid calling card services. For the year
ended December 31, 1999, these three services represented 56.2%, 10.6% and
33.2%, respectively, of our total revenues.
As of December 31, 1999, we provided integrated retail services to
approximately 30,000 small and medium-sized business customers located
primarily in the southeastern United States as well as to more than 20,000
residential and collegiate customers.
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Integrated Retail Voice Services. Our integrated retail voice services include
the following:
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.
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.
Advanced Intelligent We offer AIN 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-
Services free and operator- 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.
Data Services. Our data services include the following:
Internet 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.
DSL We offer xDSL technologies utilizing Alcatel and
Teltrend DSL 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 50 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 agreements with Covad and
NorthPoint to resell their DSL services in markets
where we have not installed our own equipment.
Private Line Our private line services provide telecommunications
Services connectivity between a customer's different locations
to transmit voice, video or data in a variety of
bandwidths from DS-0 to OC-48.
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Frame Relay
We offer frame relay services on the Lucent STDX-9000
switching platform. Our frame relay services offer
customers an efficient method of data transport up to
T-1 speeds. Frame relay allows our customers to more
efficiently meet their data transfer needs for such
applications as Internet access, local area network
interconnection and complex systems network
architectures.
ATM We offer ATM services, which are high-bandwidth, low-
delay, connection-oriented switching and multiplexing
techniques for data transfer. ATM allows for the
simultaneous high-speed transfer of voice, data and
video in a more efficient manner than traditional
methods.
Wholesale Services. Our wholesale voice services include the following:
Switched/Dedicated We offer 1+ domestic call origination and termination
Services 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 ("LATA") services.
Prepaid Calling Card We provide prepaid calling card services, including
Services such features as private label branding, recharge
capabilities, multilingual instructions and 24-hour
customer support.
As of December 31, 1999, we provided wholesale services to more than 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.
Implementation of Local Telecommunications Services
We began offering local exchange services in selected markets in the
southeastern United States in November 1997. We have installed 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.
We are also colocating digital loop carriers in incumbent local exchange
carrier ("ILEC") central offices in these markets to facilitate cost-effective
service to smaller customers. As these facilities become operational, we will
be able to provide a greater percentage of our local service via our own
facilities, which should improve margins and the competitiveness of our
pricing.
In connection with offering local exchange services, we entered into the
BellSouth Interconnection Agreement to (1) resell BellSouth's local exchange
services and (2) interconnect our network with BellSouth's network for the
purpose of gaining access to the unbundled network elements necessary to
provide local exchange services. The BellSouth Interconnection Agreement
contains most favored nation provisions which grant us the right to obtain the
benefit of any arrangements entered into during the term of the agreement
between BellSouth and any other carrier that materially differ from the rates,
terms or conditions of the BellSouth Interconnection Agreement. The initial
term of the BellSouth Interconnection Agreement expired in January 1999;
however it continued in effect until a new agreement was executed on February
21, 2000.
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Our ability to provide local switched services in our other target markets
is dependent upon obtaining favorable interconnection agreements with local
exchange carriers. In addition to the BellSouth Interconnection Agreement, we
have entered into interconnection agreements with GTE, Sprint, Bell Atlantic
and Southwestern Bell, and are currently negotiating interconnection
agreements with other local exchange carriers. Changes in the regulatory
environment could make negotiating such agreements more difficult and
protracted, and there can be no assurance that we will be able to obtain
interconnection agreements on acceptable terms.
Rollout of High-speed 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 positioning ourselves 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 December 31, 1999, we had installed 14 frame
relay switches. These switches allow for a more cost-effective solution for
our customers while providing us with a higher operating margin. We have
colocated network equipment in 48 incumbent local exchange carrier central
offices throughout the southeastern United States, in addition to two stand-
alone DLC sites which we own. In August 1999, we began 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.
Our DSL service is offered under the brand name D.S.LynxTM. We launched
D.S.Lynx in October 1999 in conjunction with the NHL Carolina Hurricanes'
season opener at the Raleigh Entertainment and Sports Arena. As part of our
Hurricanes sponsorship, we provide all local and long distance service to the
team and the new Arena. The Arena is the location of one of our two stand-
alone DLC sites.
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:
. local service;
. frame relay services;
. private line services;
. Internet services;
. paging and personal messaging;
. conference calling services; and
. operator services.
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Across both sales channels, these specialists support sales efforts by:
. meeting with customers and prospects;
. conducting competitive analysis;
. providing preliminary pricing services;
. providing continued training for the sales forces; and
. 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
December 31, 1999, we employed more than 200 direct sales representatives
working in 23 sales offices located throughout the southeastern United States.
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, a sales administrator who
tracks sales and order flow for that office and specialists who support sales
efforts. 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:
Charlotte, NC Wilmington, NC Atlanta, GA Northern VA
Chapel Hill, NC Winston-Salem, Ft. Lauderdale, Richmond, VA
Fayetteville, NC FL Roanoke, VA
NC Charleston, SC Jacksonville, Knoxville, TN
Greensboro, NC Columbia, SC FL Nashville, TN
Greenville, NC Greenville, SC Orlando, FL
Raleigh, NC Alpharetta, GA Tampa, FL
Norfolk, VA
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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 our members in return
for being endorsed as a preferred vendor. As of December 31, 1999, more than
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
December 31, 1999, there were more than 35 colleges and universities
participating in the Academic Edge Program.
In 1998 and 1999, sales through our direct sales force accounted for
approximately 70.3% and 74.1%, respectively, of our integrated retail services
revenue.
Independent Dealer and Agent Sales. In 1992 we established a network of
independent dealers and agents 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, North Carolina. In 1998 and 1999, sales through our
authorized independent dealers and agents accounted for approximately 29.7%
and 25.9%, respectively, 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 18 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, including the BTI
Center for the Performing Arts in Raleigh, North Carolina. We currently
provide local and long distance services to the Carolina Hurricanes and Tampa
Bay Lightning, two National Hockey League teams, and the arenas where the
teams play, in return for certain advertising rights. We also market our
wholesale services through trade journals, event sponsorships, trade shows and
direct mail campaigns.
Network Facilities
We operate an advanced telecommunications network including five digital
switches interconnected by owned and leased transmission capacity. In
addition, we have installed Lucent 5ESS local switches in Raleigh,
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Charlotte, Greensboro and Wilmington, North Carolina; Columbia and Greenville,
South Carolina; Atlanta, Georgia; and Orlando and Jacksonville, Florida. As of
December 31, 1999, we had also deployed 48 digital loop carriers in ILEC
central offices to facilitate providing cost-effective local service to
smaller business customers, as well as two stand-alone digital loop carriers.
Furthermore, we have installed 14 Lucent 9000 switches to enhance our
network's frame relay operations. We currently have Alcatel MegaHub 600E
switching systems in Raleigh, Atlanta, Dallas, New York and Orlando. We own
and operate a gateway pair of Alcatel Signaling Transfer Points ("STPs") in
Atlanta and Raleigh to provide SS7 common channel signaling throughout our
network. The SS7 signaling system reduces connect time delays and provides
additional technical capabilities and efficiencies for call routing. Our
network has also been designed to use AIN applications technology to allow us
greater flexibility in data management and feature development. Our investment
in digital switching, SS7 signaling and AIN applications technology has
significantly increased network capacity, which has lowered the cost of
providing services and enabled us to sell excess capacity to other
telecommunications carriers.
In October 1997, we entered into an agreement with Qwest to lease on an
indefeasible right of use ("IRU") basis approximately 3,375 route miles of
fiber optic network to serve markets from New York to Miami and Atlanta to
Nashville. We have selected Nortel to provide optronics and dense wavelength
division multiplexing ("DWDM") equipment for this network. We believe that
this network, which is expected to be completed during the second quarter of
2000, will enable us to carry a significant portion of our intraregional
telecommunications traffic over our own facilities, thereby reducing our cost
of services by decreasing payments to other carriers for use of their
transport facilities. We lease fiber optic network capacity from major
facilities-based carriers (including AT&T and MCI WorldCom) either on our own
or through our membership in the ACCA.
The extent and manner of expansion of our fiber optic network in the future
will be based on various factors, including:
(1) the number of our customers and volume of their telecommunications
traffic in a market;
(2) the anticipated operating cost savings associated with the
transmission of the telecommunications traffic in a given area using
Company-owned facilities in lieu of capacity purchased from other
operators; and
(3) the expenditures required to acquire (by construction, purchase or
long-term lease) the required network facilities.
We also operate a fiber optic network extending approximately 100 route
miles in North Carolina, linking Raleigh, Durham and the Research Triangle
Park area, to provide services in the Raleigh market. This network was built
in a ring configuration in order to ensure redundancy, deploying throughout a
self-healing SONET architecture, high-quality fiber and advanced transmission
electronics.
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 toward business combinations and alliances in the
telecommunications industry might create significant new competitors for 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.
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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 might further increase the number of
competitors.
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 2000 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. The FCC
recently approved Bell Atlantic's provision of in-region long distance
services in New York. Southwestern Bell has an application pending with the
FCC to provide these services in Texas.
We expect continued long distance price declines because some carriers are
expanding their capacity. Broadwing, 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 our 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 its
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 we currently offer, excluding long
distance. Incumbent local exchange carriers benefit from:
. long-standing relationships with our target customers,
. greater financial and technical resources,
. the ability to subsidize local services from revenues in unrelated
businesses, and
. 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
11
<PAGE>
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 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 provide transparency to customers
and competitors. The Telecommunications Act of 1996 has increased competition
in the local telecommunications business. The Telecommunications Act:
. 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 permit such interconnection at any technologically
feasible point and allow requesting carriers to collocate equipment on
their premises;
. 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;
. requires all local exchange providers to offer their services for resale
without unreasonable conditions;
. requires incumbent local exchange carriers to offer to requesting
telecommunications carriers certain network elements on an unbundled
basis;
. requires incumbent local exchange carriers to offer to requesting
telecommunications carriers the services they provide to end users to
those other carriers at wholesale rates;
. requires all local exchange providers to permit competing carriers
access to poles, ducts, conduits and rights of way at regulated prices;
and
. 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 might offer competing products with
prices 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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<PAGE>
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. Recently, the FCC authorized
Bell Atlantic to provide in-region long distance services in New York and
Southwestern Bell has applied for such authority in Texas. 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 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
13
<PAGE>
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 upheld
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 us,
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 we, 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 us, to
contribute to universal service support. These contributions are assessed
based on certain interstate and international end user telecommunications
revenues. The revenues for the high cost and low-income fund are estimated
quarterly based on certain interstate and gross end user telecommunications
revenues. The revenues for the schools and libraries and rural health-care
fund are our estimated quarterly on interstate and international gross end
user telecommunications revenues. We may pass these costs on to our
subscribers.
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
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<PAGE>
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 our 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 our 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
our identification of the network elements that must be unbundled. On remand
the FCC largely retained its list of unbundled elements, but it eliminated the
requirement that ILECs provide unbundled access to local switching for
customers with four or more lines in the top 50 metropolitan statistical
areas, and the requirement to provide unbundled operator services and
directory assistance. 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 effect 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 August 5, 1999,
the FCC adopted an order granting price cap local exchange carriers additional
pricing flexibility. The order provides certain immediate regulatory relief of
price cap local exchange carriers and sets forth a framework of "triggers" to
provide those companies with greater flexibility to set rates for interstate
access services. The order also initiated a rulemaking to determine whether
the FCC should regulate the access charges of CLECs, such as us.
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
re-examine 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 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
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<PAGE>
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 us 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 rates 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. States also often require prior approval or ratification for
transfers of certain assets, customers and ownership of common carriers and
for issuance of certain debt and equity.
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 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
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<PAGE>
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 December 31, 1999, we employed approximately 980 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 is
currently represented by a collective bargaining agreement. We believe that
our relations with our employees are good.
Item 2. Properties
We lease offices and space in a number of locations, primarily for sales
offices and network equipment installations. We lease approximately 100,000
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 March 2000 and April
2005. In addition, we lease rights-of-way, office space and land for our
network equipment. The leases for the office space and land expire between
February 2003 and October 2009, and the leases for the rights-of-way are
either perpetual or are renewable through 2023. 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.
Item 3. 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 actual monetary damages ranging from $4.0 million to $12.0
million. 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.
Item 4. Submission of Matters to a Vote of Security Holders
By written consent dated December 10, 1999, the sole shareholder of our
common stock voted (1) to amend and restate our articles of incorporation to
provide for the establishment of a new class of stock designated "Series A
Preferred Stock," consisting of 200,000 shares and (2) to restate our bylaws.
The amendments to the articles of incorporation and the bylaws were required
as part of the investment by Welsh, Carson, Anderson & Stowe VIII., L.P. and
two affiliated funds (together, "WCAS") in our Series A preferred stock. The
WCAS investment is discussed in Part II, Item 5 of this Form 10-K. The Series
A preferred stock was issued on December 28, 1999. No vote of holders of the
Series A preferred stock was taken in the fourth quarter of 1999.
17
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
On December 28, 1999, Welsh, Carson, Anderson & Stowe VIII, L.P. and two
affiliated funds (together, "WCAS"), all of which are accredited investors,
purchased an aggregate of 200,000 shares of our Series A preferred stock and
warrants to purchase 4,500,000 shares of our common stock for a purchase price
of $200.0 million. We issued the shares of Series A preferred stock and the
warrants in reliance on the exemption from registration under Section 4(2) of
the Securities Act.
Each share of Series A preferred stock is initially convertible into 116.959
shares of common stock, subject to adjustment for certain dilutive issuances
of our common stock. If not converted, the Series A preferred stock has a 6%
accrued dividend payable upon conversion in cash or in kind at our election.
The purchasers of the Series A preferred stock can redeem the stock at a price
equal to the greater of liquidation value or fair market value upon the later
of December 28, 2006, or six months after the date on which all amounts owing
under our 10 1/2% Senior Notes due 2007 are paid in full. The warrants to
purchase 4,500,000 shares of common stock, subject to adjustment for certain
dilutive issuances, have an exercise price of $0.01 per share and are
exercisable for a period of ten years beginning on the earlier of a change in
control of BTI Telecom, Inc. or December 28, 2002. The warrants are cancelable
in the event we undertake a public offering of our common stock and our stock
achieves certain price levels.
There is no established public trading market for either our common stock or
our Series A Preferred Stock.
As of February 29, 2000, an aggregate of 92,397,661 shares of common stock
was outstanding, all of which was held by one shareholder. At February 29,
2000, WCAS held all of the 200,000 outstanding shares of our Series A
preferred stock. The Series A preferred stock is convertible into shares of
our common stock at any time at the election of WCAS. The conversion rate is
116.959 shares of common stock for every share of Series A preferred stock,
subject to adjustment for certain dilutive issuances of our common stock. Had
WCAS elected to convert the Series A preferred stock into common stock, an
aggregate of 115,789,461 shares of our common stock would have been
outstanding at February 29, 2000, and WCAS would be the holder of 23,391,800
of those shares.
Since our conversion from an S corporation to a C corporation in September
1997, we have only paid cash dividends on our common stock to fund shareholder
tax liabilities arising from periods when we were an S corporation. During
these periods, the shareholders incurred tax liabilities on our behalf due to
income we reported on their individual income tax returns. Restrictions
imposed by our 10 1/2% Senior Notes and our credit facilities do not allow us
to pay dividends except for those to fund the aforementioned tax liabilities.
We anticipate that, for the foreseeable future, any earnings will be retained
for use in our business and, accordingly, we do not anticipate the payment of
cash dividends on our common stock.
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Item 6. Selected Financial and Operating Data
The following selected historical financial and operating data for the five
years ended December 31, 1999 were derived from our audited financial
statements. The selected data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and notes thereto, and other financial
and operating data contained elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data (in thousands,
except per share data):
Revenues................ $114,493 $148,777 $ 194,949 $ 212,554 $ 260,049
Operating expenses:
Cost of services........ 68,199 90,820 139,030 150,901 173,153
Selling, general and
administrative
expenses............... 44,732 53,791 60,131 80,011 105,545
-------- -------- --------- --------- ---------
Total operating
expenses............... 112,931 144,611 199,161 230,912 278,698
-------- -------- --------- --------- ---------
Income (loss) from
operations............. 1,562 4,166 (4,212) (18,358) (18,649)
Interest expense........ (1,297) (1,695) (8,806) (25,430) (28,531)
Other income principally
interest .............. 44 4 2,379 5,555 2,454
Gain on sale of
marketable securities.. 62 131 -- -- --
-------- -------- --------- --------- ---------
Income (loss) before
income taxes........... 371 2,606 (10,639) (38,233) (44,726)
Income taxes............ -- -- -- -- --
-------- -------- --------- --------- ---------
Net income (loss)....... 371 2,606 $ (10,639) $ (38,233) $ (44,726)
======== ======== ========= ========= =========
Proforma income taxes
(a).................... 156 1,094 -- -- --
======== ======== ========= ========= =========
Proforma net income
(loss) (a)............. $ 215 $ 1,512 $ -- $ -- $ --
======== ======== ========= ========= =========
Cash dividends declared
per common share (b)... $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ --
======== ======== ========= ========= =========
Other Data (in
thousands, except ratio
data):
Capital expenditures,
including line access
fees................... $ 10,718 $ 8,401 $ 23,479 $ 69,434 $ 85,050
Depreciation and
amortization........... 3,073 4,471 6,613 11,457 19,412
Net cash provided by
(used in) operating
activities............. 9,446 283 8,211 (6,418) (18,462)
Net cash used in
investing activities... (10,721) (8,681) (133,248) (49,466) (61,267)
Net cash provided by
financing activities... 1,581 8,589 191,542 1,649 153,111
EBITDA(c)............... 4,635 8,637 3,138 (6,854) 1,071
Ratio of earnings to
fixed charges (d)...... 1.2x 1.8x -- -- --
Balance Sheet Data (at
period end and in
thousands):
Working capital
(deficit).............. $ (5,182) $ (3,189) $ 76,842 $ 4,599 $ 73,703
Property and equipment,
net.................... 16,792 21,498 44,577 101,960 166,574
Total assets............ 35,969 48,682 223,550 209,171 334,834
Debt and capital lease
obligations............ 13,553 21,088 251,794 254,882 279,000
Shareholder's equity
(deficit).............. 1,897 2,374 (69,574) (109,842) (219,342)
</TABLE>
- --------
(a) Historical financial information for the two years in the period ended
December 31, 1996, does not include a provision for income taxes because,
prior to the Reorganization (See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations), we were an S
corporation not subject to
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<PAGE>
income taxes. Net income has 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.
(b) The dividends were paid in part to provide funds for tax obligations owed
by BTI's shareholders as a result of BTI's S-corporation status prior to
the Reorganization.
(c) EBITDA consists of income (loss) before interest, income taxes,
depreciation, amortization, other income and expense and non-cash
compensation expense recorded in accordance with APB No. 25. 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.
(d) The ratio of earnings to fixed charges is computed by dividing income
before income taxes and fixed charges (other than capitalized interest) by
fixed charges. Fixed charges consist of interest charges, amortization of
debt issuance costs, and discount or premium related to indebtedness,
whether expensed or capitalized, and that portion of rental expense we
believe to be representative of interest (estimated to be 15% of such
expense). For the years ended December 31, 1997, 1998 and 1999, earnings
were insufficient to cover fixed charges by $10.6 million, $38.2 million
and $44.7 million, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following analysis should be read in conjunction with the financial
statements and notes thereto and the other financial data appearing elsewhere
herein. We have included EBITDA data in the following analysis because it is a
measure commonly used in the telecommunications industry. EBITDA consists of
income (loss) before interest, income taxes, depreciation, amortization, other
income and expense and non-cash compensation expense recorded in accordance
with Accounting Principles Board Opinion No. 25. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
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 (1) integrated retail voice
services, including local, long distance, paging AIN applications, operator
and other enhanced services; (2) data services, which include dial-up and
dedicated Internet Service, DSL high-speed Internet access, private line,
frame relay and ATM services; and (3) wholesale voice services including
switched/dedicated access and prepaid calling card services. As of December
31, 1999, we had 23 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 December 31, 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.
As of December 31, 1999, we had colocated network equipment in 48 incumbent
local exchange carrier central offices and we had two digital loop carriers in
stand-alone locations in order to provide more cost-effective local services
to our customers. These colocations are also facilitating development of our
DSL services offerings. We began offering DSL high-speed Internet services
during August 1999. As of December 31, 1999, we had also installed 14 frame
relay switches within our network.
In October 1997, we purchased, pursuant to an indefeasible right of use,
approximately 3,375 route miles of dark fiber from New York to Miami and
Atlanta to Nashville on a fiber optic network being constructed by
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Qwest. As of December 31, 1999, approximately 2,900 miles of this network was
operational, and we expect the remainder to come into service in phases
through the second quarter 2000. Upon completion of this network, we will have
22 points-of-presence deployed with Nortel OC-48 and DWDM technology.
As of December 31, 1999, we also had 100 route miles of fiber in North
Carolina's Raleigh-Durham-Research Triangle Park area.
Company Reorganization and Important Financing Activities. In September
1997, we undertook a series of transactions (the "1997 Transactions") to
provide ourselves with greater liquidity and financial flexibility and to
enhance our ability to execute our business strategy, including rapidly
penetrating the local exchange market and expanding our network. The 1997
Transactions included the following:
(1) we issued $250.0 million aggregate principal amount of 10 1/2% Senior
Notes due 2007 (the "10 1/2% Senior Notes");
(2) we repaid all $26.6 million of indebtedness outstanding under our
then-existing credit facility with General Electric Capital Corporation
("GE Capital"), including accrued interest thereon (the "BTI Refinancing"),
and entered into a five-year, $60.0 million senior secured credit facility
with GE Capital, which was amended and restated effective June 30, 1998, to
provide a $30.0 million revolving credit facility and a $30.0 million
capital expenditure facility (the "GE Capital Facilities");
(3) we repurchased the 50% interest in our shares held by A.B. Andrews
(the "Retiring Shareholder") for approximately $28.3 million (the "Share
Repurchase");
(4) we merged with and into a wholly owned subsidiary of BTI Telecom
Corp. and converted from an S corporation to a C corporation (the
"Reorganization");
(5) we acquired all of the fiber optic network and facilities assets of
FiberSouth, Inc. ("FiberSouth"), for approximately $31.0 million, and
repaid approximately $5.3 million of FiberSouth indebtedness, together with
accrued interest thereon (the "FiberSouth Acquisition").
Other Financing Activities. During 1999, we undertook these financing
transactions:
(1) We obtained a $60.0 million credit facility from Bank of America (the
"Bank of America Facility") on September 8, 1999. Availability under the
Bank of America Facility is based on the amount of fiber optic network
purchased from Qwest Communications and purchases of related equipment from
Nortel Networks, Inc.; and
(2) We received a $200.0 million investment on December 28, 1999, from
WCAS in exchange for 200,000 shares of Series A preferred stock and
warrants to purchase 4,500,000 shares of common stock ("WCAS Preferred
Investment").
(3) Utilizing $65.0 million of the proceeds from the WCAS Preferred
Investment, we repurchased 7.6 million shares of our outstanding common
stock.
Revenue. We generate the majority of our revenues from the sale of: (1)
integrated retail voice services, primarily to small and medium-sized
businesses; (2) data services; and (3) wholesale voice services, largely to
other telecommunications carriers. For the years ended December 31, 1997, 1998
and 1999, revenues from integrated services represented approximately 55.3%,
57.2% and 56.2%, respectively, of our total revenue. During the past several
years, market prices for certain telecommunications services have been
declining, which is a trend that we believe will likely continue. This price
compression will have a negative effect on our revenue and gross margin, which
might not be offset completely by savings from decreases in our cost of
services.
Our portfolio of integrated retail voice services includes long distance,
local, paging, AIN applications, operator and other enhanced services. In
order to capitalize on the excess capacity of our network in off-peak hours,
we market long distance services to the residential market through our
Alliance Program for trade associations and professional organizations and our
Academic Edge Program for colleges and universities.
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We began offering local exchange services, primarily on a resale basis, as
part of our array of integrated telecommunications services in selected
markets in the southeastern United States in November 1997. We have installed
Lucent 5ESS local switches in Raleigh, Charlotte, Greensboro and Wilmington,
North Carolina; Columbia and Greenville, South Carolina; Atlanta, Georgia; and
Orlando and Jacksonville, Florida. We resell ILEC services in our other target
markets and intend to install network infrastructure to support local services
as market conditions warrant. The introduction of local services contributes
to lower gross margins, as these services may be initially offered on a resale
basis. We expect these margins to continue to improve as we provide more of
these services using our own local switching facilities. As of December 31,
1999, we were providing local services in 11 states and had authority to
provide local services in 12 additional states and the District of Columbia.
Through December 31, 1999, we had sold more than 94,000 local access lines. As
of December 31, 1999, more than 85% of our local customers had purchased long
distance.
Our portfolio of data services includes dial-up and dedicated Internet
access, Web site design and hosting services, DSL high-speed Internet access
services, ATM data transport services, and private line services ranging from
DS-0 capacity to OC-48 capacity. As of December 31, 1999, we had sold
approximately 300 DSL lines. As customer demand for high-speed Internet access
and data transmission increases, we are poised to meet that demand with our
suite of Internet services, our 48 colocations in incumbent local exchange
carrier central offices, our two stand-alone DLC sites, our network of 14
frame relay switches and 3,000 miles of fiber. Data revenue as a percentage of
total revenue was 5.1% in 1997, 8.4% in 1998, and 10.6% in 1999. Our continued
focus on providing data services is evidenced by the 180% increase in our data
revenue from 1997 to 1999.
Our portfolio of wholesale voice services includes switched and dedicated
access services, and prepaid calling card services. The wholesale services
business allows us to leverage the network infrastructure developed for our
integrated retail services. Wholesale revenue as a percentage of our total
annual revenue was 39.6% in 1997, 34.4% in 1998 and 33.2% in 1999. This
decline in wholesale revenue as a percentage of our total annual revenue is
consistent with our strategic plan to focus the majority of our resources on
selling integrated retail voice and data services.
Operating Expenses. Our primary operating expense categories include cost of
services and selling, general and administrative expenses ("SG&A"). Cost of
services consists of the fixed costs of leased facilities and the variable
costs of origination, termination, and access services provided through ILECs
and other telecommunications companies. By using multiple carriers for our
transmission capacity, we are able to maintain network diversity and take
advantage of least-cost traffic routing. In addition, in October 1997 we
entered into an agreement with Qwest to lease on an IRU basis approximately
3,375 route miles of fiber optic network from New York to Miami and Atlanta to
Nashville. This network, which is expected to become substantially operational
during the second quarter of 2000, 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. As of December 31, 1999, approximately 3,000 miles of this
network was operational, including the 100 miles of fiber in North Carolina's
Raleigh-Durham-Research Triangle Park area which is not part of the Qwest IRU.
SG&A includes 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, which consist of a large percentage of customers' first
month's billings, plus a residual percentage of ongoing monthly revenues.
Selling expenses also include commissions paid to our dealers, 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 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 ILECs for leased
fiber optic facilities in addition to internal costs for network setup.
Income Taxes. We generated a net loss for 1997, 1998 and 1999. Based upon
our plans to expand the business through the construction and expansion of our
networks, customer base and product offerings, this trend
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is expected 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 our reorganization during 1997, we elected to be taxed for federal
and state income tax purposes as an S corporation under the provisions of the
Internal Revenue Code; accordingly, income, losses and credits were passed
through directly to the shareholders rather than being taxed at the corporate
level. In conjunction with the Reorganization, we converted from an S
corporation to a C corporation and, as a result, are subject to federal and
state income taxes. Conversion to a C corporation required us to adopt the
provisions of Financial Accounting Standards Board Statement No. 109 ("SFAS
109"), "Accounting for Income Taxes." The cumulative effect of adoption of
this standard is reflected in our financial statements for the 12 months ended
December 31, 1997.
Throughout the period of time that we were an S corporation, shareholders
were paid dividends to fund tax obligations arising from the income we earned
that was reported on their individual income tax returns. We will continue to
reimburse shareholders for any tax obligations arising from our income while
we were an S corporation. We believe that any such requirements will not have
a material effect on our financial condition or results of operations.
Year Ended December 31, 1999, Compared to Year Ended December 31, 1998
Revenue
Revenue increased 22.3% from $212.6 million in 1998 to $260.0 million in
1999. This $47.4 million increase was primarily driven by our continuing
success in sales of retail integrated voice services, data services and
wholesale long distance services. These product lines had revenue increases of
$24.5 million, $9.9 million and $13.1 million, respectively, in 1999.
The $24.5 million increase in retail integrated voice services during 1999
consisted of two components. One was a $26.9 million increase in local
services revenues to $38.8 million during 1999, which represented a 226.0%
increase over local services revenue of $11.9 million in 1998. The cumulative
number of local access lines we sold increased from 48,500 at December 31,
1998, to 94,000 at December 31, 1999. In addition, 28.5% of these lines were
facilities-based as of December 31, 1999, an increase of approximately 20,000
lines from the 10.5% that were facilities-based at the end of 1998. This
increase in local services revenue was partially offset by a $2.4 million
decrease in retail long distance services revenue.
Data services revenues increased by $9.8 million, or 55.1%, from $17.8
million in 1998 to $27.6 million in 1999. This $9.8 million increase was
driven by increases in retail data services, such as Internet, frame relay and
private line revenue of $2.7 million, and increases in wholesale data services
of $7.1 million. We anticipate continued increases in wholesale data services,
consisting of data and voice bandwidth sold to other telecommunications
companies, as we continue to expand our in-service fiber network.
The $13.1 million increase in wholesale voice service revenues consisted of
an increase of $29.6 million in prepaid calling card revenue partially offset
by decreases of $15.5 million and $1.0 million in wholesale international and
domestic services, respectively. We made strategic pricing decisions in 1998
to maintain minimum margins on our international products, which resulted in
the decreased revenue from these products in 1999. During 1999, we also made
changes to our prepaid calling card products to ensure profitability of this
product. We expect these pricing changes to result in significantly reduced
prepaid calling card revenues in 2000.
Cost of Services
Cost of services represented 66.6% of revenue for the year ended December
31, 1999, as compared to 71.0% for 1998. We have continued to realize
improvements in our cost of services percentage through the cost saving
initiatives described below.
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We have migrated traffic from leased facilities to owned facilities on the
operational segments of our network. We now have approximately 3,000 miles of
our fiber network completed, which has resulted in approximately $325,000 in
monthly savings on previously leased circuits. These savings should continue
to increase as operational segments of the network are completed and put into
service.
We increased our percentage of facilities-based local lines from 10% at the
end of 1998 to 28% at the end of 1999. Gross margins on our local services
continue to improve as we sell more facilities-based local service and migrate
existing resale customers to our facilities in switched-based markets. This
migration not only improves margins but enables us to better serve our
customers' needs in the local service area. Additionally facilities-based
local service allows us to generate revenue from providing originating and
terminating access to other carriers.
Our data services have inherently high gross margins. During 1999, we sold
58.1% more data services than in 1998 resulting in an increase in percentage
of total revenues from 8.4% in 1998 to 10.6% in 1999. This increase in revenue
from higher margin service has had a positive effect on our gross margin
percentage.
By marketing our bundled local, long distance and data services solution we
have increased the percentage of our retail customers purchasing multiple
products from 18% at the end of 1998 to 26% at the end of 1999. This bundling
strategy improves our cost of services percentage by avoiding certain cost
components, such as long distance access changes for facilities-based local
customers who also buy long distance services. We offer our customers the ease
of a single point-of-contact and a consolidated monthly bill for all of their
telecommunications needs. Our experience has shown that we have higher
retention rates for those customers who subscribe to more than one of our
bundled services.
We expect the continuing construction of our fiber optic networks, the
continuing effect of migrating customers to facilities-based products,
increased sales of our high margin data services, and the bundling of an
integrated solution to our customers to reduce our network costs in the
future.
Selling, General and Administrative Expenses
SG&A expenses in 1999 were $86.1 million, or 33.1% of revenue, as compared
to $68.6 million, or 32.3% of revenue in 1998. The increase in SG&A expenses
during 1999 is largely attributable to the expansion of back office
infrastructure to support our rollout of local and data services as well as
the deployment of our fiber network. This expansion resulted in additional
facilities costs and large investments in human resources during the year as
our headcount grew from 749 employees as of December 31, 1998, to 978
employees as of December 31, 1999. These additional facilities and human
resources investments are intended to provide us with the ability to continue
to expand into new markets, maximize customer retention and provide for growth
in 2000 and beyond.
In addition, depreciation and amortization was $19.4 million in 1999,
representing an increase of 69.4% over the prior year. The increase in
depreciation and amortization is 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 1999, interest expense was $28.5 million, compared to $25.4 million
in 1998. During 1998 and 1999, interest expense was primarily attributable to
our September 1997 issuance of the 10 1/2% Senior Notes to finance capital
expenditures, working capital and our introduction of competitive local
exchange carrier ("CLEC") and enhanced data services. The $3.1 million
increase in interest expense during 1999 consisted primarily of additional
borrowings on the GE Capital Facilities and the Bank of America Facility. In
addition to the amounts expensed, we capitalized $1.8 million of interest
expense associated with the construction of our local service facilities and
fiber networks during 1999, compared to $1.5 million of capitalized interest
in 1998.
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Interest income decreased to $2.5 million in 1999 from $5.6 million in 1998,
due to lower cash balances remaining from the proceeds of the 10 1/2% Senior
Note offering.
EBITDA
Earnings before interest, taxes, depreciation and amortization and other
non-cash charges (EBITDA) is a common measurement of a company's ability to
generate cash flow from operations. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to cash
flows as a measure of liquidity. We experienced positive EBITDA of $1.1
million for 1999 compared to negative EBITDA of $6.9 million for 1998. The
increase in EBITDA we experienced throughout 1999 is primarily attributable to
increases in revenue coupled with cost reduction initiatives accompanying our
migration to a facilities-based integrated communications provider. We expect
EBITDA to remain at or near breakeven during early 2000. We expect to see an
increase in EBITDA during late 2000 as we continue to expand our local service
and data offerings and complete deployment of our fiber optic network.
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Revenue
Total 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 the introduction
of local exchange services into our retail integrated voice suite of services.
Retail integrated voice services consist of local exchange services and retail
long distance services. These two services accounted for $11.9 million and
$1.8 million, respectively, of the increased revenue. 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 other $3.9 million
revenue increase consisted of increased data services revenue of $7.9 million,
partially offset by wholesale long distance revenue decreases of $4.0 million.
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 international termination 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 8.6% 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 3,375-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 pay phone 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 pay
phones. During the first quarter of 1998, we began assessing a surcharge to
our customers in order to cover these costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 1998 increased 28.1% to
$68.6 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
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expenses during 1998 was largely attributable to the hiring and increased
marketing and advertising associated with our introduction of local services.
These investments provided us with the ability to continue to expand into new
markets, maximize customer retention and provide for growth. We hired
additional personnel to facilitate the deployment of our fiber optic network.
In 1997 we recorded $2.1 million in compensation expense in connection with
options issued under our 1994 stock plan as part of the 1997 Transactions. In
addition, depreciation and amortization increased 73.3% 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 SG&A expenses associated with our introduction of local
services and the expansion of our fiber network.
Liquidity and Capital Resources
Cash Flows
For the year ended December 31, 1997, we generated $8.2 million of positive
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 interest of $4.2 million and $7.1 million,
respectively. Cash used in investing activities in 1997 was $133.2 million,
including $74.6 million used to purchase securities pledged to secure the
first six scheduled interest payments on the 10 1/2% Senior Notes (the
"Restricted Cash"). In addition, investing activities included $35.2 million
utilized for the FiberSouth Acquisition and $22.8 million in capital
expenditures during 1997. 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. We also paid dividends of $1.6
million in part to provide funds for tax obligations owed by BTI's
shareholders as a result of BTI's income reported on the shareholders' income
tax returns. In the Reorganization, we converted from S corporation to C
corporation status for income tax purposes. As a result, 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 our
facilities-based local exchange services. The $3.1 million increase in other
assets consisted of $1.6 million in capitalized
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expenditures for line access fees, and the $1.5 million purchase of a multi-
media franchise to secure service rights within the Raleigh, North Carolina
Market. The decrease in Restricted Cash resulted from the provision of $26.3
million to fund the March and September 1998 interest obligations on the 10
1/2% Senior Notes, net of $4.0 million in related investment earnings. In
addition, during 1998 we satisfied stock and option repurchase obligations
that arose in connection with the FiberSouth Acquisition and under the 1994
Stock Plan. We settled these obligations with a $2.3 million cash payment. The
payment, which is reflected as a $1.5 million adjustment to equity, 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 year ended December 31, 1999, we used $18.5 million of cash flow to
fund operating activities. A net loss of $44.7 million was the primary use of
funds in the operation of the business. The net loss was offset by $19.4
million of depreciation and amortization, as well as a $6.5 million net
increase in our operating assets and liabilities. These items are associated
with our capital expenditures and ongoing operational expansion. Cash used in
investing activities in 1999 was $61.3 million, consisting of $80.5 million in
capital expenditures, partly offset by a decrease in restricted cash of $23.8
million. Capital expenditures during 1999 were primarily related to the
deployment of the fiber optic network and purchases of equipment for the
continuing development of our facilities-based local exchange services and the
deployment of additional data service offerings. The $4.5 million increase in
other assets consisted entirely of capitalized expenditures for line access
fees and related network provisioning costs. The decrease in Restricted Cash
resulted from the provision of $26.3 million to fund the March and September
1999 interest obligations on the 10 1/2% Senior Notes, net of $2.2 million in
related investment earnings. Net cash provided by financing activities in 1999
was $153.1 million. Financing of $195.8 million, net of expenses, came from
the WCAS Preferred Investment. We intend to use proceeds from the WCAS
investment to expand our current operations. Specifically, we plan to add to
our telecommunications network and fiber optic infrastructure open sales
offices in new markets and enhance our data services such as DSL high-speed
Internet access. Offsetting the $195.8 million investment was a $65.0 million
repurchase of a portion of our outstanding shares of common stock, at a price
of $8.55 per share. Net proceeds from long-term borrowings were $24.9 million
during 1999, which consisted of $4.1 million in net payments on the GE Capital
Facilities offset by a $29.0 million draw on the Bank of America Facility.
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 semi-annually 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 which are held as restricted cash. 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 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, 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
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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.
Effective June 30, 1998, we amended and restated our the GE Capital
Facilities. Borrowings under the GE Capital Facilities are based upon a
percentage of eligible accounts receivable and eligible capital expenditures,
respectively, as defined in the loan agreement. These borrowings can be used
for working capital and other purposes. Borrowings under the GE Capital
Facilities are secured by substantially all of our assets and guaranteed by
us. The borrowings bear interest at the 30-, 60- or 90- day London Interbank
Offered Rate ("LIBOR") or the prime rate, plus an applicable spread which
varies based upon our financial position. We are also required to pay a fee of
0.375% per year on the unused portion of the GE Capital Facilities. At
December 31, 1999, no amounts were outstanding under the GE Capital
Facilities, other than $140,000 in letters of credit. The GE Capital
Facilities require our compliance with various financial and administrative
covenants, including, among others, covenants limiting our ability to incur
debt, 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 GE Capital 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, but there can be no assurance
that we will be able to continue meeting these covenants or, if required,
obtain additional financing on acceptable terms, and the failure to do so may
have a material adverse impact on our business and operations.
On September 8, 1999, we obtained the Bank of America Facility. Availability
under this facility is based on the amount of fiber optic network purchased
from Qwest Communications and purchases of related equipment from Nortel
Networks, Inc. Borrowings are secured by a first security interest in the
fiber optic network and related equipment and a second security interest in
substantially all of our assets. These borrowings bear interest, at our
option, at either the 30-, 60- or 90-day LIBOR rate or the prime rate plus an
applicable margin. This margin varies, based on our financial position and
additional equity issuances, from 1.00% to 2.50% for borrowings under the
prime rate option and from 2.00% to 3.50% for borrowings under the LIBOR
option. We are also required to pay of fee of 1.5% per year on the unused
commitment. As of December 31, 1999, there was a total of $29.0 million
outstanding under the Bank of America Facility. The Bank of America Facility
contains various financial covenants with which we must comply on a monthly
and quarterly basis. We are currently in compliance with these covenants, as
amended.
During the second quarter of 1998, Moody's adjusted our long-term credit
rating from B2 to B3, citing concern that integrated services revenue and
operating cash flow were unlikely to grow as rapidly as Moody's had initially
expected when the 10 1/2% Senior Notes were originally rated. Moody's
indicated that the trend in operating results had the effect of weakening our
anticipated debt protection measures for the intermediate term. However,
Moody's indicated that our strategy to improve operating margins and cash
flows through the migration of our long distance and local traffic over more
of our own switches and network facilities continued to be a sound business
plan. Moody's also affirmed our rating of B1 on the $60.0 million GE Capital
Facilities.
In November 1998, Standard and Poor's ("S&P") lowered our corporate credit
and senior unsecured debt ratings on our long-term debt from B+ to B and
lowered our rating from BB- to B+ on the GE Capital Facilities. This rating
action reflected concerns similar to those cited by Moody's and also noted the
anticipated operating margin improvements that should result from the
migration of long distance and local traffic to more of our own switches and
fiber network. The revised rating also reflected a stable outlook for us.
Preferred Equity Investment
WCAS Preferred Investment. On December 28, 1999, Welsh, Carson, Anderson &
Stowe VII, L.P. and two affiliated funds (together, "WCAS"), all of which are
accredited investors, purchased an aggregate of 200,000 shares of our Series A
preferred stock and warrants to purchase 4,500,000 shares of our common stock
28
<PAGE>
for a purchase price of $200.0 million. Each share of Series A preferred stock
is initially convertible into 116.959 shares of common stock, subject to
adjustment for certain dilutive issuances of our common stock. If not
converted, the Series A preferred stock has a 6% accrued dividend payable upon
conversion in cash or in kind at our election. The purchasers of the Series A
preferred stock can redeem the stock at a price equal to the greater of
liquidation value or fair market value upon the later of December 28, 2006, or
six months after the date on which all amounts owing our 10 1/2% Senior Notes
due 2007 are paid in full. The warrants to purchase 4,500,000 shares of common
stock, subject to adjustment for certain dilutive issuances, have an exercise
price of $0.01 per share and are exercisable for a period of ten years
beginning on the earlier of change in control of BTI Telecom, Inc. or December
28, 2002. The warrants are cancelable in the event we undertake a public
offering of our common stock and our stock achieves certain price levels.
We plan to use the proceeds from this investment to expand our current
operations. Specifically, we plan to add to our telecommunications network and
fiber optic infrastructure, open sales offices in new markets, and enhance our
data services such as DSL high-speed Internet access. In addition, we used
$65.0 million of the proceeds to repurchase a portion of our outstanding
shares of common stock at a price of $8.55 per share.
Capital Spending
We incurred total capital expenditures of $80.5 million during 1999,
including $51.0 million related to our fiber optic network and $29.5 million
in other telecommunications equipment and corporate infrastructure, primarily
for our continued expansion of CLEC operations. Based on our business plan and
growth projections as of December 31, 1999, we estimate capital requirements
through the year 2001 to be between $150 million and $200 million. Capital
requirements include the projected costs of:
. Expanding our fiber optic network,
. adding sales offices in new geographic locations,
. expanding our local service infrastructure, and
. enhancing our data service offerings.
The actual amount and timing of our capital requirements might differ
materially from the foregoing estimate as a result of regulatory,
technological or competitive developments (including market developments and
new opportunities) in the telecommunications industry. We believe that cash on
hand, borrowings expected to be available under the GE Capital Facilities and
the Bank of America Facility and cash flow from operations will be sufficient
to expand our business as currently planned. We expect cash flow from
operations during 2000 to remain at or near breakeven as we continue to expand
our CLEC offerings and complete the deployment of our fiber optic network. In
the event our plans change or our forecasts prove to be inaccurate, the
foregoing sources of funds may prove to be insufficient to fund our planned
growth and operations. 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 in the event we decide to make
additional acquisitions or enter into joint ventures and strategic alliances.
Sources of additional capital may include public and private debt and equity
offerings, subject to compliance with the provisions in the indenture
governing the 10 1/2% Senior Notes, the GE Capital Facilities and the Bank of
America Facility. Additional financing might not be available to us, or might
not be available on terms acceptable to us and within the restrictions
contained in our financing arrangements.
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, vendors (including major suppliers
of switching equipment, fiber optic electronics, and billing and customer care
systems), 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 developed a
detailed plan to address the Year 2000 issue.
To date, we have experienced no significant negative effects due to Year
2000 issues. We believe our program was effective in resolving the Year 2000
issues to date and that it will continue to be in the future.
29
<PAGE>
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 continue to adequately address their respective Year
2000 issues could have a material adverse effect on our business, results of
operations and financial condition.
Effects of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." ("SFAS 133"). SFAS 133 will require the recognition
of all derivatives on our consolidated balance sheet at fair value. SFAS 133,
as amended by SFAS 137, is effective for all quarters of fiscal years
beginning after June 15, 2000. We do not anticipate that the adoption of SFAS
133 will have a significant effect on our results of operations or financial
position.
Inflation
We do not believe inflation has had a significant impact on our operations.
Item 7A. Quantitative and Qualitative Disclosure
Although we invest our short-term excess cash balances, the nature and
quality of these investments are restricted under the terms of the Indenture
for the 10 1/2% Senior Notes and 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, the
restricted cash balance available to fund the next two scheduled interest
payments on the 10 1/2% Senior Notes is invested in U.S. Treasury securities
in accordance with the terms of the related agreements. Accordingly, we are
subject to minimal market risk on any of our investments.
The majority of our debt, which consists of $250 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 Facilities and the
Bank of America Facility, which bear interest at variable rates based upon
market conditions and our financial position. As of December 31, 1999,
borrowings under these credit facilities were $29.0 million. Management
believes that this debt does not currently create a significant amount of
interest rate risk and, as such, has not engaged in any related hedging
transactions. However, as market conditions and outstanding borrowings under
this debt change, management intends to continue to evaluate our business
risk, and we might enter into hedging transactions if conditions warrant.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statement begin on page F-1 of this Form 10-K.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
<TABLE>
<CAPTION>
Name Age(1) 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... 49 Executive Vice President, Chief Technology Officer
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
Anthony J. deNicola(2).. 35 Director
Thomas E. McInerney(2).. 58 Director
William M. Moore, Jr.... 60 Director
Paul J. Rizzo........... 71 Director
</TABLE>
(1) At December 31, 1999
(2) Elected to the Board on February 29, 2000.
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 more than 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 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.
31
<PAGE>
Thomas F. Darden has served since 1984 as Chairman or Chief Executive
Officer 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. Previously, Mr. Darden was a consultant with Bain
and Company in Boston. Mr. Darden holds a B.A. and an M.R.P. in Environmental
Planning from UNC-CH and a J.D. from Yale University.
Anthony J. deNicola is a partner with WCAS, joining the firm in April 1994.
Prior to that, he worked at William Blair & Company financing middle market
buyouts. Mr. deNicola is currently a director of Centennial Cellular
Corporation. He holds a Bachelor's degree from DePauw University and a M.B.A.
from Harvard Business School. He is a director of Centennial Communications
Corporation and several private companies. He is a trustee of DePauw
University.
Thomas E. McInerney has served as a general partner of WCAS and other
associated partnerships since 1987. Prior to joining WCAS, Mr. McInerney was
President and Chief Executive Officer of Dama Telecommunications Corporation,
a voice and data communications services company which he co-founded in 1982.
Mr. McInerney has also been President of the Brokerage Services Division and
later Group Vice President--Financial Services of ADP, with responsibility for
the ADP divisions that serve the securities, commodities, bank, thrift and
electronic funds transfer industries. He has also held positions with the
American Stock Exchange, Citibank and American Airlines. Mr. McInerney serves
as a director of Savvis Communications Corporation, The BISYS Group, Inc.,
Centennial Communications Corp., The Cerplex Group, Inc. and SpectraSite
Holdings, Inc. He is also a director of Bridge Information Systems, Inc. and
several other private companies. Mr. McInerney received a B.A. from St. John's
University and attended New York University Graduate School of Business
Administration.
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.
Item 11. Executive Compensation
Summary Compensation Information
The following table sets forth all compensation paid or accrued by us for
services rendered to it in all capacities for the fiscal years ended December
31, 1999, 1998 and 1997, to BTI's Chief Executive Officer and BTI's other
executive officers who earned at least $100,000 in the respective fiscal year
(collectively, the "Named Officers").
32
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------ ---------------------------
Name and Principal Fiscal Stock Options All Other
Position Year Salary Bonus (Shares) Compensation
------------------ ------ -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Peter T. Loftin,
Chairman and CEO....... 1999 $875,016 $ 0 0 $169,786(1)
1998 875,016 2,537 0 138,982(2)
1997 500,000 129,403 0 275,440(3)
R. Michael Newkirk,
President and COO...... 1999 295,000 55,157 0 17,496(4)
1998 168,750 130,000 250,000 16,736(5)
1997 125,000 210,313 1,732,960 17,478(6)
Anthony M. Copeland,
Executive Vice
President and General
Counsel................ 1999 175,000 18,386 0 13,114(7)
1998 145,000 20,000 125,000 12,290(8)
1997 120,000 52,048 33,330 12,857(9)
H.A. (Butch) Charlton,
Executive Vice
President.............. 1999 232,908 0 0 13,800(10)
1998 175,000 50,000 125,000 8,300(11)
1997 122,052 34,428 33,330 0(12)
Brian K. Branson, Chief
Financial Officer and
Treasurer.............. 1999 136,667 23,165 0 13,747(13)
1998 121,667 0 125,000 13,001(14)
1997 95,000 30,929 33,330 13,246(15)
</TABLE>
- --------
(1) Includes $5,496 medical insurance premium cost, $2,213 disability
insurance cost, $8,520 telephone expense, $109,908 tax planning/consulting
cost and $42,000 car allowance and personal use of Company vehicles and
$1,649 of other expenses.
(2) 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.
(3) Includes $225,600 of relocation expenses, $2,213 disability insurance,
$3,175 telephone expense, $949 of miscellaneous expenses and $43,503 car
allowance.
(4) Includes $4,800 of BTI's matching 401(k) Plan and $12,696 representing the
taxable portion of certain car lease payments.
(5) Includes $4,800 of BTI's matching 401(k) Plan and $11,936 representing the
taxable portion of certain car lease payments.
(6) 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.
(7) Includes $4,800 of BTI's matching contributions to the 401(k) Plan and
$8,314 representing the taxable portion of certain car lease payments.
(8) Includes $4,770 of BTI's matching contributions to the 401(k) Plan and
$7,520 representing the taxable portion of certain car lease payments.
(9) Includes $3,825 car allowance, $4,750 of BTI's matching contributions to
the 401(k) Plan, and $4,282 representing the taxable portion of certain
car lease payments.
(10) Includes $4,800 of BTI's matching contribution to the 401(k) Plan and
$9,000 representing the taxable portion of certain car lease payments.
(11) Includes $4,800 of BTI's matching contribution to the 401(k) Plan and
$3,500 representing the taxable portion of certain car lease payments.
(12) Salary includes $71,010 paid by FiberSouth and $51,042 paid by BTI.
Bonuses paid include $22,000 paid by FiberSouth and $12,428 paid by BTI.
(13) Includes $4,560 of BTI's matching contribution to the 401(k) Plan and
$9,187 representing the taxable portion of certain car lease payments.
(14) Includes $3,041 of BTI's matching contributions to the 401(k) Plan and
$9,960 representing the taxable portion of certain car lease payments.
(15) Includes $2,000 car allowance, $3,148 of BTI's matching contribution to
the 401(k) Plan, and $8,098 representing the taxable portion of certain
car lease payments.
33
<PAGE>
Option Grants, Exercises and Holdings and Fiscal Year-End Option Values
The following table summarizes all option grants during the fiscal year
ended December 31, 1999, to the Named Officers:
Option Grants During Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
% of Total Annual Rates of
Number of Options Stock Price
Shares Granted to Appreciation on
Underlying Employees Exercise or for Option Term
Options in Fiscal Year Base Price Expiration -----------------
Name Granted 1999 Per Share Date 5% 10%
- ---- ---------- -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Peter T. Loftin......... 0 0% N/A N/A N/A N/A
R. Michael Newkirk...... 0 0% N/A N/A N/A N/A
Anthony M. Copeland..... 0 0% N/A N/A N/A N/A
H.A. (Butch) Charlton... 0 0% N/A N/A N/A N/A
Brian K. Branson........ 0 0% N/A N/A N/A N/A
</TABLE>
- --------
The following table sets forth certain information concerning the number and
value of unexercised options held by the Named Officers as of December 31,
1999. No stock options were exercised in 1999.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 1999 at December 31, 1999(1)
----------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Peter T. Loftin......... 0 0 $ 0 $ 0
R. Michael Newkirk...... 1,899,626 83,334 15,496,792 462,504
Anthony M. Copeland..... 116,664 41,666 747,442 231,246
H.A. (Butch) Charlton... 116,664 41,666 747,442 231,246
Brian K. Branson........ 116,664 41,666 747,442 231,246
</TABLE>
- --------
(1) Value based on the difference between the fair market value of a share of
Common Stock at December 31, 1999 ($8.55), as determined in good faith by
the Board of Directors, and the exercise price of the options.
Director Compensation
Our directors receive no compensation for serving as such but we do
reimburse their out-of-pocket expenses to attend our meetings. In 1999 each
existing director who was not an employee of ours (excluding WCAS appointed
directors) was granted an option to purchase 2,667 shares of common stock at
an exercise price of $7.50 per share, vesting in full upon grant.
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.
34
<PAGE>
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.
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.
Compensation Committee Interlocks and Insider Participation
In 1999 we established a compensation committee to review compensation
beginning in 2000. The committee consists of Messrs. Darden, Moore and Rizzo,
none of whom have ever been employees of our company. 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.
35
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------------------------------------------
Series A Preferred
Common Stock Stock
---------------------- -------------------- Percentage
Number of Percent of Number of Percent of Total Voting
Name of Beneficial Owner Shares Class(1) Shares Class Power
- ------------------------ ----------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Welsh, Carson, Anderson
& Stowe VIII, L.P.(3).. 23,391,800 20.2 200,000 100.0 20.2
Directors and executive
officers as a group (10
persons)(2)............ 118,057,079 100.0 200,000 * 100.0
</TABLE>
- --------
* Less than one percent.
(1) Based on a total of 92,397,661 shares of common stock outstanding as of
February 29, 2000, and with respect to each director, Named Officer and
shareholder beneficially owning more than 5% of our common stock, the
shares of common stock that would be outstanding if the director or Named
Officer exercised options to purchase shares of common stock which are
exercisable within 60 days of February 29, 2000, or the shareholder
exercised the right to convert shares of Series A preferred stock into
shares of common stock; and with respect to the directors, Named Officers
and 5% shareholders as a group, the shares that would be outstanding if
each had exercised the options and converted the Series A preferred stock
into common stock.
(2) Consists entirely of shares of common stock that such person has the right
to purchase pursuant to options exercisable within 60 days of February 29,
2000.
(3) Consists entirely of shares of common stock that are issuable upon the
conversion of the 200,000 shares of Series A preferred stock held by WCAS,
which convert at the rate of 116.959 shares of common stock for each share
of Series A preferred stock. All shares owned by WCAS are deemed to be
beneficially owned by Mr. deNicola and Mr. McInerney, who are partners of
WCAS, but the shares are counted only once in determining the amount
outstanding and the percentage of ownership.
Item 13. Certain Relationships and Related Transactions
Prior to termination in September 1999, we leased 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, Chairman and Chief Executive Officer and
our sole shareholder. We made payments for the townhouse of $20,000 in 1999.
We made payments for the condominium of $20,000 in 1999.
Prior to termination in September 1999, we also leased a corporate aircraft
from an entity controlled by Mr. Loftin. Our payments for the aircraft, which
is subject to a five-year lease entered into in November 1995, were $171,000
in 1999. This lease was a "dry" lease, which means that we pay all costs of
operation of the aircraft.
Pursuant to a Shareholders' Agreement, Mr. Loftin was entitled to receive
distributions in amounts sufficient to pay his taxes resulting from ownership
of BTI while we were an S corporation. In addition, he was entitled to receive
dividends in an amount equal to $61,736 per month (the "Additional
Dividends"). Pursuant to the Shareholders' Agreement, Mr. Loftin was required
to loan the Additional Dividends paid to him through June 1996 to us. This
loan bears interest at prime and was payable over 24 months through September
1999. During 1999, the highest amount outstanding under the loan was $763,000
and at December 31, 1999, the principal balance of the loan was $0. The
Shareholders' Agreement and the right to receive Additional Dividends
terminated in September 1997. However, we are required to reimburse Mr. Loftin
for his tax obligations arising from income we earned while we were an S
corporation. We believe that any such reimbursements will not have a material
adverse effect on us.
Directors Anthony J. deNicola and Thomas E. McInerney are both partners in
WCAS. As part of the WCAS Preferred Investment, WCAS has the right to appoint
two directors to our Board as long as WCAS beneficially owns at least
11,700,000 shares of common stock, including the assumed conversion of the
Series A preferred stock and the warrants into shares of our common stock.
Directors deNicola and McInerney are the appointees of WCAS.
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report:
(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
See Index to Consolidated Financial Statements on page F-1.
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.
(3) Exhibits.
See Exhibit Index in Item 14 (c) below
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended December 31, 1999.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1* Agreement and Plan of Merger 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 Restatement of BTI Telecom Corp.
3.2** Second Amended and Restated Bylaws of BTI Telecom Corp.
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.
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.
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.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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 Communications 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.
10.17++ Fourth Amendment to the GE Capital Agreement.
10.18++ Loan Agreement, entered into on September 8, 1999, between
Business Telecom, Inc. and Bank of America, National Association
and the other financial institutions party thereto from time to
time as lenders and Bank of America, National Association as
Agent.
10.19++ First Amendment to the Bank of America Loan Agreement.
10.20++ Fifth Amendment to the GE Capital Agreement.
10.21** Shareholders Agreement among BTI Telecom Corp., Peter T. Loftin,
Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Information
Partners, L.P., and BTI Investors LLC, dated December 28, 1999.
10.22** Redemption Agreement among BTI Telecom Corp., Welsh, Carson,
Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P., and
BTI Investors LLC, dated December 28, 1999.
10.23** Investor Rights Agreement among BTI Telecom Corp., Welsh, Carson,
Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P., and
BTI Investors LLC, dated December 28, 1999.
10.24** Common Stock Purchase Warrant issued by BTI Telecom Corp. to
Welsh, Carson, Anderson & Stowe VIII, L.P., dated December 28,
1999.
10.25** Common Stock Purchase Warrant issued by BTI Telecom Corp. to WCAS
Information Partners, L.P., dated December 28, 1999.
10.26** Common Stock Purchase Warrant issued by BTI Telecom Corp. to BTI
Investors LLC, dated December 28, 1999.
10.27** Series A Preferred Stock Purchase Agreement among BTI Telecom
Corp., FS Multimedia, Inc., Welsh, Carson, Anderson & Stowe VIII,
L.P., WCAS Information Partners, L.P., and BTI Investors, LLC,
dated December 28, 1999.
10.28 Agreement between BellSouth Telecommunications Inc. and Business
Telecom, Inc., dated February 21, 2000.
11.1 Computation of Earnings Per Common Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1+++ Subsidiaries of BTI Telecom Corp.
27.1 Financial Data Schedule for the Year Ended December 31, 1999
</TABLE>
- --------
* Filed as an exhibit to the Registration Statement on Form S-4 (File No.
333-41723).
** Filed as an exhibit to the Current Report on Form 8-K filed January 12,
2000.
*** Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1998.
+ Filed as an exhibit to the Registration Statement on Form S-1 (File No.
333-83101).
++ Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
+++ Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997.
+ Confidential treatment requested.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on our behalf by the undersigned, thereunto duly authorized.
BTI Telecom Corp.
Date: March 30, 2000 /s/ Peter T. Loftin
By: _________________________________
Peter T. Loftin,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter T. Loftin Chairman, Chief Executive March 30, 2000
______________________________________ Officer (Principal
Peter T. Loftin Executive Officer) and
Director
/s/ Brian K. Branson Chief Financial Officer March 30, 2000
______________________________________ (Principal Financial and
Brian K. Branson Accounting Officer) and
Director
/s/ R. Michael Newkirk President, Chief Operating March 30, 2000
______________________________________ Officer and Director
R. Michael Newkirk
/s/ Thomas F. Darden Director March 30, 2000
______________________________________
Thomas F. Darden
/s/ William M. Moore, Jr. Director March 30, 2000
______________________________________
William M. Moore, Jr.
/s/ Paul J. Rizzo Director March 30, 2000
______________________________________
Paul J. Rizzo
/s/ Anthony J. deNicola Director March 30, 2000
______________________________________
Anthony J. deNicola
/s/ Thomas E. McInerney Director March 30, 2000
______________________________________
Thomas E. McInerney
</TABLE>
39
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated Statements of Redeemable Preferred Stock and Shareholders'
Deficit for the Years Ended December 31, 1997, 1998 and 1999............. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999...................................................... 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 Shareholders
BTI Telecom Corp.
We have audited the accompanying consolidated balance sheets of BTI Telecom
Corp. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, redeemable preferred stock and
shareholders' deficit and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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. and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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
January 17, 2000
F-2
<PAGE>
BTI TELECOM CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 12,767 $ 86,149
Restricted cash........................................ 27,282 28,997
Accounts receivable, net............................... 25,840 34,157
Accounts and notes receivable from related parties..... 344 617
Other current assets................................... 1,551 1,456
--------- ---------
Total current assets................................. 67,784 151,376
Equipment, furniture and fixtures:
Equipment, furniture and fixtures...................... 103,416 200,059
Construction in progress............................... 27,052 10,925
Less: accumulated depreciation and amortization........ 28,508 44,410
--------- ---------
Total equipment, furniture and fixtures.............. 101,960 166,574
Other assets, net........................................ 13,929 16,884
Restricted cash, non-current............................. 25,498 --
--------- ---------
Total assets......................................... $ 209,171 $ 334,834
========= =========
Liabilities, redeemable preferred stock and shareholders'
deficit
Current liabilities:
Accounts payable....................................... $ 46,376 $ 59,546
Accrued expenses....................................... 3,461 3,931
Accrued interest....................................... 7,772 8,203
Shareholder note payable............................... 763 --
Advance billings and other liabilities................. 4,813 5,993
--------- ---------
Total current liabilities............................ 63,185 77,673
Long-term debt........................................... 254,119 279,000
Other long-term liabilities.............................. 1,709 1,747
--------- ---------
Total liabilities.................................... 319,013 358,420
Redeemable preferred stock, $.01 par value, authorized
10,000,000 shares:
Series A redeemable convertible preferred stock,
200,000 shares issued and outstanding (aggregate
liquidation preference of $200,000)................... -- 195,756
Shareholders' deficit:
Common stock, no par value, authorized 500,000,000
shares, 100,000,000 and 92,397,661 shares issued and
outstanding in 1998 and 1999, respectively............ 857 1,864
Common stock warrants.................................. -- 27,000
Unearned compensation.................................. (35) (737)
Accumulated deficit.................................... (110,664) (247,469)
--------- ---------
Total shareholders' deficit.......................... (109,842) (219,342)
--------- ---------
Total liabilities, redeemable preferred stock and
shareholders' deficit................................... $ 209,171 $ 334,834
========= =========
</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,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue.......................................... $194,949 $212,554 $260,049
Cost of services................................. 139,030 150,901 173,153
-------- -------- --------
Gross profit..................................... 55,919 61,653 86,896
Selling, general and administrative expenses..... 53,518 68,554 86,133
Depreciation and amortization.................... 6,613 11,457 19,412
-------- -------- --------
Loss from operations............................. (4,212) (18,358) (18,649)
Other income (expense):
Interest expense................................. (8,806) (25,430) (28,531)
Other income, principally interest............... 2,379 5,555 2,454
-------- -------- --------
Loss before income taxes......................... (10,639) (38,233) (44,726)
Income taxes..................................... -- -- --
-------- -------- --------
Net loss......................................... $(10,639) $(38,233) $(44,726)
======== ======== ========
Dividend on preferred stock...................... -- -- (27,000)
-------- -------- --------
Net loss available for common shareholders....... $(10,639) $(38,233) $(71,726)
======== ======== ========
Basic and diluted loss per share................. $ (.06) $ (.38) $ (.72)
======== ======== ========
Weighted average shares outstanding.............. 172,603 100,000 99,938
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
(In thousands)
<TABLE>
<CAPTION>
Redeemable
Preferred Stock Shareholders' Deficit
--------------- -------------------------------------------------------
Common Total
Common Stock Accumulated Unearned Shareholders'
Series A Stock Warrants Deficit Compensation Deficit
--------------- ------ -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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......... -- 820 -- -- (82) 738
Decrease in unrealized
gains................. -- -- -- (1) -- (1)
-------- ------ ------- --------- ----- ---------
Balance at December
31,1997................ $ $ 857 $ -- $ (70,349) $ (82) $ (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................ $ -- $ 857 $ -- $(110,664) $ (35) $(109,842)
Net loss............... -- -- -- (44,726) -- (44,726)
Distributions.......... -- -- -- (82) -- (82)
Repurchase of shares... -- (3) -- (64,997) -- (65,000)
Compensation related to
stock options......... -- 1,010 -- -- (702) 308
Issuance of preferred
stock and related
warrants.............. 168,756 -- 27,000 -- -- 27,000
Dividend on preferred
stock ................ 27,000 -- -- (27,000) -- (27,000)
-------- ------ ------- --------- ----- ---------
Balance at December 31,
1999................... $195,756 $1,864 $27,000 $(247,469) $(737) $(219,342)
======== ====== ======= ========= ===== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net loss....................................... $ (10,639) $(38,233) $(44,726)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation................................. 5,427 9,201 15,930
Amortization................................. 1,186 2,256 3,482
Non-cash compensation related to stock
options..................................... 738 47 308
Changes in operating assets and liabilities:
Accounts receivable........................ 307 (3,775) (8,317)
Accounts and notes receivable from related
parties................................... (645) 301 (273)
Other assets............................... (437) 150 (155)
Accounts payable and accrued expenses...... 4,168 20,057 13,640
Accrued interest expense................... 7,100 540 431
Advance billings and other liabilities..... 1,006 3,038 1,218
--------- -------- --------
Net cash provided by (used in) operating
activities.................................... 8,211 (6,418) (18,462)
Investing Activities:
Change in restricted cash.................... (74,583) 22,262 23,783
Sales of marketable securities............... -- 6 --
Purchases of equipment, furniture and
fixtures, net............................... (22,792) (66,311) (80,544)
Purchase of FiberSouth assets................ (35,186) -- --
Purchases of other assets.................... (687) (3,123) (4,506)
Settlement of FiberSouth stock option
repurchase obligation....................... -- (2,300) --
--------- -------- --------
Net cash used in investing activities.......... (133,248) (49,466) (61,267)
Financing Activities:
Net (payments on) proceeds from long-term
debt........................................ (18,671) 4,119 24,881
Proceeds from senior notes................... 250,000 -- --
Proceeds from issuance of redeemable
preferred stock............................. -- -- 195,756
Decrease in other long-term liabilities...... (159) (89) --
Payments of shareholder note payable......... (232) (943) (763)
Increase in deferred financing costs and
other assets................................ (9,523) (832) (1,681)
Repurchase of common stock................... (28,286) -- (65,000)
Distributions paid........................... (1,587) (606) (82)
--------- -------- --------
Net cash provided by financing activities...... 191,542 1,649 153,111
--------- -------- --------
Increase (decrease) in cash and cash
equivalents................................... 66,505 (54,235) 73,382
Cash and cash equivalents at beginning of
period........................................ 497 67,002 12,767
--------- -------- --------
Cash and cash equivalents at end of period..... $ 67,002 $ 12,767 $ 86,149
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--BTI Telecom Corp. and its majority owned
subsidiaries (the "Company" or "BTITC") provide (1) integrated retail
services, which include long distance, local, paging, advanced intelligent
network applications, operator and other enhanced services, primarily to small
to medium-sized business customers located in the southeastern United States;
(2) data services, which include dial-up and dedicated Internet service, DSL
high-speed Internet access, private line, frame relay and ATM services; and
(3) wholesale voice services, which include switched/dedicated access and
prepaid calling card services primarily to other telecommunication carriers.
The Company serves its customers utilizing an advanced 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, 1999 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 and 1999 was approximately $1.5 million and $1.8 million, respectively.
There were no amounts capitalized in 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, 1998 and 1999 were $11.2 million and $12.9 million, respectively.
Accumulated amortization of these costs at December 31, 1998 and 1999 was $2.0
million and $3.4 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, 1998 and
1999 were $7.5 million and $12.0 million, respectively, with accumulated
amortization of $4.8 million and $6.4 million, respectively.
F-7
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The balance in "Other Assets" as of December 31, 1998 and 1999 also includes
$1.5 million for the multi-media franchise the Company purchased from a
related company (Note 9). This asset is being amortized using the straight
line method over a four year period, with accumulated amortization at December
31, 1998 and 1999 of $.1 million and $.5 million, respectively.
Supplemental Cash Flow Information--The Company paid interest of $1.7
million, $26.4 million and $29.9 million for the years ended December 31,
1997, 1998 and 1999, respectively. The transfer of paging equipment from
inventory to equipment for the years ended December 31, 1997 and 1998 was $.4
million and $.3 million, respectively. There were no transfers of paging
equipment during 1999. The Company paid no income taxes for the years ended
December 31, 1997, 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 $5.3 million and $3.8 million as of December 31, 1998 and 1999,
respectively.
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 $5.0 million and $5.9 million at December 31, 1998 and
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 $3.9 million and $5.6 million at December 31, 1998 and 1999, 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 was completely
amortized as of December 31, 1998. All other advertising costs are expensed as
incurred. The Company expensed $1.1 million, $3.1 million and $2.8 million in
advertising costs during 1997, 1998 and 1999, respectively.
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.
Basic and Diluted Loss Per Share--Basic loss per share is calculated by
dividing net loss by the weighted average number of common shares outstanding
for the period. Diluted loss per share generally includes any dilutive effects
of options, warrants and convertible securities. At December 31, 1997, 1998
and 1999, common stock equivalents were excluded from the diluted loss per
share calculations due to their anti-dilutive effect as a result of the
Company's net loss for these years.
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
F-8
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to continue to account for such items using the 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.
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 loss
as presented.
Recently Issued Accounting Standards--In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 will
require the recognition of all derivatives on the Company's consolidated
balance sheet at fair value. SFAS 133, as amended by SFAS 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company does not anticipate that the adoption of SFAS 133 will have a
significant effect on its results of operations or financial position.
Reclassifications--Certain amounts in the December 31, 1997 and 1998
financial statements have been reclassified to conform to the December 31,
1999 presentation.
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 were required to be held in escrow for the
payment of the first six scheduled interest payments due on the Senior Notes;
four of such interest payments have been made as of December 31, 1999. 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
F-9
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 deficit. 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.
NOTE 3: EQUIPMENT, FURNITURE AND FIXTURES
Major classes of equipment, furniture and fixtures are summarized below:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Data processing equipment................................. $ 9,864 $ 14,008
Telephone service equipment............................... 60,131 85,554
Fiber optic network....................................... 24,517 87,680
Office furnishings and equipment.......................... 3,934 4,794
Leasehold improvements.................................... 4,970 8,023
Construction in progress.................................. 27,052 10,925
Less: accumulated depreciation............................ 28,508 44,410
-------- --------
Total equipment, furniture and fixtures................... $101,960 $166,574
======== ========
</TABLE>
NOTE 4: LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Unsecured 10 1/2% Senior Notes, due 2007.................. $250,000 $250,000
Credit Facilities, due 2002............................... 4,119 29,000
-------- --------
$254,119 $279,000
======== ========
</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,
F-10
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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. At December 31, 1999, no amounts were
outstanding under the Facilities. In addition, there was $.14 million
outstanding in letters of credit at December 31, 1999. The Facilities
agreement expires and amounts outstanding are due in September 2002.
Borrowings 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 (5.82%, 5.9%, and 6.0% at December 31, 1999,
respectively) or the prime rate (8.5% at December 31, 1999), plus an
applicable margin. This margin varies based on the Company's financial
position from 0.0%-1.25% for borrowings under the prime rate option and from
1.75%-3.0% 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 September 1999, the Company obtained an additional $60.0 million credit
facility (the "Facility"). Borrowings under the Facility are to be used to
finance segments of the Company's fiber optic network and associated
infrastructure. The Facility agreement expires and amounts outstanding are due
in September 2002. Borrowings under the Facility are secured by a first
security interest in the Company's fiber optic network and associated
infrastructure and a secondary interest in substantially all of the Company's
assets. Outstanding amounts bear interest, at the Company's option, at either
the 30-, 60- or 90-day LIBOR rate (5.82%, 5.9%, and 6.0% at December 31, 1999,
respectively) or the prime rate (8.5% at December 31, 1999), plus an
applicable margin. This margin varies based on the Company's financial
position and additional equity issuances from 2.0%-3.5% for borrowings under
the LIBOR option and from 1.0%-2.5% for borrowings under the prime rate
option. The Company is also required to pay a fee of 1.5% per year on the
unused commitment. Borrowings outstanding under the Facility were $29.0
million at December 31, 1999. The Facility contains 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 December
31, 1999 was $192.8 million and $261.6 million as compared to the carrying
value of $254.1 million and $279.0 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" ("SFAS 109"). The cumulative
effect of adopting SFAS 109 is reflected in the Company's financial statements
for the year ended December 31, 1997.
F-11
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes are calculated using the liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Deferred income taxes arise from temporary
differences between the income tax basis and financial reporting basis of
assets and liabilities. Components of the Company's income tax expense are as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Current:
Federal................................................ $ -- $ --
State.................................................. -- --
Deferred:
Federal................................................ 13,512 10,915
State.................................................. 1,930 1,559
-------- --------
Income tax benefit....................................... $ 15,442 $ 12,474
Changes in valuation allowance........................... (15,442) (12,474)
-------- --------
Income tax expense....................................... $ -- $ --
======== ========
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(In thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation......................... $ 3,123 $ 8,375
Line access costs.................................. 826 957
FiberSouth asset purchase.......................... 624 627
Other.............................................. 134 237
-------- --------
Total deferred tax liabilities....................... 4,707 10,196
Deferred tax assets:
Stock options...................................... 678 613
Net operating loss carryforward.................... 19,761 38,163
Accounts receivable reserve........................ 2,108 1,503
Other.............................................. 638 869
-------- --------
Total deferred tax assets............................ 23,185 41,148
Valuation allowance.................................. (19,051) (31,525)
-------- --------
4,134 9,623
-------- --------
Net deferred tax liabilities......................... $ (573) $ (573)
======== ========
</TABLE>
For the years ended December 31, 1997, 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, 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. The Tax Reform Act of 1986 contains provisions that limit the
ability to utilize net operating loss carryforwards in the case of certain
events, including significant changes in ownership interests.
F-12
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998 and December 31, 1999, the Company had net operating
loss carryforwards of approximately $49.4 million and $96.8 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>
1998 1999
----- -----
<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>
NOTE 6: SHAREHOLDERS' 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
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, 1998 of $.8 million represents the amounts
remitted back to the Company by the non-Retiring Shareholder under the
original agreement, plus accrued interest at 8.5%. The shareholder note
payable was repaid in full during 1999.
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.
F-13
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock--Of the Company's 10,000,000 authorized shares of $.01 par
value preferred stock, 200,000 shares were designated as Series A Preferred
Stock ("Series A Preferred Stock"). In December 1999, the Company completed
the issuance of 200,000 shares of its Series A Preferred Stock in a private
placement offering for net proceeds of approximately $196 million (after
deducting issuance costs of approximately $4 million). Series A Preferred
Stock ranks senior to the Company's common stock as to dividends and
liquidation rights and has voting rights equal to that of common stock. Each
share of Series A Preferred Stock is immediately convertible into 116.959
shares of common stock, subject to adjustment for dilutive issuances of the
Company's common stock. The Company has the right to force conversion of the
Series A Preferred Stock in certain instances as outlined in the purchase
agreement. The holders are also entitled to dividends equal to the greater of
(i) 6% per annum of the original purchase price of $1,000 per share or (ii)
the amount of dividends that would have been received during such period had
the Series A Preferred Stock been converted into shares of the Company's
common stock. After the later of a period of seven years or six months after
the repayment of the Company's Senior Notes, the Preferred Stock is
redeemable, at the option of the holders, at the greater of (i) $1,000 per
share plus accrued and unpaid dividends thereon or (ii) fair market value on
such date. In the event of liquidation, dissolution or winding up of the
Company, the holders are entitled to be paid out of the assets of the Company,
prior and in preference to common stockholders or any other class or series of
capital stock, an amount equal to the greater of (i) $1,000 per share plus
accrued and unpaid dividends thereon or (ii) such amount as would have been
payable had the Series A Preferred Stock been converted into shares of the
Company's common stock immediately prior to such an event.
In connection with the sale of the Series A Preferred Stock, the Company
issued warrants to purchase 4.5 million shares of common stock of the Company
at $.01 per share, expiring ten years from the date of issuance. The warrants
are eligible for exercise three years after the issuance date and are
cancelable by the Company if the Company closes a public equity offering and
its stock achieves certain price levels outlined in the Stock Purchase
Agreement. The warrants had an estimated fair value of $27.0 million on the
date of issuance. The Company recorded the estimated value of the common stock
warrants as a preferred dividend on the date the warrants were issued.
The Board of Directors approved the use of $65 million of the net proceeds
from the issuance of the Series A Preferred Stock to repurchase approximately
7.6 million shares of the Company's outstanding common stock held by its
Chairman and Chief Executive Officer. The repurchase has been recorded as a
reduction of common stock and accumulated deficit.
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 $.4
million, $.6 million and $.08 million in 1997, 1998 and 1999 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.
F-14
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loss Per Share--The following table sets forth the computation of basic and
diluted loss per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share":
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Numerator:
Net loss................................... $(10,639) $(38,233) $(44,726)
Preferred stock dividend--issuance of
warrants.................................. -- -- (27,000)
-------- -------- --------
Numerator for basic and diluted loss per
share--loss available to common
stockholders.............................. $(10,639) $(38,233) $(71,726)
Denominator:
Denominator for basic and diluted loss per
share--weighted-average shares............ 172,603 100,000 99,938
-------- -------- --------
Basic and diluted loss per share........... $ (.06) $ (.38) $ (.72)
======== ======== ========
</TABLE>
Shares Reserved for Issuance--Shares of common stock reserved for future
issuance are as follows at December 31, 1999:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
For conversion of convertible Series A Preferred Stock........ 23,392
Outstanding warrants.......................................... 4,500
Outstanding stock options..................................... 3,561
Possible future issuances under stock option plan............. 3,939
------
35,392
======
</TABLE>
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, unless sooner terminated by the Board of
Directors, for the purpose of attracting and retaining certain key employees
of the Company. The 1997 Plan provides that an aggregate of 7,500,000 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. Outstanding options vest at various
times from the date of issuance to 3 years.
F-15
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
----------------------------
1997 1998 1999
-------- -------- --------
In thousands, except per
share data
<S> <C> <C> <C>
Net loss
Actual....................................... $(10,639) $(38,233) $(44,726)
Pro forma.................................... (10,649) (38,375) (44,768)
Loss per share
Actual....................................... $ (.06) $ (.38) $ (.72)
Pro forma.................................... (.06) (.38) (.72)
</TABLE>
Option activity under the Company's plans is summarized below:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1998 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
In thousands, except per share amounts
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year.................. -- $-- 1,866 $ .13 2,855 $1.10
Options granted........... 1,866 .13 989 2.89 746 4.20
Options cancelled......... -- -- -- -- (40) 3.00
----- ---- ----- ----- ----- -----
Outstanding at end of
year..................... 1,866 $.13 2,855 $1.10 3,561 $1.75
===== ==== ===== ===== ===== =====
Options exercisable at end
of year.................. 1,720 $.13 2,106 $ .55 2,555 $1.05
Shares available for
future grant............. 3,134 2,145 3,939
</TABLE>
The weighted-average remaining contractual life of options as of December
31, 1999 is 7.07 years, with exercise prices ranging from $.001 to $7.50 per
share.
The per share weighted average fair value of stock options granted by the
Company during 1997, 1998 and 1999 was approximately $.45, $.22 and $1.92,
respectively, on the dates of grant.
The Company recorded non-cash compensation expense of $.05 million and $.3
million during the years ended December 31, 1998 and 1999, respectively.
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>
Year ended December 31,
-------------------------------
1997 1998 1999
--------- --------- -----------
<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% 5.5%
</TABLE>
F-16
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, subject to Internal Revenue Service limits. The Company matched 50% of
employee contributions in 1997, 1998 and 1999, up to a maximum of 6% of each
employee's annual salary. Employer contributions for the years ended December
31, 1997, 1998 and 1999 were $.2 million, $.2 million and $.6 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 one
of these affiliates included $.3 million and $.6 million at December 31, 1998
and 1999, respectively. Prior to the date of acquisition in 1997, the Company
paid approximately $1.0 million 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, 1997 and 1998 and
$.2 million for the year ending December 31, 1999. The Company also leased
certain facilities from its shareholder (Note 10). The airplane and facilities
leases were terminated in 1999.
Effective July 15, 1998, the Company purchased a multi-media franchise from
FiberSouth, an entity related through common ownership, 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 transaction was approved by the City of Raleigh in the first
quarter of 1999.
In 1998, the Company sold certain integrated telecommunications services to
agents and customers of an affiliate related through common ownership. The
Company paid the affiliate a commission on all sales made through the
affiliate. The commissions totaled $.5 million in 1998. There were no
commissions paid during 1999.
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 has asserted that it is seeking actual monetary damages ranging
from $4.0 million to $12.0 million. 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.
F-17
<PAGE>
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating leases--The Company rents its facilities and certain office and
other equipment under operating leases that 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 (in thousands):
<TABLE>
<CAPTION>
2004 and
2000 2001 2002 2003 Thereafter
---- ------ ------ ------ ----------
<S> <C> <C> <C> <C>
$4,458 $3,844 $3,701 $3,415 $3,063
====== ====== ====== ====== ======
</TABLE>
Total rent expense was $4.1 million, $5.1 million and $6.5 million
(including facilities rent of $60,000, $60,000 and $40,000, respectively, paid
to a related party) in 1997, 1998 and 1999, 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, $47.7 million of which was fulfilled through December 31, 1999.
The remaining commitments extend through 2000.
During 1997, the Company signed a commitment with a municipality to
contribute $3.1 million 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, 1999, the Company has paid $.6
million of this commitment.
During 1999, the Company signed sponsorship and advertising agreements with
a professional hockey team and an operator of an entertainment and sports
arena. The Company has committed to pay an aggregate of $4.1 million under the
agreements in exchange for a sponsorship of the hockey team and certain
advertising and promotional benefits over the next five years. Payments under
the agreement will be made over a five-year period commencing in October 1999.
As of December 31, 1999, 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 1998 or 1999.
NOTE 11: ENTERPRISE WIDE DISCLOSURE
Under Statement of financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," the Company operated, for
all periods presented, as a single segment.
Revenues by product line are disclosed as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Retail Long Distance $107,861 $109,671 $107,320
Local Service 32 11,899 38,796
--------------------------
Retail Integrated Voice 107,893 121,570 146,116
Data Services 9,852 17,765 27,631
Wholesale Long Distance 77,204 73,219 86,302
--------------------------
Total $194,949 $212,554 $260,049
======== ======== ========
</TABLE>
All operations and assets are based in the United States.
F-18
<PAGE>
BTI TELECOM CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1998 and 1999
(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, 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
====== ====== ======= ======
Year ended December 31, 1999:
Allowance for doubtful
accounts...................... $5,271 $3,448 $(4,962) $3,757
====== ====== ======= ======
</TABLE>
F-19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1* Agreement and Plan of Merger 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 Restatement of BTI Telecom Corp.
3.2** Second Amended and Restated Bylaws of BTI Telecom Corp.
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 102% 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.
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.
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 Communications 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.
10.17++ Fourth Amendment to the GE Capital Agreement.
10.18++ Loan Agreement, entered into on September 8, 1999 between Business
Telecom, Inc. and Bank of America, National Association and the
other financial institutions party thereto from time to time as
lenders and Bank of America, National Association as Agent.
10.19++ First Amendment to the Bank of America Loan Agreement.
10.20++ Fifth Amendment to the GE Capital Agreement.
10.21** Shareholders Agreement among BTI Telecom Corp., Peter T. Loftin,
Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Information
Partners, L.P., and BTI Investors LLC, dated December 28, 1999.
</TABLE>
<PAGE>
Exhibit 12.1
EXHIBIT 12.1 BTI TELECOM CORP. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (loss) before taxes.................................. $ 371 $2,606 $(10,639) $(38,233) $(44,726)
Less interest capitalized to inventories
during the period.......................................... -- -- -- -- --
Adjusted income (loss) before taxes......................... 371 2,606 (10,639) (38,233) (44,726)
Fixed Charges: Other interest expense....................... 1,297 1,695 8,805 25,430 28,531
Amortization of financing costs............................. 25 99 421 1,469 1,292
Rental expense(1)........................................... 947 1,305 611 761 969
Total fixed charges......................................... 2,269 3,099 9,837 27,660 30,792
Earnings.................................................... 2,640 5,705 (802) (10,573) (13,934)
Ratio (shortfall) of earnings to fixed charges.............. 1.2x 1.8x -- -- --
</TABLE>
<PAGE>
EXHIBIT 10.28
AGREEMENT
BETWEEN
BELLSOUTH TELECOMMUNICATIONS INC.
AND
BUSINESS TELECOM, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
General Terms and Conditions
Part A
<S> <C>
1. Purpose
2. Term of the Agreement
3. Ordering Procedures
4. Parity
5. White Pages Listings
6. Bona Fide Request/New Business Request Process for Further Unbundling
7. Court Ordered Requests for Call Detail Records and Other Subscriber
Information
8. Liability and Indemnification
9. Intellectual Property Rights and Indemnification
10. Treatment of Proprietary and Confidential Information
11. Assignments
12. Resolution of Disputes
13. Taxes
14. Force Majeure
15. Year 2000 Compliance
16. Modification of Agreement
17. Waivers
18. Governing Law
19. Arm's Length Negotiations
20. Notices
21. Rule of Construction
22. Headings of No Force or Effect
23. Multiple Counterparts
24. Implementation of Agreement
25. Filing of Agreement
26. Entire Agreement
Part B - Definitions
Attachment 1 - Resale
Attachment 2 - Network Elements and Other Services
Attachment 3 - Network Interconnection
Attachment 4 - Physical Collocation
Attachment 5 - Access to Numbers and Number Portability
Attachment 6 - Ordering and Provisioning
Attachment 7 - Billing and Billing Accuracy Certification
Attachment 8 - Rights-of-Way, Conduits and Pole Attachments
Attachment 9 - Performance Measurements
Attachment 10 - Agreement Implementation Template
</TABLE>
<PAGE>
General Terms and Conditions - Part A
Page 1
AGREEMENT
THIS AGREEMENT is made by and between BellSouth Telecommunications,
Inc., ("BellSouth"), a Georgia corporation, and Business Telecom, Inc., ("BTI")
a North Carolina corporation, and shall be deemed effective as of February 21,
2000. This Agreement may refer to either BellSouth or BTI or both as a "Party"
or "Parties."
W I T N E S S E T H
WHEREAS, BellSouth is a local exchange telecommunications company
authorized to provide telecommunications services in the states of Alabama,
Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina and Tennessee; and
WHEREAS, BTI is or seeks to become an alternative local exchange
telecommunications company ("CLEC") authorized to provide telecommunications
services in the states of Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, and Tennessee; and
WHEREAS, the Parties wish to resell BellSouth's telecommunications
services and/or interconnect their facilities, purchase network elements and
other services, and exchange traffic specifically for the purposes of fulfilling
their obligations pursuant to sections 251 and 252 of the Telecommunications Act
of 1996 ("the Act").
NOW THEREFORE, in consideration of the mutual agreements contained
herein, BellSouth and BTI agree as follows:
1. Purpose
The Parties agree that the rates, terms and conditions contained
within this Agreement, including all Attachments, comply and conform
with each Parties' obligations under sections 251 and 252 of the Act.
The resale, access and interconnection obligations contained herein
enable BTI to provide competing telecommunications service pursuant
to the Act, to residential and business subscribers within the
territory of BellSouth. The Parties agree that BTI will not be
considered to have offered telecommunications services to the public
in any state within BellSouth's region until such time as it has
ordered services for resale or interconnection facilities for the
purposes of providing business and/or residential telecommunications
services pursuant to the Act to customers.
<PAGE>
General Terms and Conditions - Part A
Page 2
2. Term of the Agreement
2.1 The term of this Agreement shall be two years, beginning February 21,
2000, and shall apply to the state(s) of Alabama, Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and
Tennessee. If as of the expiration of this Agreement, a Subsequent
Agreement (as defined in Section 2.2 below) has not been executed by
the Parties, this Agreement shall continue on a month-to-month basis
while a Subsequent Agreement is being negotiated. The Parties' rights
and obligations with respect to this Agreement after expiration shall
be as set forth in Section 2.4 below.
2.2 The Parties agree that by no later than one hundred and eighty (180)
days prior to the expiration of this Agreement, they shall commence
negotiations with regard to the terms, conditions and prices of resale
and/or local interconnection to be effective beginning on the
expiration date of this Agreement ("Subsequent Agreement").
2.3 If, within one hundred and thirty-five (135) days of commencing the
negotiation referred to in Section 2.2 above, the Parties are unable
to satisfactorily negotiate new resale and/or local interconnection
terms, conditions and prices, either Party may petition the Commission
to establish appropriate local interconnection and/or resale
arrangements pursuant to 47 U.S.C. 252. The Parties agree that, in
such event, they shall encourage the Commission to issue its order
regarding the appropriate local interconnection and/or resale
arrangements no later than the expiration date of this Agreement. The
Parties further agree that in the event the Commission does not issue
its order prior to the expiration date of this Agreement, or if the
Parties continue beyond the expiration date of this Agreement to
negotiate the local interconnection and/or resale arrangements without
Commission intervention, the terms, conditions and prices ultimately
ordered by the Commission, or negotiated by the Parties, will be
effective retroactive to the day following the expiration date of this
Agreement.
2.4 Notwithstanding the foregoing, in the event that as of the date of
expiration of this Agreement the parties are negotiating in good faith
and have converted the existing agreement to a month-to-month term,
the Parties have not entered into a Subsequent Agreement and either no
arbitration proceeding has been filed in accordance with Section 2.3
above, or the Parties have not mutually agreed (where permissible) to
extend the arbitration window for petitioning the applicable
Commission(s) for resolution of those terms upon which the Parties
have not agreed, then either Party may terminate this Agreement upon
sixty (60) days notice to the other Party. In the event that
BellSouth terminates this Agreement as provided above, BellSouth shall
continue to offer services to BTI pursuant to the terms, conditions
and rates set forth in either BellSouth's Statement of Generally
Available Terms (SGAT) to the extent an SGAT has been approved by the
applicable Commission(s), or the then current standard interconnection
agreement. In the event that the SGAT or BellSouth's standard
<PAGE>
General Terms and Conditions - Part A
Page 3
interconnection agreement becomes effective as between the Parties,
the Parties may continue to negotiate a Subsequent Agreement, and the
terms of such Subsequent Agreement shall be effective retroactive to
the day following expiration of this Agreement.
3. Ordering Procedures
3.1 BTI shall provide BellSouth its Carrier Identification Code (CIC),
Operating Company Number (OCN), Group Access Code (GAC) and Access
Customer Name and Address (ACNA) code as applicable prior to placing
its first order.
3.2 The Parties agree to adhere to the BellSouth Local Interconnection and
Facility Based Ordering Guide and Resale Ordering Guide, as
appropriate for the services ordered.
3.3 BTI shall pay charges for Operational Support Systems (OSS) as set
forth in this Agreement in Attachment 1 and/or in Attachment 2, 3, 5
and 7 as applicable.
4. Parity
When BTI purchases, pursuant to Attachment 1 of this Agreement,
telecommunications services from BellSouth for the purposes of resale
to end users, BellSouth shall provide said services so that the
services are equal in quality, subject to the same conditions, and
provided within the same provisioning time intervals that BellSouth
provides to its affiliates, subsidiaries and end users. To the extent
technically feasible, the quality of a Network Element, as well as the
quality of the access to such Network Element provided by BellSouth to
BTI shall be at least equal in quality to that which BellSouth
provides to itself. The quality of the interconnection between the
networks of BellSouth and the network of BTI shall be at a level that
is equal to that which BellSouth provides itself, a subsidiary, an
Affiliate, or any other party. The interconnection facilities shall
be designed to meet the same technical criteria and service standards
that are used within BellSouth's network and shall extend to a
consideration of service quality as perceived by end users and service
quality as perceived by BTI.
5. White Pages Listings
BellSouth shall provide BTI and their customers access to white pages
directory listings under the following terms:
5.1 Listings. BTI shall provide all new, changed and deleted listings on
--------
a timely basis and BellSouth or its agent will include BTI residential
and business customer listings in the appropriate White Pages
(residential and business) or alphabetical directories. Directory
listings will make no distinction between BTI and BellSouth
subscribers.
<PAGE>
General Terms and Conditions - Part A
Page 4
5.2 Rates. Subscriber primary listing information in the White Pages
-----
shall be provided at no charge to BTI or its subscribers and BTI will
provide subscriber listing information to BellSouth at no charge.
5.3 Procedures for Submitting BTI Subscriber Information. BellSouth will
----------------------------------------------------
provide to BTI a magnetic tape or computer disk containing the proper
format for submitting subscriber listings. BTI will be required to
provide BellSouth with directory listings and daily updates to those
listings, including new, changed, and deleted listings, on a magnetic
tape, computer disk, or other mutually agreed upon means. These
procedures are detailed in BellSouth's Local Interconnection and
Facility Based Ordering Guide.
5.4 Unlisted/Non-Published Subscribers. BTI will be required to provide
----------------------------------
to BellSouth the names, addresses and telephone numbers of all BTI
customers that wish to be omitted from directories.
5.5 Inclusion of BTI Customers in Directory Assistance Database.
-----------------------------------------------------------
BellSouth will include and maintain BTI subscriber listings in
BellSouth's Directory Assistance databases at no charge and BTI shall
provide such Directory Assistance listings at no charge. BellSouth
and BTI will formulate appropriate procedures regarding lead time,
timeliness, format and content of listing information.
5.6 Listing Information Confidentiality. BellSouth will accord BTI's
-----------------------------------
directory listing information the same level of confidentiality that
BellSouth accords its own directory listing information, and BellSouth
shall limit access to BTI's customer proprietary confidential
directory information to those BellSouth employees who are involved in
the preparation of listings.
5.7 Optional Listings. Additional listings and optional listings will be
-----------------
offered by BellSouth at tariffed rates as set forth in the General
Subscriber Services Tariff, less the wholesale discount.
5.8 Delivery. BellSouth or its agent shall deliver White Pages
-----------
directories to BTI subscribers at no charge.
<PAGE>
General Terms and Conditions - Part A
Page 5
6. Bona Fide Request/New Business Request Process for Further Unbundling
To the extent BTI is a facilities based provider or a facilities
based and resale provider, this section shall apply. BellSouth shall,
upon request of BTI, provide to BTI access to its network elements at
any technically feasible point for the provision of BTI's
telecommunications service where such access is necessary and failure
to provide access would impair the ability of BTI to provide services
that it seeks to offer. Any request by BTI for access to a network
element, interconnection option, or for the provisioning of any
service or product that is not already available shall be treated as a
Bona Fide Request/New Business Request, and shall be submitted to
BellSouth pursuant to the Bona Fide Request/New Business Request
process set forth following.
6.1 A Bona Fide Request/New Business Request shall be submitted in writing
to BTI's Account Manager by BTI and shall specifically identify the
requested service date, technical requirements, space requirements
and/or such specifications that clearly define the request such that
BellSouth has sufficient information to analyze and prepare a
response. Such a request also shall include BTI's designation of the
request as being (i) pursuant to the Telecommunications Act of 1996 or
(ii) pursuant to the needs of the business.
7. Court Ordered Requests for Call Detail Records and Other Subscriber
Information
To the extent technically feasible, BellSouth maintains call detail
records for BTI end users for limited time periods and can respond to
subpoenas and court ordered requests for this information. BellSouth
shall maintain such information for BTI end users for the same length
of time it maintains such information for its own end users.
7.1 BTI agrees that BellSouth will respond to subpoenas and court ordered
requests delivered directly to BellSouth for the purpose of providing
call detail records when the targeted telephone numbers belong to BTI
end users. Billing for such requests will be generated by BellSouth
and directed to the bona fide requesting party.
7.2 BTI agrees that in cases where BTI receives subpoenas or court ordered
requests for call detail records for targeted telephone numbers
belonging to BTI end users, BTI will advise the law enforcement agency
initiating the request to redirect the subpoena or court ordered
request to BellSouth. Billing for call detail information will be
generated by BellSouth and directed to the law enforcement agency
initiating the request.
7.3 In cases where the timing of the response to the law enforcement
agency prohibits BTI from having the subpoena or court ordered request
redirected to BellSouth by
<PAGE>
General Terms and Conditions - Part A
Page 6
the law enforcement agency, BTI will furnish the official request to
BellSouth for providing the call detail information. BellSouth will
provide the call detail records to BTI and bill BTI a reasonable rate
for the information. BTI agrees to reimburse BellSouth for the call
detail information provided.
7.4 BTI will provide BTI end user and/or other customer information that
is available to BTI in response to subpoenas and court orders for
their own customer records. BellSouth will redirect subpoenas and
court ordered requests for BTI end user and/or other customer
information to BTI for the purpose of providing this information to
the law enforcement agency.
8. Liability and Indemnification
8.1 BellSouth Liability. BellSouth shall take financial responsibility
-------------------
for its own actions in causing, or its lack of action in preventing,
unbillable or uncollectible BTI revenues.
8.2 BTI Liability. In the event that BTI consists of two (2) or more
-------------
separate entities as set forth in the preamble to this Agreement, all
such entities shall be jointly and severally liable for the
obligations of BTI under this Agreement.
8.3 Liability for Acts or Omissions of Third Parties. Neither BellSouth
------------------------------------------------
nor BTI shall be liable for any act or omission of another
telecommunications company providing a portion of the services
provided under this Agreement.
8.4 Limitation of Liability.
-----------------------
8.4.1 Each Party's liability to the other for any loss, cost, claim, injury
or liability or expense, including reasonable attorney's fees relating
to or arising out of any negligent act or omission in its performance
of this Agreement whether in contract or in tort, shall be limited to
a credit for the actual cost of the services or functions not
performed or improperly performed.
8.4.2 Limitations in Tariffs. A Party may, in its sole discretion, provide
----------------------
in its tariffs and contracts with its Customer and third parties that
relate to any service, product or function provided or contemplated
under this Agreement, that to the maximum extent permitted by
Applicable Law, such Party shall not be liable to Customer or third
Party for (i) any Loss relating to or arising out of this Agreement,
whether in contract, tort or otherwise, that exceeds the amount such
Party would have charged that applicable person for the service,
product or function that gave rise to such Loss and (ii) Consequential
Damages. To the extent that a Party elects not to place in its tariffs
or contracts such limitations of liability, and the other Party incurs
a Loss as a result thereof, such Party shall indemnify and reimburse
the other Party for that portion of the Loss that would have been
limited had the first Party included in its tariffs and contracts the
limitations of liability that such other Party included in its own
tariffs at the time of such Loss.
<PAGE>
General Terms and Conditions - Part A
Page 7
8.4.3 Neither BellSouth nor BTI shall be liable for damages to the other's
terminal location, POI or other company's customers' premises
resulting from the furnishing of a service, including, but not limited
to, the installation and removal of equipment or associated wiring,
except to the extent caused by a company's negligence or willful
misconduct or by a company's failure to properly ground a local loop
after disconnection.
8.4.4 Under no circumstance shall a Party be responsible or liable for
indirect, incidental, or consequential damages, including, but not
limited to, economic loss or lost business or profits, damages arising
from the use or performance of equipment or software, or the loss of
use of software or equipment, or accessories attached thereto, delay,
error, or loss of data. In connection with this limitation of
liability, each Party recognizes that the other Party may, from time
to time, provide advice, make recommendations, or supply other
analyses related to the Services, or facilities described in this
Agreement, and, while each Party shall use diligent efforts in this
regard, the Parties acknowledge and agree that this limitation of
liability shall apply to provision of such advice, recommendations,
and analyses.
8.5 Indemnification for Certain Claims. The Party providing services
----------------------------------
hereunder, its affiliates and its parent company, shall be
indemnified, defended and held harmless by the Party receiving
services hereunder against any claim, loss or damage arising from the
receiving company's use of the services provided under this Agreement
pertaining to (1) claims for libel, slander or invasion of privacy
arising from the content of the receiving company's own
communications, or (2) any claim, loss or damage claimed by the
customer of the Party receiving services arising from such company's
use or reliance on the providing company's services, actions, duties,
or obligations arising out of this Agreement.
8.6 Disclaimer. EXCEPT AS SPECIFICALLY PROVIDED TO THE CONTRARY IN THIS
----------
AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATIONS OR WARRANTIES TO
THE OTHER PARTY CONCERNING THE SPECIFIC QUALITY OF ANY SERVICES, OR
FACILITIES PROVIDED UNDER THIS AGREEMENT. THE PARTIES DISCLAIM,
WITHOUT LIMITATION, ANY WARRANTY OR GUARANTEE OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, ARISING FROM COURSE OF PERFORMANCE,
COURSE OF DEALING, OR FROM USAGES OF TRADE.
9. Intellectual Property Rights and Indemnification
9.1 No License. No patent, copyright, trademark or other proprietary
----------
right is licensed, granted or otherwise transferred by this Agreement.
BTI is strictly prohibited from any use, including but not limited to
in sales, in marketing or
<PAGE>
General Terms and Conditions - Part A
Page 8
advertising of telecommunications services, of any BellSouth name,
service mark or trademark.
9.2 Ownership of Intellectual Property. Any intellectual property which
----------------------------------
originates from or is developed by a Party shall remain in the
exclusive ownership of that Party. Except for a limited license to
use patents or copyrights to the extent necessary for the Parties to
use any facilities or equipment (including software) or to receive any
service solely as provided under this Agreement, no license in patent,
copyright, trademark or trade secret, or other proprietary or
intellectual property right now or hereafter owned, controlled or
licensable by a Party, is granted to the other Party or shall be
implied or arise by estoppel. It is the responsibility of each Party
to ensure at no additional cost to the other Party that it has
obtained any necessary licenses in relation to intellectual property
of third Parties used in its network that may be required to enable
the other Party to use any facilities or equipment (including
software), to receive any service, or to perform its respective
obligations under this Agreement.
9.3 Indemnification. The Party providing a service pursuant to this
---------------Agreement will defend the Party receiving such service
or data provided as a result of such service against claims of
infringement arising solely from the use by the receiving Party of
such service and will indemnify the receiving Party for any damages
awarded based solely on such claims in accordance with Section 8 of
this Agreement.
9.4 Claim of Infringement. In the event that use of any facilities or
---------------------
equipment (including software), becomes, or in reasonable judgment of
the Party who owns the affected network is likely to become, the
subject of a claim, action, suit, or proceeding based on intellectual
property infringement, then said Party shall promptly and at its sole
expense, but subject to the limitations of liability set forth below:
9.4.1 modify or replace the applicable facilities or equipment (including
software) while maintaining form and function, or
9.4.2 obtain a license sufficient to allow such use to continue.
9.4.3 In the event 9.4.1 or 9.4.2 are commercially unreasonable, then said
Party may, terminate, upon reasonable notice, this contract with
respect to use of, or services provided through use of, the affected
facilities or equipment (including software), but solely to the extent
required to avoid the infringement claim.
9.5 Exception to Obligations. Neither Party's obligations under this
------------------------
Section shall apply to the extent the infringement is caused by: (i)
modification of the facilities or equipment (including software) by
the indemnitee; (ii) use by the indemnitee of the facilities or
equipment (including software) in combination with equipment or
facilities (including software) not provided or authorized by the
indemnitor provided the facilities or equipment (including software)
would not be infringing
<PAGE>
General Terms and Conditions - Part A
Page 9
if used alone; (iii) conformance to specifications of the indemnitee
which would necessarily result in infringement; or (iv) continued use
by the indemnitee of the affected facilities or equipment (including
software) after being placed on notice to discontinue use as set forth
herein.
9.6 Exclusive Remedy. The foregoing shall constitute the Parties' sole
----------------
and exclusive remedies and obligations with respect to a third party
claim of intellectual property infringement arising out of the conduct
of business under this Agreement.
10. Treatment of Proprietary and Confidential Information
10.1 Confidential Information. It may be necessary for BellSouth and BTI
------------------------
to provide each other with certain confidential information, including
trade secret information, including but not limited to, technical and
business plans, technical information, proposals, specifications,
drawings, procedures, customer account data, call detail records and
like information (hereinafter collectively referred to as
"Information"). All Information shall be in writing or other
tangible form and clearly marked with a confidential, private or
proprietary legend and that the Information will be returned to the
owner within a reasonable time. The Information shall not be copied
or reproduced in any form. BellSouth and BTI shall receive such
Information and not disclose such Information. BellSouth and BTI
shall protect the Information received from distribution, disclosure
or dissemination to anyone except employees of BellSouth and BTI with
a need to know such Information and which employees agree to be bound
by the terms of this Section. BellSouth and BTI will use the same
standard of care to protect Information received as they would use to
protect their own confidential and proprietary Information.
10.2 Exception to Obligation. Notwithstanding the foregoing, there will be
-----------------------
no obligation on BellSouth or BTI to protect any portion of the
Information that is: (1) made publicly available by the owner of the
Information or lawfully disclosed by a Party other than BellSouth or
BTI; (2) lawfully obtained from any source other than the owner of
the Information; or (3) previously known to the receiving Party
without an obligation to keep it confidential.
<PAGE>
General Terms and Conditions - Part A
Page 10
11. Assignments
Any assignment by either Party to any non-affiliated entity of any
right, obligation or duty, or of any other interest hereunder, in
whole or in part, without the prior written consent of the other Party
shall be void. A Party may assign this Agreement or any right,
obligation, duty or other interest hereunder to an Affiliate company
of the Party without the consent of the other Party. All obligations
and duties of any Party under this Agreement shall be binding on all
successors in interest and assigns of such Party. No assignment or
delegation hereof shall relieve the assignor of its obligations under
this Agreement in the event that the assignee fails to perform such
obligations.
12. Resolution of Disputes
Except as otherwise stated in this Agreement, the Parties agree that
if any dispute arises as to the interpretation of any provision of
this Agreement or as to the proper implementation of this Agreement,
either Party may petition the Commission for a resolution of the
dispute. However, each Party reserves any rights it may have to seek
judicial review of any ruling made by the Commission concerning this
Agreement.
13. Taxes
13.1 Definition. For purposes of this Section, the terms "taxes" and
----------
"fees" shall include but not limited to federal, state or local sales,
use, excise, gross receipts or other taxes or tax-like fees of
whatever nature and however designated (including tariff surcharges
and any fees, charges or other payments, contractual or otherwise, for
the use of public streets or rights of way, whether designated as
franchise fees or otherwise) imposed, or sought to be imposed, on or
with respect to the services furnished hereunder or measured by the
charges or payments therefore, excluding any taxes levied on income.
13.2 Taxes and Fees Imposed Directly On Either Providing Party or
------------------------------------------------------------
Purchasing Party.
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13.2.1 Taxes and fees imposed on the providing Party, which are not permitted
or required to be passed on by the providing Party to its customer,
shall be borne and paid by the providing Party.
13.2.2 Taxes and fees imposed on the purchasing Party, which are not required
to be collected and/or remitted by the providing Party, shall be borne
and paid by the purchasing Party.
13.3 Taxes and Fees Imposed on Purchasing Party But Collected And Remitted
---------------------------------------------------------------------
By Providing Party.
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<PAGE>
General Terms and Conditions - Part A
Page 11
13.3.1 Taxes and fees imposed on the purchasing Party shall be borne by the
purchasing Party, even if the obligation to collect and/or remit such
taxes or fees is placed on the providing Party.
13.3.2 To the extent permitted by applicable law, any such taxes and/or fees
shall be shown as separate items on applicable billing documents
between the Parties. Notwithstanding the foregoing, the purchasing
Party shall remain liable for any such taxes and fees regardless of
whether they are actually billed by the providing Party at the time
that the respective service is billed.
13.3.3 If the purchasing Party determines that in its opinion any such taxes
or fees are not payable, the providing Party shall not bill such taxes
or fees to the purchasing Party if the purchasing Party provides
written certification, reasonably satisfactory to the providing Party,
stating that it is exempt or otherwise not subject to the tax or fee,
setting forth the basis therefor, and satisfying any other
requirements under applicable law. If any authority seeks to collect
any such tax or fee that the purchasing Party has determined and
certified not to be payable, or any such tax or fee that was not
billed by the providing Party, the purchasing Party may contest the
same in good faith, at its own expense. In any such contest, the
purchasing Party shall promptly furnish the providing Party with
copies of all filings in any proceeding, protest, or legal challenge,
all rulings issued in connection therewith, and all correspondence
between the purchasing Party and the taxing authority.
13.3.4 In the event that all or any portion of an amount sought to be
collected must be paid in order to contest the imposition of any such
tax or fee, or to avoid the existence of a lien on the assets of the
providing Party during the pendency of such contest, the purchasing
Party shall be responsible for such payment and shall be entitled to
the benefit of any refund or recovery.
13.3.5 If it is ultimately determined that any additional amount of such a
tax or fee is due to the imposing authority, the purchasing Party
shall pay such additional amount, including any interest and penalties
thereon.
13.3.6 Notwithstanding any provision to the contrary, the purchasing Party
shall protect, indemnify and hold harmless (and defend at the
purchasing Party's expense) the providing Party from and against any
such tax or fee, interest or penalties thereon, or other charges or
payable expenses (including reasonable attorney fees) with respect
thereto, which are incurred by the providing Party in connection with
any claim for or contest of any such tax or fee.
13.3.7 Each Party shall notify the other Party in writing of any assessment,
proposed assessment or other claim for any additional amount of such a
tax or fee by a taxing authority; such notice to be provided, if
possible, at least ten (10) days prior to the date by which a
response, protest or other appeal must be filed, but in no event later
than thirty (30) days after receipt of such assessment, proposed
assessment or claim.
<PAGE>
General Terms and Conditions - Part A
Page 12
13.4 Taxes and Fees Imposed on Providing Party But Passed On To Purchasing
---------------------------------------------------------------------
Party.
-----
13.4.1 Taxes and fees imposed on the providing Party, which are permitted or
required to be passed on by the providing Party to its customer, shall
be borne by the purchasing Party.
13.4.2 To the extent permitted by applicable law, any such taxes and/or fees
shall be shown as separate items on applicable billing documents
between the Parties. Notwithstanding the foregoing, the purchasing
Party shall remain liable for any such taxes and fees regardless of
whether they are actually billed by the providing Party at the time
that the respective service is billed.
13.4.3 If the purchasing Party disagrees with the providing Party's
determination as to the application or basis for any such tax or fee,
the Parties shall consult with respect to the imposition and billing
of such tax or fee. Notwithstanding the foregoing, the providing Party
shall retain ultimate responsibility for determining whether and to
what extent any such taxes or fees are applicable, and the purchasing
Party shall abide by such determination and pay such taxes or fees to
the providing Party. The providing Party shall further retain
ultimate responsibility for determining whether and how to contest the
imposition of such taxes and fees; provided, however, that any such
contest undertaken at the request of the purchasing Party shall be at
the purchasing Party's expense.
13.4.4 In the event that all or any portion of an amount sought to be
collected must be paid in order to contest the imposition of any such
tax or fee, or to avoid the existence of a lien on the assets of the
providing Party during the pendency of such contest, the purchasing
Party shall be responsible for such payment and shall be entitled to
the benefit of any refund or recovery.
13.4.5 If it is ultimately determined that any additional amount of such a
tax or fee is due to the imposing authority, the purchasing Party
shall pay such additional amount, including any interest and penalties
thereon.
13.4.6 Notwithstanding any provision to the contrary, the purchasing Party
shall protect indemnify and hold harmless (and defend at the
purchasing Party's expense) the providing Party from and against any
such tax or fee, interest or penalties thereon, or other reasonable
charges or payable expenses (including reasonable attorney fees) with
respect thereto, which are incurred by the providing Party in
connection with any claim for or contest of any such tax or fee.
13.4.7 Each Party shall notify the other Party in writing of any assessment,
proposed assessment or other claim for any additional amount of such a
tax or fee by a taxing authority; such notice to be provided, if
possible, at least ten (10) days prior to the date by which a
response, protest or other appeal must be filed, but in
<PAGE>
General Terms and Conditions - Part A
Page 13
no event later than thirty (30) days after receipt of such assessment,
proposed assessment or claim.
13.5 Mutual Cooperation. In any contest of a tax or fee by one Party, the
------------------
other Party shall cooperate fully by providing records, testimony and
such additional information or assistance as may reasonably be
necessary to pursue the contest. Further, the other Party shall be
reimbursed for any reasonable and necessary out-of-pocket copying and
travel expenses incurred in assisting in such contest.
14. Force Majeure
In the event performance of this Agreement, or any obligation
hereunder, is either directly or indirectly prevented, restricted, or
interfered with by reason of fire, flood, earthquake or like acts of
God, wars, revolution, civil commotion, explosion, acts of public
enemy, embargo, acts of the government in its sovereign capacity,
labor difficulties, including without limitation, strikes, slowdowns,
picketing, or boycotts, unavailability of equipment from vendor,
changes requested by Customer, or any other circumstances beyond the
reasonable control and without the fault or negligence of the Party
affected, the Party affected, upon giving prompt notice to the other
Party, shall be excused from such performance on a day-to-day basis to
the extent of such prevention, restriction, or interference (and the
other Party shall likewise be excused from performance of its
obligations on a day-to-day basis until the delay, restriction or
interference has ceased); provided however, that the Party so affected
shall use diligent efforts to avoid or remove such causes of non-
performance and both Parties shall proceed whenever such causes are
removed or cease.
15. Year 2000 Compliance
Each Party warrants that it has implemented a program the goal of
which is to ensure that all software, hardware and related materials
(collectively called "Systems") delivered, connected with BellSouth or
supplied in the furtherance of the terms and conditions specified in
this Agreement: (i) will record, store, process and display calendar
dates falling on or after January 1, 2000, in the same manner, and
with the same functionality as such software records, stores,
processes and calendar dates falling on or before December 31, 1999;
and (ii) shall include without limitation date data century
recognition, calculations that accommodate same century and
multicentury formulas and date values, and date data interface values
that reflect the century.
16. Modification of Agreement
16.1 BellSouth shall make available, pursuant to 47 USC (S) 252 and the FCC
rules and regulations regarding such availability, to BTI any
interconnection, service, or network element provided under any other
agreement filed and approved pursuant to 47 USC (S) 252. The Parties
shall adopt all rates, terms and conditions concerning
<PAGE>
General Terms and Conditions - Part A
Page 14
such other interconnection, service or network element and any other
rates, terms and conditions that are interrelated or were negotiated
in exchange for or in conjunction with the interconnection, service or
network element being adopted. The adopted interconnection, service,
or network element and agreement shall apply to the same states as
such other agreement and for the identical term of such other
agreement.
16.2 If BTI changes its name or makes changes to its company structure or
identity due to a merger, acquisition, transfer or any other reason,
it is the responsibility of BTI to notify BellSouth of said change and
request that an amendment to this Agreement, if necessary, be executed
to reflect said change.
16.3 No modification, amendment, supplement to, or waiver of the Agreement
or any of its provisions shall be effective and binding upon the
Parties unless it is made in writing and duly signed by the Parties.
16.4 Execution of this Agreement by either Party does not confirm or infer
that the executing Party agrees with any decision(s) issued pursuant
to the Telecommunications Act of 1996 and the consequences of those
decisions on specific language in this Agreement. Neither Party
waives its rights to appeal or otherwise challenge any such
decision(s) and each Party reserves all of its rights to pursue any
and all legal and/or equitable remedies, including appeals of any such
decision(s).
16.5 In the event that any final and nonappealable legislative, regulatory,
judicial or other legal action materially affects any material terms
of this Agreement, or the ability of BTI or BellSouth to perform any
material terms of this Agreement, BTI or BellSouth may, on thirty (30)
days' written notice require that such terms be renegotiated, and the
Parties shall renegotiate in good faith such mutually acceptable new
terms as may be required. In the event that such new terms are not
renegotiated within ninety (90) days after such notice, the Dispute
shall be referred to the Dispute Resolution procedure set forth in
Section 12.
16.6 If any provision of this Agreement, or the application of such
provision to either Party or circumstance, shall be held invalid, the
remainder of the Agreement, or the application of any such provision
to the Parties or circumstances other than those to which it is held
invalid, shall not be effective thereby, provided that the Parties
shall attempt to reformulate such invalid provision to give effect to
such portions thereof as may be valid without defeating the intent of
such provision.
17. Waivers
A failure or delay of either Party to enforce any of the provisions
hereof, to exercise any option which is herein provided, or to require
performance of any of the provisions hereof shall in no way be
construed to be a waiver of such provisions or options, and each
Party, notwithstanding such failure, shall have the right thereafter
<PAGE>
General Terms and Conditions - Part A
Page 15
to insist upon the specific performance of any and all of the
provisions of this Agreement.
18. Governing Law
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Georgia, without regard to
its conflict of laws principles.
19. Arm's Length Negotiations
This Agreement was executed after arm's length negotiations between
the undersigned Parties and reflects the conclusion of the undersigned
that this Agreement is in the best interests of all Parties.
20. Notices
20.1 Every notice, consent, approval, or other communications required or
contemplated by this Agreement shall be in writing and shall be
delivered in person or given by postage prepaid mail, address to:
BellSouth Telecommunications, Inc.
CLEC Account Team
9/th/ Floor
600 North 19/th/ Street
Birmingham, Alabama 35203
and
General Attorney - COU
Suite 4300
675 W. Peachtree St.
Atlanta, GA 30375
BTI
Anthony M. Copeland
Executive Vice President and General Counsel
4300 Six Forks Road
Raleigh, North Carolina 27609
or at such other address as the intended recipient previously shall
have designated by written notice to the other Party.
<PAGE>
General Terms and Conditions - Part A
Page 16
20.2 Where specifically required, notices shall be by certified or
registered mail. Unless otherwise provided in this Agreement, notice
by mail shall be effective on the date it is officially recorded as
delivered by return receipt or equivalent, and in the absence of such
record of delivery, it shall be presumed to have been delivered the
fifth day, or next business day after the fifth day, after it was
deposited in the mails.
20.3 BellSouth shall provide BTI notice via Internet posting of price
changes and of changes to the terms and conditions of services
available for resale.
21. Rule of Construction
No rule of construction requiring interpretation against the drafting
Party hereof shall apply in the interpretation of this Agreement.
22. Headings of No Force or Effect
The headings of Articles and Sections of this Agreement are for
convenience of reference only, and shall in no way define, modify or
restrict the meaning or interpretation of the terms or provisions of
this Agreement.
23. Multiple Counterparts
This Agreement may be executed multiple counterparts, each of which
shall be deemed an original, but all of which shall together
constitute but one and the same document.
24. Implementation of Agreement
If BTI is a facilities based provider or a facilities based and resale
provider, this section shall apply. Within 60 days of the execution
of this Agreement, the Parties will adopt a schedule for the
implementation of the Agreement. The schedule shall state with
specificity time frames for submission of including but not limited
to, network design, interconnection points, collocation arrangement
requests, pre-sales testing and full operational time frames for the
business and residential markets. An implementation template to be
used for the implementation schedule is contained in Attachment 10 of
this Agreement.
25. Filing of Agreement
Upon execution of this Agreement it shall be filed with the
appropriate state regulatory agency pursuant to the requirements of
Section 252 of the Act. If the regulatory agency imposes any filing
or public interest notice fees regarding the filing or approval of the
Agreement, BTI shall be responsible for publishing the required notice
and the publication and/or notice costs shall be borne by BTI.
<PAGE>
General Terms and Conditions - Part A
Page 17
26. Entire Agreement
This Agreement and its Attachments, incorporated herein by this
reference, sets forth the entire understanding and supersedes prior
Agreements between the Parties relating to the subject matter
contained herein and merges all prior discussions between them, and
neither Party shall be bound by any definition, condition, provision,
representation, warranty, covenant or promise other than as expressly
stated in this Agreement or as is contemporaneously or subsequently
set forth in writing and executed by a duly authorized officer or
representative of the Party to be bound thereby.
This Agreement may include attachments with provisions for the
following services:
Network Elements and Other Services
Local Interconnection
Resale
Collocation
The following services are included as options for purchase by BTI.
BTI shall elect said services by written request to its Account
Manager if applicable.
Optional Daily Usage File (ODUF)
Enhanced Optional Daily Usage File (EODUF)
Access Daily Usage File (ADUF)
Line Information Database (LIDB) Storage
Centralized Message Distribution Service (CMDS)
Calling Name (CNAM)
IN WITNESS WHEREOF, the Parties have executed this Agreement the day and year
above first written.
BellSouth Telecommunications, Inc. Business Telecom, Inc.
/s/ Jerry Hendrix /s/ Anthony M. Copeland
- ----------------------------- ----------------------------------------
Signature Signature
Jerry Hendrix Anthony M. Copeland
- ----------------------------- ----------------------------------------
Name Name
Senior Director Executive Vice President/General Counsel
---------------------------- ----------------------------------------
Title Title
02/21/00 February 16, 2000
- ----------------------------- ----------------------------------------
Date Date
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0
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