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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER:
333-62797
BIRCH TELECOM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 43-1766929
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2020 Baltimore Avenue 64108
Kansas City, Missouri (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(816) 300-3000
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Securities registered pursuant to Section 12(b) of the Act:
14% Senior Notes due 2008
(Title of Class)
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. [ ]
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PART I
THIS FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK FACTORS"
AND ELSEWHERE IN THIS FORM 10-K. UNLESS THE CONTEXT SUGGESTS OTHERWISE,
REFERENCES IN THIS FORM 10-K TO THE "COMPANY" OR "BIRCH" MEAN BIRCH TELECOM,
INC. AND ITS WHOLLY OWNED SUBSIDIARIES.
ITEM 1. BUSINESS
GENERAL
Birch is a competitive local exchange carrier (CLEC) serving small to
mid-sized businesses and, to a lesser extent, residential customers, in selected
markets in Missouri, Kansas, and Texas. The Company provides its customers with
integrated telecommunications services, including local and long distance
service, customer premises equipment (CPE), and Internet services, such as
access, web hosting, web site design and Intranet development. Birch provides
telecommunications services to its customers through a combination of owned and
leased network facilities and resold services. For the year ended December 31,
1998, the Company's total revenue was $26.1 million.
Birch provides local, long distance, and CPE services in Missouri and
Kansas, principally in territories served by Southwestern Bell Telephone Company
(SWBT), including Kansas City, St. Louis and St. Joseph, Missouri and Wichita,
Topeka, Manhattan, Lawrence, Emporia, Salina and Dodge City, Kansas. In 1999,
the Company began providing local services in selected Texas markets. The
Company also provides Internet services in selected markets in Kansas and
Missouri. Birch currently operates a long distance circuit switch in Wichita,
Kansas and a local/long distance circuit switch in Kansas City, Missouri. The
Company expects to deploy additional local/long distance circuit switches in St.
Louis, Missouri and Wichita, Kansas, in the second quarter of 1999.
Additionally, in 1999, the Company expects to deploy asynchronous transfer mode
(ATM) packet switches in various markets in which it offers telecommunications
services.
Birch was incorporated under the laws of Delaware in December 1996. The
Company's principal executive offices are located at 2020 Baltimore Avenue,
Kansas City, Missouri 64108 and its telephone number is (816) 300-3000.
RECENT TRANSACTIONS
In February 1998, Birch merged with Valu-Line Companies, Inc.
(Valu-Line) in a transaction valued at $19.5 million, consisting of $4.75
million in cash, 2,968,750 shares of Series A Preferred Stock of the Company
having an aggregate liquidation preference of $4.75 million, and 6,593,750
shares of Series C Preferred Stock having an aggregate liquidation preference of
$10.0 million. Valu-Line, founded in 1982, has been primarily providing switched
long distance services, CPE sales and services and, since March 1997, local
service in selected smaller markets throughout the state of Kansas.
On March 13, 1998, Birch completed a private placement of 6,264,063
shares of its Series B Preferred Stock having an aggregate liquidation
preference of $9.5 million and $3.5 million in aggregate principal amount of
convertible notes, raising aggregate net proceeds of approximately $12.4 million
which were used to pay the cash portion of the consideration for the Valu-Line
merger, to repay certain debt and for general corporate purposes. In June 1998,
the convertible notes were converted into 2,307,965 shares of Series B Preferred
Stock of the Company.
In May 1998, Birch acquired Dunn & Associates, Inc., d/b/a Boulevard
Phone Company (Boulevard), a shared tenant service provider in the Kansas City
metropolitan area, for $300,000 in cash.
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In May 1998, Birch acquired Telesource Communications, Inc.
(Telesource), a CPE provider in the Kansas City metropolitan area, for $325,000
in cash. In connection with the Telesource acquisition, the Company assumed
$290,000 of Telesource's debt which has since been repaid.
During June 1998, the Company completed a $115 million private offering
of 14% Senior Notes (the Senior Notes) due June 2008 and 115,000 warrants to
purchase 1,409,734 shares of Common Stock of the Company. The warrants are
exercisable at $0.01 per share and expire June 2008. The Company received net
proceeds from the Senior Notes of $110.2 million and concurrently purchased
pledged securities of $44.2 million. The pledged securities are restricted for
interest payments on the Senior Notes and, together with the interest accruing
thereon, will be used to satisfy such interest payments through June 2001. The
Senior Notes were subsequently exchanged for substantially identical 14% notes
due June 2008 that had been registered under the Securities Act of 1933 in an
exchange offer that expired in March 1999.
In September 1998, the Company purchased certain assets and liabilities
of TFSnet, Inc. (TFSnet), an Internet service provider in the Kansas City
metropolitan area, for $2.65 million.
In February 1999, Birch acquired American Local Telecommunications,
L.L.C. (ALT), a local service provider in the Dallas metropolitan area for
$700,000 in cash and stock.
In March 1999, Birch acquired Capital Communications Corporation
(Capital), a CPE provider in the St. Louis metropolitan area for $3.0 million in
cash and additional cash compensation from conversion of Capital's customer base
to Birch's local service.
TELECOMMUNICATIONS SERVICES
Birch's telecommunication services are designed to appeal to small and
mid-sized businesses that not only rely on their telecommunications networks,
but who also value integrated telecommunications services packages from a single
provider.
Local and Long Distance
Birch provides local and long distance services to its customers in its
markets. Local service is currently provided through resale of SWBT services,
through a platform of SWBT's unbundled network elements and through Birch's
switch and SWBT's unbundled local loops. Birch's services feature simple
long-distance pricing structures and discounted local service packages (compared
to SWBT). Birch's services are billed on a single invoice and customer inquiries
are directed to a single customer service number. Long distance calling services
include outbound, toll free (800/888), and calling card. Customers may subscribe
to long distance services provided by other interexchange carriers (IXCs) upon
request.
Customer Premises Equipment
Birch sells and services CPE, including key systems, PBXs, and
voice-mail systems, and provides inside-wire services for commercial accounts,
including wiring for data networking. Birch is an authorized equipment
distributor for Northern Telecom, Inc. (NORTEL), Toshiba America Information
Systems, Inc. and NEC America Inc. As a result of Birch's acquisition of
Capital, it now also is an authorized equipment distributor for Executone
Information Systems, Inc. and Tadiran Electronic Industries, Inc. in the St.
Louis metropolitan area.
Internet Services
Birch provides Internet services, including both dial-up and dedicated
Internet access services, web hosting, web-site design and Intranet development
services. Birch targets customers that use the Internet as their primary
wide-area data network, and therefore Birch expects their Internet requirements
to grow both in terms of access capacity requirements and in the sophistication
of required services.
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In addition to these telecommunication services, in certain geographic
areas, Birch provides a combination of equipment, local, long distance and
Internet services to multiple tenants of office buildings and complexes in the
greater Kansas City metropolitan area. Customers pay a monthly fee based solely
on the number of telephone stations they require, the amount of long distance
traffic they generate, and the Internet services for which they subscribe.
SALES AND MARKETING
Sales
As of December 31, 1998, Birch had a direct sales force of 55
representatives operating from nine offices throughout Missouri and Kansas. Of
these representatives, 10 were primarily selling CPE and the remaining 45 were
selling Birch's local and long-distance services. These sales representatives
are supported by sales managers.
Birch focuses on converting customers in its targeted small to mid-size
business segment, seeking to establish a solid, long-term relationship with its
customers. The Company has developed a commission structure that enables it to
attract experienced, productive sales people. The Company's commission structure
incorporates both a revenue and a local-line quota, and is based on productivity
parameters. Birch's sales managers are experienced in disciplined,
activity-based sales management.
Birch does not actively market to residential customers, but has found
that its other sales and promotional efforts attract residential customers, many
of whom are owners or employees of businesses using Birch's telecommunication
services.
Advertising and Promotion
Birch conducts an extensive marketing campaign in its local markets,
making use of advertising and public relations to position itself in the small
to mid-size business segment and contrasting its service attributes with that of
SWBT. This marketing campaign includes sponsorship of major local events,
affiliations with local organizations, and direct mailings. While the Company
does not actively market to residential customers, management believes that its
willingness to serve these customers -- unlike many other CLECs -- creates a
greater interest in Birch's development among the news media and general public.
In the past, Birch market launches have been accompanied by extensive local
media coverage.
In keeping with Birch's philosophy of being accessible to its
customers, Birch establishes local sales and customer service offices in many of
the cities and towns in its markets. Birch is the only provider of local
telephone service that maintains an office in many of these cities and towns.
Birch's offices are open to walk-in traffic and often are located in
high-profile areas.
Pricing
Birch does not intend to position itself as the cheapest provider of
services, especially with respect to its long-distance services. Birch targets
customers who value the convenience of its service offerings and personalized
customer service. Customers who have the highest price sensitivity are likely to
move frequently among providers, driving up churn rates. Birch has historically
experienced a low churn rate.
NETWORK FACILITIES
Ownership of Strategic Facilities
Birch currently operates a long distance circuit switch in Wichita,
Kansas and a local/long distance circuit switch in Kansas City, Missouri. The
Company expects to deploy additional circuit switches in St. Louis, Missouri and
Wichita, Kansas in the second quarter 1999. Birch's local circuit switches are
manufactured by Lucent Technologies, Inc. (Lucent) and are the Series
5ESS(R)-2000 digital models. Birch has a five-year purchase agreement with
Lucent that allows it to purchase switching equipment at a discount from
published list prices and that contains no minimum purchase requirements.
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In markets where Birch operates a circuit switch, the Company is also
collocating its electronic equipment at SWBT's main central office. This allows
Birch to connect to transmission lines leased by Birch from SWBT (unbundled
loops). Collocation and use of SWBT unbundled loops allows Birch to avoid the
extensive capital costs of complete network construction and enables it to build
its market share without undertaking a lengthy construction program.
At the customer's premise, Birch connects unbundled loops directly to
customer-owned equipment. Birch also deploys electronic equipment (intelligent
channel banks or access servers) that concentrate traffic and enable Birch to
obtain higher capacity from the transmission line of the incumbent local
exchange carrier (ILEC).
In addition to its circuit switches, Birch is deploying ATM packet
switches in 1999. These packet switches will make use of the same type of
monitoring, environmental control and power infrastructure that supports its
circuit switches. Initially, the Company will use these packet switches to
transmit data over its leased transmission lines, but also plans to use these
packet switches to transmit voice traffic.
Leasing of Transmission Facilities
Birch leases transmission facilities connecting Birch's switches with
its collocated equipment in SWBT's main central offices and unbundled loops
primarily from SWBT. Birch believes that by leasing these local transmission
facilities, rather than building them, it is able to access local transmission
facilities at a competitive price. Given the existing capacity of local
networks, the Company does not anticipate having to build local transmission
facilities in the future. Similarly, Birch believes that the existing capacity
of long-distance networks renders direct ownership of long distance transmission
facilities unnecessary.
Leasing rather than building transmission lines supports Birch's
strategy of rapid local market development insofar as the Company's sales
activity is not constrained by network construction. Moreover, Birch's services
can generally be made available throughout a metropolitan area utilizing leased
transmission facilities rather than at a limited number of locations to which a
provider has built transmission facilities.
OPERATIONS
Emporia Service Center
Central to Birch's ability to offer excellent service and support its
growth is its service center in Emporia, Kansas. This service center processes
orders, interfaces with SWBT's operational support systems, provides customer
service, trouble resolution, billing and collection for the Company's customers.
The Emporia service center provides rapid, human assistance, rather than the
automated, cumbersome customer interface currently used by many
telecommunications providers.
Field Technical Operations
Birch's field technicians service its owned facilities and
customer-owned facilities. These technicians install, repair and maintain
digital switches, transmission equipment, PBXs, key systems, data equipment and
inside wiring, including wiring for data networking. Field technicians are often
the most respected source of telecommunications advice for small and mid-sized
business customers. Birch believes that having a skilled, in-demand group of
technicians supports Birch's CPE customer base and strengthens customer loyalty.
INFORMATION SYSTEMS
Birch's proprietary information systems provide integrated customer
service, ordering, provisioning, trouble tracking and billing. The Company
intends to upgrade its existing systems to add capabilities providing for
multi-state management of its local networks, automating the provisioning
process and improving Birch's billing capabilities. These upgrades are being
accomplished through the licensing of industry-leading operations support and
billing systems. Birch personnel are responsible for integrating these modules
with each other and with the Company's existing systems, and for ongoing
management of the systems. The Company also maintains an
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electronic data interface with SWBT and intends to continuously improve this
interface in order to achieve even more efficient provisioning intervals and
customer service response.
REGULATION
Overview
Telecommunications services provided by Birch are subject to regulation
by federal, state and local government agencies. At the federal level, the
Federal Communications Commission (FCC) has jurisdiction over interstate and
international services. Interstate services are communications that originate in
one state and terminate in another. Intrastate services are communications that
originate and terminate in a single state. State regulatory commissions (State
Commissions) exercise jurisdiction over intrastate services. Additionally,
municipalities and other local government agencies may regulate limited aspects
of Birch's business, such as use of government-owned rights-of-way, and may
require permits such as zoning approvals and building permits.
In recent years, the regulation of the telecommunications industry has been
in a state of flux as the United States Congress and various state legislatures
have passed laws seeking to foster greater competition in telecommunications
markets. The FCC and State Commissions have adopted many new rules to implement
this legislation and encourage competition. These changes are incomplete. 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. Certain of these and
other existing 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 this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or Birch can be predicted at this time.
Removal of Entry Barriers
Federal law prohibits state and local governments from enforcing any
law, rule or legal requirement that prohibits or has the effect of prohibiting
any entity from providing interstate or intrastate telecommunications services.
This should enable Birch to provide a full range of local telecommunications
services in any state. This also reduces the barriers to entry by other
potential competitors and therefore increases the level of competition Birch
will likely face in all its markets.
Interconnection with ILEC Facilities
A CLEC cannot compete effectively with an ILEC in switched local
telephone services unless it is able to connect its facilities with the ILEC and
obtain access to certain essential services and resources under reasonable
rates, terms and conditions. The Telecommunications Act of 1996 (the
Telecommunications Act) imposes a number of access and interconnection
requirements on all local exchange carriers (LECs), including CLECs, with
additional requirements imposed on ILECs. These requirements will provide access
to certain networks under reasonable rates, terms and conditions. Specifically,
all LECs, including the Company, must provide the following:
- Telephone Number Portability. Telephone number portability
enables a customer to keep the same telephone number when the
customer switches LECs.
- Dialing Parity. All LECs must provide dialing parity, which
means that a customer calling to or from a competing LEC
network cannot be required to dial more digits than would be
required for a comparable call originating and terminating on
the other LEC's network.
- Reciprocal Compensation. The duty to provide reciprocal
compensation means that a carrier must terminate calls that
originate on another carrier's network in exchange for
compensation.
- Resale. LECs generally may not prohibit or place unreasonable
restrictions on the resale of their services by other
carriers.
- Access to Rights-of-Way. All LECs must provide access to their
poles, ducts, conduits and rights-of-way to competing carriers
on a reasonable, nondiscriminatory basis.
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In addition, ILECs must offer local exchange services to resellers at a
wholesale rate that is less than the retail rate charged to end users. State
commissions are charged with determining the size of this discount. ILECs also
must offer access to various unbundled elements of their networks. This
requirement allows new entrants to purchase elements of an ILEC's network, at
cost-based rates, that may be necessary to provide service to a new entrant's
customers. While ILECs are generally required to offer to CLECs interconnection,
including reciprocal compensation for mutual termination of traffic, unbundled
network elements and services that can be resold by CLECs, ILEC-CLEC
interconnection agreements may have short terms, requiring the CLEC to
renegotiate the agreements. ILECs may not provide timely provisioning or
adequate service quality, thereby impairing a CLEC's reputation with customers
who can easily switch back to the ILEC. In addition, the prices set in the
agreements or through State Commissions arbitration proceedings may be subject
to changes mandated by State Commissions as they develop permanent rules
governing interconnection.
The FCC is charged with establishing national guidelines to implement
certain portions of the Telecommunications Act. The FCC issued its
Interconnection Order on August 8, 1996. In July of 1997, however, the United
States Court of Appeals for the Eighth Circuit issued a decision vacating the
FCC's pricing rules, as well as certain other portions of the FCC's
interconnection rules, on the grounds that the FCC had improperly intruded into
matters reserved for state jurisdiction. On January 25, 1999, the Supreme Court
largely reversed the Eighth Circuit's order, holding that the FCC has general
jurisdiction to implement the local competition provisions of the
Telecommunications Act. The Supreme Court stated that the FCC has authority to
set pricing guidelines for unbundled network elements, to prevent ILECs from
separating existing combinations of network elements, and to establish "pick and
choose" rules regarding interconnection agreements (which would permit a carrier
seeking interconnection to "pick and choose" among the terms of various other
interconnection agreements between the ILECs and other CLECs). This action
reestablishes the validity of many of the FCC rules vacated by the Eighth
Circuit. Although the Supreme Court affirmed the FCC's authority to develop
pricing guidelines, the Supreme Court did not evaluate the specific pricing
methodology adopted by the FCC and has remanded the case to the Eighth Circuit
for further consideration. In addition, the Supreme Court concluded that it was
proper for the FCC to conclude that unbundled network elements could include not
only physical facilities such as transmission lines, but also services such as
directory assistance, operator services, and vertical switching functions such
as caller ID, call waiting, and call forwarding. However, it also vacated the
FCC's rule that identifies the unbundled network elements that ILECs must
provide to CLECs because the FCC had failed to consider which of those unbundled
network elements were "necessary" for the CLEC or would "impair" the ability of
the CLEC to provide the services it seeks to offer. The FCC is expected to
reconsider the statutory criteria for requiring ILECs to make those network
elements available to CLECs during 1999. Thus, while the Supreme Court resolved
many issues, including the FCC's jurisdictional authority, other issues remain
subject to further consideration by the courts and the FCC, and the Company
cannot predict the ultimate disposition of those matters. The possible impact of
this decision, including the portion dealing with unbundled network elements, on
existing interconnection agreements between ILECs and CLECs or on agreements
that may be negotiated in the future, cannot be determined at this time.
In June 1997, SWBT notified Birch and other CLECs in SWBT's service
territory that it would not pay or collect reciprocal compensation under
interconnection agreements for traffic terminated at an Internet service
provider (ISP). On December 31, 1997, Birch filed a petition with the Missouri
Public Service Commission to arbitrate the terms of an interconnection agreement
between Birch and SWBT. In its pleading, Birch claimed, among other things, that
ISP traffic is local in nature, and that the rate of reciprocal compensation
payments for traffic to an ISP should be the same as the rate for other local
calls. On April 23, 1998, the Missouri Public Service Commission ordered the
parties, pending final resolution of these issues by the FCC, to compensate each
other for ISP traffic at the same rate as is applicable to other local calls. On
February 25, 1999, the FCC (1) adopted an order concluding that dial-up traffic
to ISPs is jurisdictionally mixed and appears to be primarily interstate in
nature, but that parties are bound by existing interconnection agreements, as
interpreted by State Commissions, and thus are subject to reciprocal
compensation obligations to the extent provided by such agreements or as
determined by State Commissions, and (2) issued a notice or proposed rulemaking
to determine the appropriate compensation arrangements in the future for this
type of traffic. If a decision adverse to Birch is issued on any appeal or
review of the order of the Missouri Public Service Commission, or a future rule
of the FCC eliminates or changes the compensation for ISP traffic, then the
ability of Birch to serve existing and future ISP customers profitably would be
limited, which could have a material adverse effect on Birch's business,
operating results and financial condition.
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Birch Interconnection Agreements
Birch has entered into interconnection agreements with SWBT covering
Missouri, Kansas and Texas, each of which provides (1) the right to purchase
SWBT's local telecommunications services at state-specific wholesale discount
percentages (19.2% in Missouri, 21.6% in Kansas, and 21.6% in Texas, in
general), and (2) comprehensive terms covering collocation, interconnection,
exchange of traffic between the Birch and SWBT networks, access to rights of
way, number portability, and Birch's purchase of unbundled network elements from
SWBT for transmission facilities to Birch's customers. On March 16, 1999, SWBT
provided notice to Birch of its intention to terminate the Missouri and Texas
interconnection agreements at the expiration of their terms (May 21, 1999 and
January 22, 2000, respectively), and to negotiate the terms and conditions of
successor interconnection agreements. Notwithstanding the notice of termination,
each of the Missouri and Texas interconnection agreements provides that they
will remain in effect until a replacement agreement has been negotiated by the
parties, arbitrated (if necessary to resolve any disputed issues), and approved
by the Missouri Public Service Commission or Texas Public Utilities Commission
respectively.
SWBT Entry into Long-Distance Service
Birch's principal competitor in each of its markets is SWBT. Section
271 of the Telecommunications Act establishes procedures under which a Bell
Operating Company (BOC), like SWBT, can provide services originating from (and
in certain cases, terminating in) its telephone exchange service area
("in-region" interLATA service). SWBT is currently permitted to provide
interLATA services to customers outside of its telephone exchange service areas
("out-of-region" interLATA service), and other "incidental" interLATA service.
Before SWBT can provide non-incidental in-region interLATA service, it must
offer interconnection on terms approved by the State Commission and receive
approval from the FCC, with input from the U.S. Department of Justice and State
Commissions. The interconnection offered by SWBT must comply with a "competitive
checklist" that incorporates the interconnection requirements discussed above,
as well as other requirements. SWBT sought authority pursuant to Section 271 to
enter the in-region interLATA market in Oklahoma, and this application was
denied by the FCC on June 26, 1997. SWBT has filed notices with the Missouri
Public Service Commission, Kansas Corporation Commission and Texas Public
Utilities Commission of its intention to file Section 271 applications with the
FCC in the future, but has no other Section 271 applications pending before the
FCC at this time. The Texas Public Utilities Commission and Kansas Corporation
Commission concluded that SWBT had not yet met the requirements of the
competitive checklist in their respective states. The Missouri Public Service
Commission held hearings on SWBT's Section 271 filing in March 1999 and is
expected to conclude in the near future whether it believes SWBT has met the
requirements of the competition checklist in Missouri.
After receiving approval from the FCC as described above, SWBT will be
able to provide in-region interLATA services, which will enable it to provide
customers with a full range of local and long distance telecommunications
services. The provision of interLATA services by SWBT is expected to reduce the
market share of the major IXCs, which may be significant customers of Birch's
services. Consequently, the entry of the BOCs into the long distance market may
have adverse consequences on the ability of CLECs both to generate access
revenue from the IXCs and to compete in offering a package of local and long
distance services. No BOC has yet won FCC approval to enter the interLATA
market, but industry analysts believe approval for the first such entry could
occur as early as the fourth quarter of 1998.
Relaxation of Regulation
A long-term goal of the Telecommunications Act is to increase
competition for telecommunications services, thereby reducing the need for
regulation of these services. To this end, the Telecommunications Act requires
the FCC to streamline its regulation of ILECs and permits the FCC to forbear
from regulating particular classes of telecommunications services or providers.
Because Birch is considered a non-dominant carrier and, therefore, is not
heavily regulated by the FCC, the potential for regulatory forbearance likely
will be more beneficial to the ILECs than Birch in the long run.
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Federal Regulation Generally
Comprehensive amendments to the Communications Act were made by the
Telecommunications Act, which was signed into law on February 8, 1996. The
Telecommunications Act changed regulation at both the federal and state levels
that affect virtually every segment of the telecommunications industry. The
stated purpose of the Telecommunications Act is to promote competition in all
areas of telecommunications. Through a series of proceedings, the FCC has
established different levels of regulation for "dominant carriers" and
"non-dominant carriers." Only ILECs are classified as dominant; all other
providers of domestic interstate services are classified as non-dominant
carriers. As a non-dominant carrier, Birch is subject to relatively limited
regulation by the FCC. Birch may offer domestic interstate service without prior
FCC approval. Birch must offer interstate services at just and reasonable rates
in a manner that is not unreasonably discriminatory.
The FCC has adopted rules requiring ILECs to provide "collocation" to
CLECs for the purpose of interconnecting their competing networks. Under the
rules adopted by the FCC, ILECs are required to provide either physical
collocation or virtual collocation at their switching offices.
As discussed earlier, all LECs, including CLECs, must make their
services available for resale by other carriers, provide nondiscriminatory
access to rights-of-way, offer reciprocal compensation for termination of
traffic and provide dialing parity and telephone number portability. ILECs must
offer "equal access" to competing IXCs, making it easier for new IXCs to attract
customers. The Telecommunications Act requires all telecommunications carriers
to contribute to the universal service mechanism established by the FCC and to
ensure that their services are accessible to and usable by persons with
disabilities. Moreover, the FCC is currently engaged in a number of rulemakings
in which it is considering regulatory implications of various aspects of local
exchange competition. Any or all of these proceedings may negatively affect
CLECs, including Birch.
The FCC could grant ILECs substantial pricing flexibility with regard
to interstate access services. The May 21, 1997 order reforming the FCC's price
cap formula affords LECs greater flexibility in establishing rates and provides
additional incentives to foster efficiency. To the extent these regulatory
initiatives enable or require ILECs to offer selectively reduced rates for
access services, the rates Birch may charge for access services will likely be
constrained by competitive pressures. Birch's rates also will likely be
constrained by the fact that competitors other than the ILECs are subject to the
same streamlined regulatory regime as Birch and can price their services to meet
competition.
States who have ruled on the issue treat traffic to ISPs terminated in
the local exchange as local calls, for which end user customers normally pay
fixed monthly charges or low per minute rates up to a cap. ILECs contend that
traffic routed to ISPs is interstate in nature and the charge for such calls
should be charged at a different rate. As discussed above, on February 25, 1999,
the FCC concluded that parties are bound by existing interconnection agreements,
as interpreted by State Commissions, and thus are subject to reciprocal
compensation obligations to the extent provided by such agreements or as
determined by State Commissions, but issued a notice or proposed rulemaking to
determine the appropriate compensation arrangements in the future for this type
of traffic. Therefore, in the future CLECs might no longer receive the benefit
of substantial reciprocal compensation call-termination revenue for CLEC ISP
customers.
Federal law also protects the privacy of certain information about
telecommunications customers that a carrier such as Birch acquires by virtue of
its provision of telecommunications services to such customers. Protected
information, known as Customer Proprietary Network Information (CPNI), includes
information related to the quantity, technological configuration, type,
destination and the amount of use of a telecommunications service. A carrier may
not use the CPNI acquired through one of its service offerings to market certain
other service offerings without the approval of the affected customers. These
restrictions may affect Birch's ability to market a variety of packaged services
to existing customers.
State Regulation Generally
Most State Commissions require companies that wish to provide
intrastate common carrier services to register or be certified to provide such
services. These certifications generally require a showing that the carrier has
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adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. States also impose a
variety of other requirements, including service quality, universal service and
other obligations on CLECs.
Several states, including Missouri, Kansas and Texas, provide ILECs
with flexibility for their rates, special contracts (selective discounting) and
tariffs, particularly for services deemed subject to competition. This pricing
flexibility increases the ability of SWBT and other ILECs to compete with Birch
and constrains the rates Birch may charge for its services. In light of the
additional competition that is expected to result from the Telecommunications
Act, states may grant ILECs additional pricing flexibility. At the same time,
some ILECs may request increases in local exchange rates to offset revenue
losses due to competition.
Birch is currently certified by the Missouri Public Service Commission,
the Kansas Corporation Commission, and the Texas Public Utilities Commission to
provide both local and long distance service in Missouri, Kansas and Texas.
Local Regulation Generally
If Birch desires to install its own transmission facilities, Birch may
be required, in certain cities, to obtain from municipal authorities zoning
variances, street opening and construction permits, permission to use rights-
of-way, and other approvals. Birch also may be required to obtain a franchise to
place facilities in public rights of way. In some areas, Birch may be required
to pay license or franchise fees for such approvals. There can be no assurances
that fees will remain at current levels, or that Birch's competitors will face
the same expenses, although the Telecommunications Act does require that any
such fees charged by municipalities be reasonable and non-discriminatory as
among telecommunications carriers.
COMPETITION
The telecommunications industry is highly competitive. The Company
believes that the principal competitive factors affecting its business are
customer service, accurate billing, variety of services, and, to a lesser
extent, pricing levels and clear pricing policies. The ability of the Company to
compete effectively depends upon its continued ability to maintain high quality,
market-driven services at prices generally equal to or below those charged by
its competitors. To maintain its competitive posture, the Company believes that
it must be in a position to reduce its prices in order to meet reductions in
rates, if any, by others. Any such reductions could adversely affect the
Company. Many of the Company's current and potential competitors have financial,
personnel and other resources, including brand name recognition, substantially
greater than those of the Company, as well as other competitive advantages over
the Company.
Incumbent Local Exchange Carriers
In its existing markets, Birch competes principally with SWBT. As a
recent entrant in the telecommunications services industry, Birch has not
achieved and does not expect to achieve a significant market share for any of
its services in its larger markets. In particular, SWBT and other local
telephone companies have long-standing relationships with their customers, have
financial, technical and marketing resources substantially greater than those of
the Company, have the potential to subsidize competitive services with revenue
from a variety of businesses and currently benefit from certain existing
regulations that favor these ILECs over Birch in certain respects. While recent
regulatory initiatives, which allow CLECs such as the Company to interconnect
with ILEC facilities, provide increased business opportunities for Birch, such
interconnection opportunities have been (and likely will continue to be)
accompanied by increased pricing flexibility for and relaxation of regulatory
oversight of the ILECs. Future regulatory decisions could afford ILECs with
increased pricing flexibility or other regulatory relief and, such decisions
could also have a material adverse effect on the Company.
CLECs/IXCs/Other Market Entrants
The Company also faces, and expects to continue to face, competition
from other current and potential market entrants, including long distance
carriers competing with Birch's long distance services and seeking to enter,
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reenter or expand entry into the local exchange market such as AT&T, MCI
WorldCom, GTE and Sprint. Competition also comes from other CLECs, resellers of
local exchange services, competitive access providers (CAPs), cable television
companies, electric utilities, microwave carriers, wireless telephone system
operators and private networks built by large end users. In addition, a
continuing trend toward consolidation and strategic alliances of
telecommunications companies, as well as the development of new technologies,
could give rise to significant new competitors to the Company, putting Birch at
a competitive disadvantage. The Telecommunications Act includes provisions which
impose certain regulatory requirements on all LECs, including the Company, while
granting the FCC expanded authority to reduce the level of regulation applicable
to any or all telecommunications carriers, including ILECs. The manner in which
these provisions of the Telecommunications Act are implemented and enforced
could have a material adverse effect on the Company's ability to compete
successfully against ILECs and other telecommunications service providers
The changes in the Telecommunications Act radically altered the market
opportunity for traditional CAPs and CLECs. Due to the fact that most existing
CAP/CLECs initially entered the market providing dedicated access in the
pre-1996 era, these companies had to build a fiber infrastructure before
offering services. Since passage of the Telecommunications Act, many CAPs have
added switches to become CLECs to take advantage of the opening of the local
market. With the Telecommunications Act requiring unbundling of the LEC
networks, CAP/CLECs will now be able to more rapidly enter the market by
installing switches and leasing trunk and loop capacity until traffic volume
justifies building facilities. Newer CLECs, like the Company and some
competitors that Birch may encounter in some of its markets, will not have to
replicate existing facilities and can be more opportunistic in designing and
implementing networks.
In addition to the CLECs, IXCs and other competitors listed above, the
Company may face competition from other market entrants such as electric
utilities, cable television companies and wireless companies. Electric utilities
have existing assets and low cost access to capital which could allow them to
enter a market rapidly and accelerate network development. Cable television
companies are also entering the telecommunications market. Some cable television
companies are upgrading their networks with fiber optics and installing
facilities to provide fully interactive transmission of broadband voice, video
and data communications. Some cable companies are attempting to offer Internet
access and local telephone service over hybrid fiber-coaxial cable systems.
Finally, wireless companies have announced intentions to develop wireless
technology to be deployed in the United States as a broadband substitute for
traditional wireline local telephones.
Long Distance Services
The long distance telecommunications industry has numerous entities
competing for the same customers and a high average churn rate, as customers
frequently change long distance providers in response to the offering of lower
rates or promotional incentives by competitors. Prices in the long distance
market have declined significantly in recent years and are expected to continue
to decline. Birch's primary competitors are the major IXCs and resellers of long
distance services. The Company believes that pricing levels are a principal
competitive factor in providing long distance service; however Birch seeks to
avoid direct price competition by packaging long distance service, local
service, CPE and Internet access service together with a simple pricing plan.
CPE
The Company competes with numerous equipment vendors and installers,
and telecommunications management companies with respect to CPE sales and
related services. Birch generally offers its products at prices consistent with
other providers and differentiates its service through its product packages.
Data/Internet Services Providers
The Internet services market is highly competitive, and the Company
expects that competition will continue to intensify. Internet service, both
Internet access and on-line content services, is provided by ISPs,
satellite-based companies, long-distance carriers and cable television
companies. Many of these companies provide businesses and individuals with
direct access to the Internet and a variety of supporting services. In addition,
many companies (such as America Online, Inc., MSN, Prodigy Services Company and
WebTV Networks) offer "online" services consisting
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of access to closed, proprietary information networks with services similar to
those available on the Internet, in addition to direct access to the Internet.
Long distance companies, for example, are aggressively entering the Internet
access markets. Long distance carriers have substantial transmission
capabilities, traditionally carry data to large numbers of customers and have an
established billing system infrastructure that permits them to add new services.
Satellite companies are offering broadband access to the Internet from desktop
PCs and cable companies are starting to provide Internet services using cable
modems to customers in major markets. Many of these competitors have
substantially greater financial, technological, marketing, personnel and other
resources than those available to Birch.
EMPLOYEES
At December 31, 1998, the Company employed approximately 345 persons.
Additionally, the Company utilizes temporary employees in some of its processes.
The Company is not party to any collective bargaining arrangements. The Company
believes that its relationship with its employees is satisfactory.
RISK FACTORS
This Form 10-K includes "forward looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act.
Although Birch believes that its plans, intentions and expectations reflected in
such forward looking statements are reasonable, it can give no assurance that
such plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from Birch's forward looking
statements are set forth below and elsewhere in this Form 10-K. All forward
looking statements attributable to Birch or persons acting on its behalf are
expressly qualified in their entirety by the cautionary statements set forth
below.
Substantial Future Operating Losses; Negative Cash Flow From Operations
The expansion of Birch's business and the deployment of its services
and systems will require significant capital expenditures, a substantial portion
of which will need to be incurred before the realization of significant revenue.
Birch expects to generate negative earnings before interest, income taxes,
depreciation and amortization (EBITDA) while it emphasizes deployment of its
switches and further development of its telecommunications services business and
until it establishes a sufficient revenue-generating customer base. There can be
no assurance that an adequate revenue base will be established. For the year
ended December 31, 1998, the Company had an operating loss of $10.9 million, net
loss of $16.2 million and EBITDA loss of $8.6 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Birch
expects to experience increasing operating losses and negative EBITDA as it
expands its operations. There can be no assurance that Birch will achieve or
sustain profitability or generate sufficient EBITDA to meet its working capital,
capital expenditures and debt service requirements, which could have a material
adverse effect on Birch's business, operating results and financial condition
and its ability to achieve sufficient cash flow to service the Notes. See
"-- Substantial Leverage; Ability to Service Indebtedness;" "-- Need for
Additional Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Substantial Leverage; Ability to Service Indebtedness
The Company is highly leveraged. At December 31, 1998 Birch had total
long term indebtedness of approximately $115.8 million (most of which consisted
of the Senior Notes) and total stockholders' deficit (excluding $14.1 million in
aggregate liquidation preference of Series B Preferred Stock) of approximately
$7.1 million. For the years ended December 31, 1997 and 1998, earnings were
insufficient to cover fixed charges by approximately $1.8 million and $16.2
million, respectively. The Company and its subsidiaries are permitted to incur
substantial additional indebtedness in the future.
The ability of the Company to fund the capital expenditures and other
costs contemplated by its business plan and to make scheduled payments with
respect to the Senior Notes will depend upon, among other things, its ability to
seek and obtain additional financing within the next year, to implement its
business plan, to deploy its network and expand its operations, and to obtain
and retain a significant number of customers in its target markets,
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<PAGE> 13
and the future operating performance of Birch and its subsidiaries. Each of
these factors is, to a large extent, subject to economic, financial,
competitive, political, regulatory and other factors, many of which are beyond
Birch's control. Birch expects that it will generate operating losses for the
foreseeable future and that its business will not generate positive cash flow
for the foreseeable future. In addition, the Company will require significant
amounts of additional financing, which may not be available, before it will be
able to generate positive cash flow. No assurance can be given that Birch will
be successful in developing and maintaining a level of cash flow from operations
sufficient to permit it to pay the principal of, and interest and any other
payments, if any, on the Senior Notes. If Birch is unable to generate sufficient
cash flow from operations to service its indebtedness, including the Senior
Notes, it may have to modify its growth plans, limit its capital expenditures,
restructure or refinance its indebtedness, seek additional capital or liquidate
its assets. There can be no assurance (i) that any of these strategies could be
effected on satisfactory terms, if at all, in light of Birch's high leverage or
(ii) that any such strategy would yield sufficient proceeds to service the
Senior Notes. Any failure by Birch to satisfy its obligations with respect to
the Senior Notes at maturity or prior thereto would constitute a default under
the agreements governing the Senior Notes (Indenture) and could cause a default
under agreements governing other indebtedness of Birch. See "-- Limited History
of Operations as a Combined Organization," "-- Need for Additional Financing"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The degree to which Birch is leveraged could have important
consequences to holders of the Senior Notes, including (i) making it more
difficult for Birch to satisfy its obligations with respect to the Senior Notes;
(ii) increasing Birch's vulnerability to general adverse economic and industry
conditions; (iii) limiting Birch's ability to obtain additional financing to
fund its expected capital expenditures for the next two years, future working
capital (including anticipated future operating losses), or other general
corporate requirements; (iv) requiring the dedication of a substantial portion
of Birch's cash flow from operations (if any) to the payment of principal of,
and interest on, its indebtedness, thereby reducing the availability of such
cash flow to fund working capital, capital expenditures or other general
corporate purposes; (v) limiting Birch's flexibility in planning for, or
reacting to, changes in its business and the telecommunications industry; (vi)
limiting Birch's ability to expand into new markets; and (vii) placing Birch at
a competitive disadvantage relative to less leveraged competitors. In addition,
Birch's operating and financial flexibility will be limited by covenants
contained in agreements governing the indebtedness of Birch, including the
Indenture. Among other things, the covenants in the Indenture limit, and
covenants in agreements governing other indebtedness will likely limit, the
ability of Birch and its subsidiaries to incur additional indebtedness, issue
preferred stock, pay dividends or make distributions to its stockholders or to
make certain other restricted payments, create certain liens upon assets, apply
the proceeds from the disposition of certain assets or enter into certain
transactions with affiliates. There can be no assurance that such covenants will
not adversely affect Birch's ability to finance its future operations or capital
needs or to engage in other business activities which may be in the interests of
Birch.
The Company currently anticipates that, in order to pay the principal
of the Senior Notes or to redeem or repurchase the Senior Notes upon a change of
control, Birch may be required to adopt one or more alternatives, such as
refinancing its indebtedness or selling its equity securities or the equity
securities or assets of its subsidiaries. There can be no assurance that any of
the foregoing actions could be effected on satisfactory terms, that any of the
foregoing actions would enable the Company to pay the principal amount of the
Senior Notes or that any of such actions would be permitted by the terms of the
Indenture or any of the debt instruments of Birch or Birch's subsidiaries then
in effect.
Need For Additional Financing
Birch expects to make significant capital outlays for the foreseeable
future in order to continue the development activities called for in its current
business plan and thereafter and to fund expected operating losses. In order for
the Company to implement its current business plan and finance its projected
capital expenditures, Birch will be required to seek and obtain significant
amounts of additional financing (debt and/or equity) within the next year. The
Company's ongoing expansion into Texas is dependent upon raising substantial
additional financing in the near term. If Birch's plans or assumptions change,
if its assumptions prove to be inaccurate, or if it experiences unanticipated
costs or competitive pressures, Birch will be required to seek additional
capital sooner than currently anticipated, possibly within the next six months.
In particular, if Birch elects to pursue significant additional acquisition
opportunities or to deploy more switches than currently planned, its cash needs
may be increased
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substantially. There can be no assurance that Birch's current projection of cash
flow (and losses) from operations (which will depend upon numerous future
factors and conditions, many of which are outside of Birch's control) will be
accurate. Because Birch's cost of developing new networks and services, funding
other strategic initiatives and operating its business will depend on a variety
of factors (including the number of subscribers and the service for which they
subscribe, the nature and penetration of services that may be offered by Birch,
regulatory changes, changes in technology and actions taken by competitors in
response to Birch's strategic initiatives), it is almost certain that actual
costs and revenue will vary from expected amounts, very likely to a material
degree, and such variations are likely to affect Birch's future capital
requirements. Birch intends to seek additional debt and/or equity financing
necessary to fund Birch's liquidity needs. There can be no assurance that Birch
will be able to raise additional capital on satisfactory terms or at all. If
Birch decides to raise additional funds through the incurrence of debt, its
interest obligations will increase and it may become subject to additional or
more restrictive financial covenants. For example, Birch's ability to access the
cash flow of its subsidiaries may be restricted by such future debt covenants.
If Birch decides to raise additional funds through the issuance of equity,
equity holders will be diluted. In the event that Birch is unable to obtain such
additional capital or to obtain it on acceptable terms or in sufficient amounts,
Birch will be required to delay the development of its network or take other
actions that could have a material adverse effect on Birch's business, operating
results and financial condition and its ability to achieve sufficient cash flow.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Limited History of Operations as a Combined Organization
Birch commenced operations on January 1, 1997 and merged with Valu-Line
in February 1998. Prior to the merger, Birch had been a development stage
company with no revenue. While Valu-Line has a 15-year operating history, it
only has been under the guidance of Birch management for about one year.
Additionally, in 1998, Birch acquired Boulevard, Telesource and TFSnet, and in
1999, Capital and ALT. Prospective investors, therefore, have limited financial
or operating information about Birch as a combined organization. Birch's
viability, profitability and growth depend upon its ability to successfully
integrate its acquired companies. The implementation of Birch's business plan
will be subject to numerous risks, many of which are outside of its control and
any of which could require substantial changes to proposed plans or otherwise
alter the time frames or budgets currently contemplated. Such risks include (i)
risks related to the integration of Birch's acquired companies into a cohesive
and efficient enterprise; (ii) the risks of unfavorable regulatory changes;
(iii) the need to obtain required governmental and local regulatory approvals;
(iv) the need to negotiate acceptable purchase, lease, joint venture and other
agreements, including interconnection agreements with SWBT, other ILECs and long
distance service providers; (v) identifying, financing and completing suitable
acquisitions; (vi) risks associated with developing its operational support and
back office systems; (vii) risks associated with entry into new markets; (viii)
risks associated with recruiting and training new employees; and (ix) risks
typically associated with any business venture, such as unanticipated cost
increases. There can be no assurance that the implementation of Birch's current
business plan will be successful, and the failure to integrate Birch's acquired
companies successfully would have a material adverse effect on Birch's business,
operating results and financial condition.
Risks Associated with Acquisitions
Birch's current business plan contemplates future acquisitions and may
result in acquisitions of companies that are larger than Birch. Future
acquisitions by Birch could result in the incurrence of debt or contingent
liabilities, which could have a material adverse effect on Birch's business,
financial condition and results of operations. Such transactions commonly
involve certain risks, including, among others: the difficulty of assimilating
the acquired operations and personnel; the potential disruption of Birch's
ongoing business and diversion of resources and management time; the possible
inability of management to maintain uniform standards, controls, procedures and
policies; the risks of entering markets in which Birch has little or no direct
prior experience; and the potential impairment of relationships with employees
or customers as a result of changes in management. There can be no assurance
that any future acquisition will be made, that Birch will be able to obtain
additional financing needed to finance such acquisitions and, if any
acquisitions are so made, that the acquired business will be successfully
integrated into Birch's operations or that the acquired business will perform as
expected. The failure to integrate any such future acquisition successfully
would have a material adverse effect on Birch's business, operating results and
financial condition and its ability to achieve sufficient cash flow.
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Business Expansion Risks; Possible Inability to Manage Growth
Birch's business strategy contemplates expanding its operations rapidly
into new markets. Birch's success will depend, among other things, upon Birch's
ability to secure significant amounts of additional financing, assess potential
markets, obtain required governmental authorizations and permits, provision new
customers, implement interconnection and collocation with ILEC facilities, lease
adequate trunking capacity from ILECs or other CLECs, purchase and install
switches in additional markets, implement efficient operations support systems
and other back office systems, and develop a sufficient customer base. The
successful implementation of Birch's business plan will result in rapid
expansion of its operations. Rapid expansion of Birch's operations may place a
significant strain on Birch's management, financial and other resources. See
"-- Need for Additional Financing."
The Company's ability to manage future growth, should it occur, will
depend upon its ability to develop efficient operations support systems and
other back office systems, monitor operations, control costs, maintain
regulatory compliance, maintain effective quality controls and significantly
expand Birch's internal management, technical, information and accounting
systems and to attract, assimilate, train and retain additional qualified
personnel, including sales, marketing and technical personnel. See
"-- Dependence on New Employees." Failure of Birch to manage its future growth
effectively could adversely affect the expansion of Birch's customer base and
service offerings. There can be no assurance that the Company will successfully
implement and maintain such operational and financial systems or successfully
obtain, integrate and utilize the employees and management, operational and
financial resources necessary to manage a developing and expanding business in
an evolving, highly regulated and increasingly competitive industry. Any failure
to expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of Birch's
business could have a material adverse effect on Birch's business, operating
results and financial condition and its ability to achieve sufficient cash flow.
If Birch were unable to hire sufficient qualified personnel or develop,
acquire and integrate successfully its operational, customer service and other
information systems, customers could experience delays in connection of service
and/or lower levels of customer service. Failure by Birch to meet the demands of
customers and to manage the expansion of its business and operations could have
a material adverse effect on Birch's business, operating results and financial
condition and its ability to achieve sufficient cash flow.
Regulation
Birch is subject to, and benefits from, varying degrees of federal,
state, and local regulation of its business and the businesses of its
competitors. On the federal level, Birch is not currently subject to rate
regulation, nor is it currently required to obtain FCC authorization for the
installation, acquisition, or operation of its network facilities. Birch's
subsidiaries that provide intrastate services are generally subject to
certification and tariff-filing requirements by state regulators. In addition,
Birch must comply with various state and federal obligations, such as the duty
to contribute to universal service subsidies, the impact of which cannot yet be
fully assessed. Failure to comply with federal and state reporting and
regulatory requirements may result in fines or other penalties, including loss
of certification to provide services.
The Telecommunications Act, state laws, the rules of the FCC and State
Commissions may provide ILECs with increased pricing flexibility for their
services and other regulatory relief, which could have a material adverse effect
on CLECs, including Birch. There can be no assurance that future regulatory
provisions will not be less favorable to CLECs and more favorable to their
competitors. If ILECs like SWBT are allowed by regulators to lower the rates for
their services, to engage in substantial volume and term discount pricing
practices for their customers, or to charge CLECs unreasonable fees for
interconnection to the ILECs' networks, Birch's business, operating results and
financial condition could be materially adversely affected. ILECs may also seek
to delay competitors through legal or regulatory challenges, or by recalcitrant
responses to requirements that they open their markets through interconnection
and unbundling of network elements. For example, SWBT has refused to pay
reciprocal compensation to Birch for calls to ISPs. See "Business -- Regulation
- -- Interconnection with ILEC Facilities." Increased local exchange competition
resulting from various legislative initiatives, including the Telecommunications
Act, may allow BOCs such as SWBT to provide long distance services under
provisions of the Telecommunications Act more quickly than had earlier been
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anticipated. When SWBT is permitted to provide such services, it will be in a
position to offer integrated local and long distance service, subject to certain
regulatory constraints, and Birch will no longer enjoy the competitive advantage
of being one of the only companies in its markets to offer integrated local and
long distance service and billing. See "Business -- Regulation -- SWBT Entry
into Long-Distance Service."
There are currently many regulatory actions under way and being
contemplated by federal and state authorities regarding interconnection pricing
and other issues that could result in significant changes to the business
conditions in the telecommunications industry. State Commissions determine the
size of the wholesale discount at which ILECs must offer local exchange services
to resellers. Prices set forth in interconnection agreements or through
proceedings before State Commissions may be subject to changes mandated by State
Commissions as they develop permanent rules governing interconnection. No
assurance can be given that changes in current or future regulations adopted by
the FCC or state regulators, or other legislative, administrative, or judicial
initiatives relating to the telecommunications industry, would not have a
material adverse effect on Birch's business, operating results and financial
condition. In particular, Birch's belief that the entire local exchange market
will open to CLEC competition depends upon continued favorable pro-competitive
regulatory changes, and the ability of Birch to compete in these new market
segments may be adversely affected by the greater pricing flexibility and other
regulatory relief granted to ILECs under the Telecommunications Act and under
changes in state regulatory policy. See "Business -- Regulation."
Competition
The telecommunications industry is highly competitive. Birch expects it
will face substantial and increasing competition from a variety of service
providers due to regulatory changes and a trend toward business combinations and
alliances in the market. Birch faces competition from integrated service
providers as well as entities that serve individual market segments targeted by
Birch. In each of the cities served by Birch's networks, the services offered by
Birch compete principally with the services offered by the ILEC serving that
area. ILECs, like SWBT, have established networks, long-standing relationships
with their customers, strong political and regulatory influence, the potential
to subsidize competitive services from monopoly service revenue, and the benefit
of state and federal regulations that, until recently, have favored ILECs. In
the local exchange market, the ILECs continue to hold near-monopoly positions.
Other ILECs are already offering in-region long distance services.
Birch also expects to face competition from other current and potential
market entrants, including other CLECs, IXCs, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators, and
private networks built by large end users. The Telecommunications Act
facilitates such entry by requiring ILECs to allow new entrants to acquire local
services at wholesale prices for resale and to purchase unbundled network
elements at cost-based prices. A continuing trend toward combinations and
strategic alliances in the telecommunications industry, including potential
consolidation among ILECs, or among CLECs in smaller markets, or transactions
between telephone companies and cable companies, or between IXCs and CLECs,
could give rise to significant new competitors. Many of Birch's current and
potential competitors have financial, personnel, and other resources, including
broad name recognition, substantially greater than those of Birch, as well as
other competitive advantages over Birch.
The World Trade Organization (WTO) agreement on basic
telecommunications services could increase the level of competition faced by
Birch. Under this agreement, the United States and 68 other members of the WTO
committed themselves to opening their respective telecommunications markets,
including permitting foreign entry into basic telecommunications services
markets and adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telecommunications companies, effective in
some cases as early as January 1998. The FCC has introduced streamlined
processing of applications to facilitate entry into the U.S. market by entities
of WTO-member origin. There can be no assurance that the pro-competitive effects
of the WTO agreement will not have a material adverse effect on Birch's
business, operating results and financial condition and its ability to achieve
sufficient cash flow to service the Senior Notes.
Birch currently purchases all of its resold local services from SWBT
and is therefore heavily dependent on the availability of the network of SWBT.
To the extent Birch interconnects with and uses the networks of other ILECs,
CLECs, and fiber optic transport providers to service its customers, Birch is
and will be dependent upon the
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technology and capabilities of those carriers to meet certain telecommunications
needs of Birch's customers and to maintain its service standards. Birch must
interface with the ILEC's operations support systems in order to properly
provision new customers. There can be no assurance that Birch will be able to
obtain the interconnection it requires at rates and on terms and conditions that
permit Birch to offer switched services that are both competitive and
profitable. See "-- Reliance on Leased Transport Facilities and ILEC
Interconnection; Relationship with SWBT." In the event that Birch experiences
difficulties in obtaining high quality, reliable and reasonably priced services
from SWBT and other carriers, the attractiveness of Birch's services to its
customers would be significantly impaired.
The long distance telecommunications market has numerous entities
competing for the same customers and a high average churn rate, as customers
frequently change long distance providers in response to the offering of lower
rates or promotional incentives. Prices in the long distance market have
declined significantly in recent years and are expected to continue to decline.
The Company will face competition from large carriers such as AT&T, MCI WorldCom
and Sprint. Other competitors are likely to include BOCs providing out-of-
region (and, with the removal of regulatory barriers, in-region) long distance
services, other ILECs, other CLECs, microwave and satellite carriers and private
networks owned by large end users. See "-- Regulation."
The FCC may authorize a BOC to provide interLATA (Local Access and
Transport Area) services in a state when the BOC satisfies 14 specified
interconnection requirements and receives approval from the FCC. In evaluating a
BOC application for interLATA entry, the FCC must consult with the U.S.
Department of Justice and the applicable State Commission. If and when SWBT
obtains authority to provide interLATA services in a state, it will be able to
offer customers local and long distance telephone services. This will permit
SWBT to offer a full range of services to potential customers in that state and
thus eliminate an existing competitive advantage of Birch. Given the resources
and experience that SWBT currently possess in the local exchange market, the
ability to provide both local and long distance services could make SWBT a very
strong competitor. See "Business -- Regulation -- SWBT Entry into Long-Distance
Service."
The Company competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business.
The Internet services market is also highly competitive and the Company
expects that competition will continue to intensify. Birch's competitors in this
market will include other Internet service providers, other telecommunications
companies, on-line services providers and Internet software providers. Many of
these competitors have substantially greater financial, technological,
marketing, personnel and other resources than those available to Birch.
The Company believes that the principal competitive factors affecting
its business operations are service quality, network reliability, reliable
customer service, accurate billing and variety of services, to a lesser extent,
pricing levels and clear pricing policies. The ability of Birch to compete
effectively will depend upon its ability to maintain high quality, market-driven
services at prices generally equal to or below those charged by its competitors.
To maintain its competitive posture, the Company believes that it must be in a
position to reduce its prices in order to meet reductions in rates, if any,
offered by others. Any such reductions could adversely affect Birch's business,
operating results and financial condition. See "Business -- Competition."
Reliance on Leased Transport Facilities and ILEC Interconnection;
Relationship with SWBT
Because Birch has elected to lease transport capacity, it is dependent
upon the availability of fiber optic transmission facilities owned by ILECs (in
particular SWBT), CLECs and other fiber optic transport providers whose fiber
optic networks are being or will be leased by Birch. The risks inherent in this
approach include, but are not limited to, negotiating and renewing favorable
supply agreements, and the timeliness of the ILECs, CLECs or other fiber optic
transport providers in processing Birch's orders for customers who seek to
utilize Birch's service. Alternatively, if and when Birch seeks to install its
own fiber, Birch must obtain permits, access to rights-of-way, and permission to
utilize underground conduit and aerial pole space from entities such as ILECs
and other utilities, railroads, long distance companies, state highway
authorities, local governments and transit authorities, and may be required to
obtain franchises from municipal governments. There can be no assurance that
Birch will be able to obtain and maintain the franchises, permits and rights
needed to implement its network buildout on acceptable terms.
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<PAGE> 18
The failure to enter into and maintain any such required arrangements for a
particular network may affect Birch's ability to develop that network and may
have a material adverse effect on Birch's business, operating results and
financial condition and its ability to achieve sufficient cash flow.
In addition to transport providers, the Company is reliant on executing
interconnection agreements with the ILECs, in particular SWBT, operating in its
target markets. Birch's interconnection agreements with SWBT in Missouri, Kansas
and Texas currently provide that Birch's connection and maintenance orders will
be executed at parity with SWBT's customers and that SWBT will provide adequate
trunking capacity to keep call blockage within industry standards. Accordingly,
Birch and its customers are currently dependent on SWBT and will in the future
be dependent on other ILECs to assure uninterrupted service. Blocked calls
result in customer dissatisfaction and risk the loss of business. ILEC-CLEC
interconnection agreements, such as the agreements between SWBT and certain
operating subsidiaries of Birch, typically may have short terms, requiring Birch
to renegotiate the agreements continually. ILECs may not provide timely
provisioning or adequate service quality, thereby impairing Birch's reputation
with customers who can easily switch back to the ILEC. In addition, the prices
set in the agreements may be subject to significant rate increases at the
discretion of the states. There can be no assurance that ILECs like SWBT will
comply with their network provisioning requirements, or that Birch will be able
to procure interconnections in other markets on terms comparable to the
interconnection agreements Birch currently has in place. In addition, there can
be no assurance that the rates charged to Birch under such interconnection
agreements will allow Birch to offer low enough usage rates to attract a
sufficient number of customers and to operate its business profitably. See
"Business -- Regulation -- Birch Interconnection Agreements."
As described above, Birch is reliant on the continued cooperation of
and the continued lack of competition from SWBT. Any extended interruption in
SWBT's cooperation could disrupt Birch's operations and have a material adverse
effect on Birch's business, operating results and financial condition and its
ability to achieve sufficient cash flow. It is also possible that SWBT may
expand and refocus its product offerings and networks to compete directly with
Birch. Accordingly, there can be no assurance that SWBT will continue to lease
transport capacity to Birch or that SWBT will continue to renew the
interconnection agreements it has with Birch, which would have a material
adverse effect on Birch's business, financial condition and results of
operations.
Risks Relating to Long Distance Business
As part of its offering of a package of telecommunications services to
its customers, Birch offers long distance services to its customers. The long
distance business is extremely competitive and prices have declined
substantially in recent years and are expected to continue to decline. In
addition, the long distance industry has historically had a high average churn
rate, as customers frequently change long distance providers in response to the
offering of lower rates or promotional incentives by competitors. Birch will
initially rely on other carriers to provide transmission and termination
services for all of its long distance traffic. Birch will need resale agreements
with long distance carriers to provide it with transmission services. Such
agreements typically provide for the resale of long distance services on a
per-minute basis and may contain minimum volume commitments. Negotiation of
these agreements involves estimates of future supply and demand for transmission
capacity as well as estimates of the calling patterns and traffic levels of
Birch's future customers. In the event Birch fails to meet its minimum volume
commitments, it may be obligated to pay underutilization charges and in the
event it underestimates its need for transmission capacity, Birch may be
required to obtain capacity through more expensive means. The incurrence of any
underutilization charges, rate increases or termination charges could have a
material adverse effect on Birch's business, operating results and financial
condition and its ability to achieve sufficient cash flow.
Dependence on Billing, Customer Service and Information Systems
Sophisticated back office information and processing systems are vital
to Birch's growth and its ability to monitor costs, bill customers, provision
customer orders, provide customer service and achieve operating efficiencies.
Birch's plans for the development and implementation of these operations support
systems rely, for the most part, on choosing products and services offered by
third party vendors and integrating such products and services in-house to
produce efficient operational solutions. There can be no assurance that these
systems will be successfully implemented on a timely basis or that they will
perform as expected. Failure of these vendors to deliver proposed products and
services in a timely and effective manner and at acceptable costs, failure by
Birch to
-18-
<PAGE> 19
adequately identify all of its information and processing needs, failure of
Birch's related processing or information systems, failure by Birch to integrate
effectively such products or services, or the failure by Birch to upgrade
systems as necessary could have a material adverse effect on Birch. In addition,
Birch's right to use these systems is dependent upon license agreements with
third party vendors. Certain of such agreements may be cancelable by the vendor
and the cancellation or nonrenewal of these agreements may have an adverse
effect on Birch's business, operating results and financial condition and its
ability to achieve sufficient cash flow.
Risk of New Service Acceptance by Customers
The success of Birch's service offerings will be dependent upon, among
other things, the willingness of customers to accept Birch as a new provider of
telecommunications services. There can be no assurance that Birch will be
successful in overcoming the resistance of customers or that customers will be
willing to contract for Birch's services. The lack of such acceptance could have
a material adverse effect on Birch's business, operating results and financial
condition and its ability to achieve sufficient cash flow.
Rapid Technological Change
The telecommunications industry is subject to rapid and significant
changes in technology. Birch will be subject to competitive threats from new
technology that becomes available before and after its networks are built. The
effect of technological changes on the businesses of Birch, however, cannot be
predicted. Birch believes its future success will depend, in part, on its
ability to anticipate and adapt to such changes and to offer, on a timely basis,
services that meet customer demands. Thus, there can be no assurance that
technological developments will not have a material adverse effect on Birch's
business, operating results and financial condition and its ability to achieve
sufficient cash flow.
Risk of Loss or Reduction of Access Charge Revenues
A portion of Birch's revenue comes from access charges, which are paid
to Birch by long distance carriers for originating and terminating calls to
customers served by Birch. The amount of access charge revenue that Birch
receives is calculated based on guidelines set by federal and state regulatory
bodies, and such guidelines could change at any time. These circumstances could
have a material adverse effect on Birch's business, operating results and
financial condition and its ability to achieve sufficient cash flow. See
"Business -- Telecommunications Services" and "Business -- Regulation -- Federal
Regulation Generally."
Difficulties in Implementing Enhanced Service Features
Birch has begun, and plans to continue, to deploy switches in the
cities in which it will operate networks and plans initially to rely on ILEC or
CLEC facilities for certain aspects of interconnection. Subject to obtaining
interconnection with SWBT, Birch will be able to offer a variety of enhanced
service features (such as voicemail, call waiting, caller ID and call
forwarding). Although under the Telecommunications Act the ILECs will be
required to unbundle network elements and permit Birch to purchase only the
origination and termination services it needs, there can be no assurance that
such unbundling will be effected in a timely manner and result in prices
favorable to Birch. In addition, Birch's ability to implement successfully its
enhanced service features will require the negotiation of resale agreements with
ILECs and other CLECs and the negotiation of interconnection and collocation
agreements with ILECs, which can take considerable time, effort and expense and
are subject to federal, state and local regulation.
Birch's enhanced service features may not be profitable due to, among
other factors, lack of customer demand, inability to secure access to ILEC
facilities on acceptable terms, and competition and pricing pressure from the
ILECs and other CLECs. There can be no assurance that Birch will be able to
successfully implement its switched and enhanced service features strategy.
Control of Company By Current Stockholders
As of December 31, 1998, the executive officers and directors of the
Company beneficially owned 14,103,752 shares of Common Stock, representing
approximately 60.1% of the Common Stock on a fully-diluted
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<PAGE> 20
basis. The Company's executive officers and directors as a group will be able to
exercise significant influence over such matters as the election of the
directors of the Company and other fundamental corporate transactions, such as
mergers, assets sales and the sale of the Company. In addition, the Purchasers
Rights Agreement (as defined) provides that each of the parties thereto will
vote in favor of the election of certain designees to the Company's Board of
Directors. See "Security Ownership of Certain Beneficial Owners and Management,"
"Certain Relationships and Related Party Transactions -- Purchasers Rights
Agreement".
In addition, the Company may adopt certain procedural and other
requirements or amend its Certificate of Incorporation or By-Laws in a manner
that could have the effect of delaying, deterring or preventing a change in
control of the Company or make it more difficult for stockholders to effect
certain corporate actions, including the ability to replace incumbent directors
and to accomplish transactions opposed by the incumbent Board of Directors.
Dividend Policy
The Company has no plans to pay cash dividends on its Common Stock in
the foreseeable future. The declaration and payment of any dividends in the
future will be determined by the Board of Directors, in its discretion, and will
depend on a number of factors, including the Company's earnings, capital
requirements and overall financial condition. In addition, the Company's ability
to declare and pay dividends will be substantially restricted under the terms of
the Indenture.
Dependence on Key Personnel
Birch's business is managed by a small number of key executive
officers, particularly David E. Scott, Birch's President and Chief Executive
Officer, Jeffrey D. Shackelford, Birch's Senior Vice President of Sales, Gary L.
Chesser, Birch's Senior Vice President of Engineering and Operations, David W.
Vranicar, Birch's Senior Vice President of Business Development, Bradley A.
Moline, Birch's Senior Vice President of Finance and Chief Financial Officer,
Donald H. Goldman, Birch's Senior Vice President of Internet Services, Gregory
C. Lawhon, Birch's Senior Vice President of Public Policy and General Counsel,
and Stephen L. Sauder, Vice President of Birch, the loss of any of whom could
have a material adverse effect on Birch's business, operating results and
financial condition. Birch believes that its future success will depend in large
part on its continued ability to attract and retain highly skilled and qualified
executive personnel. See "Part III, Item 10, Directors and Executive Officers of
the Registrant."
Dependence on New Employees
Birch's future success will depend in large part on its ability to
obtain the services of motivated technical, information systems, marketing, and
sales personnel. Birch is particularly dependent on its ability to identify,
hire, train, retain, and manage highly skilled and experienced network engineers
to execute the installation, development, and operation of Birch's networks, as
well as sales and marketing personnel to create and expand Birch's customer
base. The pace of growth of the CLEC industry may make it difficult to recruit
qualified labor for key functions, particularly general managers, sales
representatives, sales management, public policy experts, technicians,
engineers, and operations management. Because many of Birch's markets are small,
finding the right employees who are willing to relocate may be more difficult.
There can be no assurance that Birch will be able to obtain or retain the
services of additional personnel necessary for Birch's growth.
Risk of System Failure
Birch's operations are dependent upon its ability to protect its
network infrastructure against damage from fire, earthquakes, floods, power
loss, and similar events and to construct networks that are not vulnerable to
the effects of such events. The occurrence of a natural disaster or other
unanticipated problem at Birch's facilities or at the sites of its switches
could cause interruptions in the services provided by Birch. The failure of a
switch would result in interruption of service to the customers served by such
switch until necessary repairs were effected or replacement equipment were
installed. Additionally, failure of the other telecommunications providers to
provide the data communications capacity required by Birch as a result of
natural disaster, operational disruption or for any other reason could cause
interruptions in the services provided by Birch. Any damage or failure that
causes interruptions in Birch's operations could have a material adverse effect
on Birch's business, financial condition and results of operations.
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<PAGE> 21
Year 2000 Issue
All companies that rely on computers face an issue as the year 2000
approaches. The "year 2000" problem is the result of the past practice in the
computer industry of computer programs using two digits rather than four to
define the applicable year. This practice will result in incorrect results when
computers perform arithmetic operations, comparisons or data field sorting
involving years later than 1999. Any of Birch's computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Based on ongoing assessments, the Company has determined
that it will be required to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
There can be no assurance until the year 2000 that Birch's systems will
be year 2000 compliant. In addition, Birch uses SWBT's facilities to service its
customers, and such facilities currently utilize numerous date-sensitive
computer applications. If SWBT's facilities are not year 2000 compliant, or if
the systems of other ILECs, long-distance carriers and others upon which Birch
relies are not year 2000 compliant, it would have a material adverse effect on
Birch's business, operating results and financial condition and its ability to
achieve sufficient cash flow.
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<PAGE> 22
ITEM 2. PROPERTIES
At December 31, 1998, the Company owned or leased the following
facilities:
<TABLE>
<CAPTION>
APPROXIMATE EXPIRATION
LOCATION FUNCTION SQUARE FEET LEASE/OWN DATE OF LEASE
- -------- -------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Kansas City, MO Company Headquarters, Engineering 30,000 Lease Month-to-Month
& Operations
Kansas City, MO Future Company Headquarters, 47,000 Lease March 2007
Engineering & Operations
Kansas City, MO Sales Office 3,000 Lease Month-to-Month
Kansas City, MO Switch Site 8,300 Lease March 2003
Emporia, KS Customer Care Center & Customer 58,500 Own N/A
Premises Equipment
Emporia, KS Advertising & Print Shop 3,000 Lease Month-to-Month
Sunset Hills (St. Sales Office 3,000 Lease June 2002
Louis), MO
Maryland Heights (St. Switch Site 5,100 Lease November 2008
Louis), MO
Wichita, KS Sales Office 2,000 Lease May 2001
Wichita, KS Switch Site 6,300 Lease September 2008
Wichita, KS Switch Site 1,100 Lease August 2000
St. Joseph, MO Sales Office 1,500 Lease November 1999
Topeka, KS Sales Office 2,100 Lease April 2003
Salina, KS Sales Office & Customer Premises 5,000 Own N/A
Equipment Warehouse
Manhattan, KS Sales Office & Warehouse 5,000 Lease Month-to-Month
Dodge City, KS Sales Office 1,000 Lease Month-to-Month
Tyler, TX Sales Office 2,500 Lease January 2002
Waco, TX Sales Office 2,600 Lease December 2001
Beaumont, TX Sales Office 3,300 Lease December 2001
Longview, TX Sales Office 1,000 Lease December 1999
Mission (Kansas City), Internet Operations 1,000 Lease December 1999
KS
Overland Park (Kansas Shared Tenant Services 3,200 Lease September 2001
City), KS
Lawrence, KS Sales Office 775 Lease May 1999
Irving, TX Sales Office 1,000 Lease Month-to-Month
Leawood (Kansas City), Customer Premises Equipment 2,300 Lease December 1999
KS
</TABLE>
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<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
Birch knows of no pending or threatened material litigation or
proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, the Company initiated the
solicitation of stockholder approval for a proposal to (i) increase the
authorized size of the Company's Board of Directors from five to seven, and (ii)
to increase the number of shares of the Company's common stock authorized for
issuance under the Company's 1998 Stock Option Plan to 6,195,845.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A) MARKET INFORMATION
There is no established public trading market for the Company's Common
Stock
B) HOLDERS
As of March 29, 1999, there were 81 holders of record of the Company's
Common Stock.
C) DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since
its inception and does not intend to pay any dividends on its Common Stock in
the foreseeable future.
D) RECENT SALES OF UNREGISTERED SECURITIES
In February 1998, Birch merged with Valu-Line Companies, Inc.
(Valu-Line) in a transaction valued at $19.5 million, consisting of $4.75
million in cash, 2,968,750 shares of Series A Preferred Stock of the Company
having an aggregate liquidation preference of $4.75 million, and 6,593,750
shares of Series C Preferred Stock having an aggregate liquidation preference of
$10.0 million. Valu-Line, founded in 1982, has been primarily providing switched
long distance services, CPE sales and services and, since March 1997, local
service in selected smaller markets throughout the state of Kansas. The
securities in connection with the merger were issued pursuant to an exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
On March 13, 1998, Birch completed a private placement of 6,264,063
shares of its Series B Preferred Stock having an aggregate liquidation
preference of $9.5 million and $3.5 million in aggregate principal amount of
convertible notes, raising aggregate net proceeds of approximately $12.4 million
which were used to pay the cash portion of the consideration for the Valu-Line
merger, to repay certain debt and for general corporate purposes. In June 1998,
the convertible notes were converted into 2,307,965 shares of Series B Preferred
Stock of the Company. The securities in connection with this private placement
were issued pursuant to an exemption under Rule 506 promulgated under Section
4(2) of the Securities Act of 1933.
During June 1998, the Company completed a $115 million private offering
of 14% Senior Notes (the Senior Notes) due June 2008 and 115,000 warrants to
purchase 1,409,734 shares of Common Stock of the Company. The warrants are
exercisable at $0.01 per share and expire June 2008. The Company received net
proceeds from the Senior Notes of $110.2 million and concurrently purchased
pledged securities of $44.2 million. The pledged securities are restricted for
interest payments on the Senior Notes and, together with the interest accruing
thereon, will be used to satisfy such interest payments through June 2001. The
Senior Notes were issued pursuant to Rull 144A promulgated under the Securities
Act of 1933. The Senior Notes were subsequently exchanged for substantially
identical 14% notes due June 2008 that had been registered under the Securities
Act of 1933 in an exchange offer that expired in March 1999.
In February 1999, Birch acquired American Local Telecommunications,
L.L.C. (ALT), a local service provider in the Dallas metropolitan area for
$700,000 in cash and stock. The securities in connection with the merger were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act of 1933.
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<PAGE> 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data and should
be read in conjunction with and is qualified by reference to "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements of the Company, the notes thereto and the
other financial data contained elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
THE PREDECESSOR(1) THE COMPANY
------------------------------------------------- -----------------------
1994 1995 1996 1997 1997 1998
--------- --------- ---------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $ 10,741 $ 12,226 $ 13,217 $ 16,801 $ - $ 26,087
Cost of services....................... 6,713 8,284 8,749 11,842 - 18,886
--------- --------- ---------- ---------- --------- -----------
Gross margin........................... 4,028 3,942 4,468 4,959 - 7,201
Selling, general and administrative.... 3,022 3,520 3,561 4,067 1,776 15,769
Depreciation and amortization.......... 199 189 311 341 27 2,308
--------- --------- ---------- ---------- --------- -----------
Income (loss) from operations.......... 807 233 596 551 (1,083) (10,876)
Interest, net.......................... 48 58 102 97 (14) (5,332)
--------- --------- ---------- ---------- --------- -----------
Income (loss) before income taxes...... 759 175 494 454 (1,789) (16,208)
Provision for income taxes............. 319 81 205 186 - -
--------- --------- ---------- ---------- --------- -----------
Net income (loss)...................... $ 440 $ 94 $ 289 $ 268 (1,789) (16,208)
========= ========= ========== ==========
Preferred stock dividends.............. - 1,696
Amortization of preferred stock
issuance costs......................... - 29
--------- -----------
Loss applicable to common stock........ $ (1,789) $ (17,933)
========= ===========
Weighted average shares outstanding -
basic and diluted...................... 1,235 3,809
========= ===========
Loss per common share - basic and
diluted................................ $ (1.45) $ (4.71)
========= ===========
</TABLE>
(1) The Predecessor company is Valu-Line which merged with Birch during February
1998. Prior to February 1998, Birch had no revenues and was in the
developmental stage.
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<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
THE PREDECESSOR THE COMPANY
------------------------------------------------- -----------------------
1994 1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 333 $ 96 $ 158 $ 258 $ 210 $ 39,745
Pledged securities........................ - - - - - 37,785
Property and equipment.................... 2,063 2,265 2,721 2,964 128 26,900
Total assets.............................. 3,748 3,971 3,868 4,802 534 134,149
Long-term debt and capital lease
obligations............................... 1,188 1,431 792 681 - 115,791
Redeemable preferred stock................ - - - - - 14,063
Total stockholders' equity (deficit)...... 1,014 1,108 1,397 1,665 29 (7,099)
OTHER FINANCIAL DATA:
Cash flows from operating activities...... $ 568 $ (267) $ 834 $ 488 $ (1,464) $ (10,643)
Cash flows from investing activities...... (753) (230) (513) (243) (215) (67,093)
Cash flows from financing activities...... 395 259 (257) (145) 1,889 117,271
EBITDA(1)................................. 1,006 422 907 892 (1,776) (8,568)
Capital expenditures...................... 753 230 513 243 128 21,550
Ratio of earnings to fixed charges(2)..... 14.1x 3.5x 5.2x 4.9x - -
Deficiency of earnings to fixed charges(2) - - - - 1,789 16,208
OPERATING DATA:
Access Lines ............................. - - - 14,700 - 39,323
Local Customers........................... - - - 5,835 - 14,735
Average lines per business customer....... - - - * - 4.73
Average lines per residential customer.... - - - * - 1.25
Employees at end of period................ 51 58 61 84 14 345
</TABLE>
(1) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles (GAAP), Birch's
management believes that EBITDA is accepted as a generally recognized
measure of performance in the telecommunications industry. Birch's
management has noted that EBITDA is generally recognized as a measure of
comparison of different CLECs in the telecommunications industry and,
therefore, the Company believes that such information is useful and relevant
to investors. Nevertheless, this measure should not be considered in
isolation or as a substitute for operating income (as determined in
accordance with GAAP) as an indicator of Birch's operating performance, or
to cash flows from operating activities (as determined in accordance with
GAAP) as a measure of liquidity. In addition, it should be noted that
companies calculate EBITDA differently and, therefore, EBITDA as presented
for the Company may not be comparable to EBITDA reported by other companies.
See the consolidated financial statements of Valu-Line and Birch and related
notes thereto (collectively, the Consolidated Financial Statements) included
elsewhere in this Form 10-K for a review of the cash used in and provided
by operating and investing activities. Furthermore, there are legal and
functional requirements that limit management's discretionary use of funds
depicted by EBITDA. See "Risk Factors - Substantial Future Operating Losses;
Negative Cash Flow from Operations" and "Rick Factors - Substantial
Leverage; Ability to Service Indebtedness."
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as loss before income taxes plus fixed charges. Fixed charges
consist of interest expense and a reasonable approximation of the interest
factor included in rental payments on operating leases. Earnings were
insufficient to cover fixed charges for the years ended December 31, 1997
and 1998.
(*) Information not available.
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<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements, including the notes thereto,
appearing elsewhere in this Annual Report on Form 10-K. Except for the
historical information contained herein, the matters discussed in this Annual
Report contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, that are based on management's beliefs and assumptions,
current expectations, estimates, and projections. Statements that are not
historical facts, including without limitation statements which are preceded by,
followed by or include the words "believes," "anticipates," "plans," "expects,"
"may," "should" or similar expressions are forward-looking statements. Many of
the factors that will determine the Company's future results are beyond the
ability of the Company to control or predict. These statements are subject to
risks and uncertainties and, therefore, actual results may differ materially.
The Company disclaims any obligation to update any forward-looking statements
whether as a result of new information, future events or otherwise.
Important factors that may affect future results include, but are not
limited to: the impact of competitive products and pricing, product development,
changes in law and regulations, customer demand, litigation, availability of
future financing, uncertainty of market acceptance of new products, and other
risks detailed from time to time in the Company's SEC reports, copies of which
are available upon request from the Company's investor relations department.
OVERVIEW
Birch was organized on December 23, 1996 to become a leading provider
of telecommunications services to small and mid-sized businesses in its target
markets. Since such date and prior to the Valu-Line acquisition, Birch was a
development stage company with no revenue and principal activities consisting of
procuring governmental authorizations, raising capital, hiring management and
other key personnel, designing and developing its telephone networks, acquiring
equipment and facilities, negotiating resale and interconnection agreements and
pursuing acquisition opportunities. Birch had no assets, liabilities or
financial activity prior to January 1, 1997.
In February 1998, Birch merged with Valu-Line in a transaction valued
at $19.5 million, consisting of $4.75 million in cash, 2,968,750 shares of
Series A Preferred Stock having an aggregate liquidation preference of $4.75
million, and 6,593,750 shares of Series C Preferred Stock having an aggregate
liquidation preference of $10.0 million. Valu-Line, founded in 1982, has been
primarily providing switched long distance services, CPE sales and services and,
since March 1997, local service.
On March 13, 1998, Birch completed a private placement of 6,264,063
shares of its Series B Preferred Stock having an aggregate liquidation
preference of $9.5 million and $3.5 million in aggregate principal amount of its
Convertible Notes, raising aggregate net proceeds of approximately $12.4 million
which were used to pay the cash portion of the consideration in the Valu-Line
merger, to repay certain debt and for general corporate purposes. The
Convertible Notes have been converted to 2,307,965 shares of Series B Preferred
Stock.
In May 1998, Birch acquired Boulevard, a shared tenant service provider
in the Kansas City metropolitan area, for $300,000 in cash. In May 1998, Birch
acquired Telesource, a CPE provider in the Kansas City metropolitan area, for
$325,000 in cash. In connection with the Telesource acquisition, the Company
assumed $290,000 of Telesource's debt which has since been repaid.
During June 1998, the Company completed a $115 million private offering
of 14% Senior Notes due June 2008 and 115,000 warrants to purchase 1,409,734
shares of common stock. Interest on the Senior Notes is payable semi-annually in
arrears on June 15 and December 15 of each year. Warrants are exercisable at
$0.01 per share and expire June 2008. The Company received net proceeds from the
Senior Notes of $110.2 million and concurrently purchased pledged securities of
$44.2 million. The pledged securities are restricted for interest payments on
the Senior Notes and, together with the interest accruing thereon, will be used
to satisfy such interest payments through June 2001. The Company classifies its
pledged securities, consisting of $37.8 million of U.S. Treasury securities at
December 31, 1998, as held to maturity recorded at amortized cost and maturing
between six and thirty months. A
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<PAGE> 28
portion of the proceeds of this offering, $337,000, was allocated to the
warrants, and the resulting debt discount is being amortized over the life of
the debt on the straight-line method, which does not differ materially from the
effective interest method. Unamortized discount was $319,000 at December 31,
1998. The amount allocated to the warrants represents the estimated fair value
of the warrants at the date of issuance. The Senior Notes rank pari pasu in
right of payment to all existing and future senior indebtedness of the Company
and rank senior in the right of payment to all existing and future subordinated
indebtedness of the Company.
In September 1998, the Company purchased certain assets and liabilities
of TFSnet, an Internet service provider in the Kansas City metropolitan area,
for $2.65 million. The Valu-Line, Telesource, Boulevard, and TFSnet acquisitions
were recorded using the purchase method of accounting. Results from the acquired
companies are included in the financial statements from the date of the
respective acquisitions.
In February 1999, Birch acquired ALT, a local service provider in the
Dallas metropolitan area for $700,000 in cash and stock. In March 1999, Birch
acquired Capital, a CPE provider in the St. Louis metropolitan area for $3.0
million in cash and additional cash compensation from conversion of Capital's
customer base to Birch's local service.
Birch is focused on the development of its existing markets in Missouri
and Kansas and expansion into neighboring markets in SWBT's service area,
including Texas. In May 1998, Birch expanded its markets to include Kansas City,
St. Louis and St. Joseph, Missouri and Topeka and Wichita, Kansas. Birch
currently operates a long distance circuit switch in Wichita, Kansas, a
local/long distance circuit switch in Kansas City, Missouri, and is in the
process of deploying local/long distance switches in St. Louis, Missouri and
Wichita, Kansas. By operating its own switch in a particular market, Birch can
"unbundle" the services traditionally offered by the ILEC in that market and
retain a much higher percentage of the service charges paid by its customers.
Revenue
Birch generates most of its revenue from the sale of local and long
distance telephone service, CPE and Internet service to small and mid-sized
business customers. Birch offers local and long distance service packages in
certain markets in Missouri, Kansas and Texas. Revenue from local services
consists of charges for basic local service and custom calling features. Birch
offers local telephone service at a discount to the competing ILEC and offers
long distance service at a flat per minute rate for calls within the continental
United States. CPE and related services are offered at negotiated rates
generally consistent with other competitors. Birch also offers Internet access
in selected markets primarily at a flat monthly rates.
Operating Expenses
Birch's primary operating expenses consist of cost of services and
selling, general and administrative expenses.
Cost of Services. Birch's cost of services include the cost of
purchasing the "bundle" of traditional ILEC services for resale to its local
service subscribers. Birch purchases local telephone service for its customers
on a "wholesale" basis pursuant to an interconnection agreement with the ILEC in
Birch's targeted markets. Once a Birch switch is operational in a market, Birch
can "unbundle" the local services offered by the ILEC in that market and retain
a much higher percentage of the service charges paid by its customers as most
charges relate only to leasing the transmission lines.
Additionally, ILECs typically charge both a start-up fee as well as a
monthly recurring fee for use of their central offices for collocation of CLEC
transmission equipment. By physically collocating its transmission equipment in
or near existing ILEC switching offices, Birch has more direct control over its
ILEC links for both unbundled loops and trunking facilities. Birch also invests
in transmission and distribution electronics equipment associated with its
switches.
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<PAGE> 29
The Company's primary long distance expenses are expenses associated
with the Company's leased long distance network. For calls terminating outside
of Birch's network, long distance carriers are used to provide services.
Birch's primary expense associated with providing Internet access to
its customers is the cost of leasing transmission facilities. Birch's primary
expense associated with CPE is the cost of purchasing equipment from
manufacturers and labor for equipment installation.
Selling, General and Administrative Expenses. Birch's selling, general
and administrative expenses include its selling and marketing costs and customer
service, billing, corporate administration, personnel and network maintenance
expense.
Birch employs a direct sales force in each of its target markets. To
attract and retain a highly qualified sales force, Birch offers its sales
personnel a compensation package that emphasizes commissions. Birch expects to
incur significant selling and marketing costs as it expands its operations.
Birch has implemented and continues to refine tailored systems for
operations support systems and other back office systems that provision and
track customer orders from point of sale to the installation and testing of
service. Along with the development costs of these systems, Birch also incurs
ongoing expenses for customer service and billing systems. As Birch's strategy
stresses the importance of personalized customer service, Birch expects that its
customer service department will become a larger part of Birch's ongoing
administrative expenses. Birch also expects billing costs to increase as its
number of customers and the call volume increases. Birch incurs other costs and
expenses, including the costs associated with the maintenance of its network,
administrative overhead, office leases and bad debt. Birch expects that these
costs will grow significantly as it expands its operations and that
administrative overhead will be a large portion of these expenses during the
expansion phase of Birch's business. However, Birch expects these expenses to
become smaller as a percentage of Birch's revenue as Birch builds its customer
base.
The Company has experienced operating losses since its inception as a
result of efforts to build its customer base, develop and construct its network
infrastructure, build its internal staffing, develop its systems and expand to
new markets. The Company expects to continue to focus on increasing its customer
base and geographic coverage. Accordingly, the Company expects that its cost of
service, selling, general and administrative expenses, and capital expenditures
will continue to increase significantly, all of which may have a negative impact
on operating results. The projected increases in capital expenditures will
continue to generate negative cash flows from construction activities during the
next several years as the Company develops and constructs its switch network.
The Company may also be forced to change its pricing policies to respond to a
changing competitive environment, and there can be no assurance that the Company
will be able to maintain its operating margin. There can be no assurance that
growth in the Company's revenue or customer base will continue or that the
Company will be able to achieve or sustain profitability or positive cash flows.
The Company has generated net operating losses since its inception and,
accordingly, has incurred no income tax expense. The Company has reduced the net
deferred tax assets generated by these losses by a valuation allowance which
offsets the net deferred tax asset due to the uncertainty of realizing the
benefit of the tax loss carryforwards. 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.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue was $26.1 million for the year ended December 31, 1998
compared to $-0- for the year ended December 31, 1997, principally as a result
of the Valu-Line, Boulevard, Telesource and TFSnet acquisitions and opening five
new markets in 1998. Revenue increases in excess of revenue gained from
acquisitions in 1998 were largely from new customer sales particularly focused
on local. For 1998, as a percentage of total revenue,
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<PAGE> 30
communications and other services were 81.4% (including revenue from Internet
access services, which was 2% of total revenue for such period) and CPE sales
were 18.6%.
Cost of services. Cost of services was $18.9 million for 1998 compared
to $0 for 1997, principally as a result of the Valu-Line, Boulevard, Telesource
and TFSnet acquisitions and opening five new markets in 1998. Gross margin for
1998 was $7.2 million, or 27.6% of revenue.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $15.8 million for 1998 compared to $1.8 million for
1997. These expenses increased principally as a result of the Valu-Line,
Boulevard, Telesource and TFSnet acquisitions and opening five new markets in
1998. Additionally, the Company expanded its engineering and operations staff in
preparation for switch deployment. EBITDA was $(8.6) million for 1998 compared
to $(1.8) million for 1997.
Depreciation and amortization. Depreciation and amortization was $2.3
million for 1998 compared to $27,000 for 1997, most of which was attributable to
the fixed and intangible assets acquired in the Valu-Line, Boulevard, Telesource
and TFSnet acquisitions.
Interest. Interest expense was $8.2 million for 1998 primarily from the
senior note interest charges. Interest income was $2.9 million in 1998 compared
to $14,000 for 1997 primarily as a result of invested funds received from the
Senior Notes.
Net loss. Net loss was $16.2 million for 1998 compared to $1.8 million
for 1997, as discussed above.
VALU-LINE (PREDECESSOR COMPANY)
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue increased 27.1% to $16.8 million for the year ended
December 31, 1997, from $13.2 million for the year ended December 31, 1996,
primarily as a result of entering the local service market in March 1997 and
long distance volumes increasing faster than the decline in long distance
pricing. As a percent of total revenue, communications and other services were
82%, or $13.8 million, and CPE sales were 18%, or $3.0 million for the year
ended December 31, 1997 compared to 80.9%, or $10.7 million, and 19.1%, or $2.5
million, for the year ended December 31, 1996.
Cost of services. Cost of services increased 35.4% to $11.8 million for
the year ended December 31, 1997, from $8.7 million for the year ended December
31, 1996 primarily as a result of the increase in revenue. Gross margin
increased 11.0% to $5.0 million, or 29.5% of revenue, for the year ended
December 31, 1997 from $4.5 million, or 33.8% of revenue, for the year ended
December 31, 1996 primarily as a result of low margins on resold local service,
which was started in March 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 14.2% to $4.1 million for the year ended
December 31, 1997, from $3.6 million for the year ended December 31, 1996,
primarily as a result of sales commissions related to increased business volumes
and increased customer service expenditures associated with the commencement of
local service. EBITDA decreased 1.7% to $892,000 for the year ended December 31,
1997 from $907,000 for the year ended December 31, 1996 primarily as a result of
the start-up costs associated with offering local service.
Depreciation and amortization. Depreciation and amortization increased
9.6% to $341,000 for the year ended December 31, 1997, compared to $311,000 for
the year ended December 31, 1996.
Interest expense. Interest expense was $97,000 for the year ended
December 31, 1997 compared to $102,000 for the year ended December 31, 1996.
Income taxes. Income taxes increased 9.3% to $186,000 for the year
ended December 31, 1997, compared to $205,000 for the year ended December 31,
1996.
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<PAGE> 31
Net income. Net income was $268,000 for the year ended December 31,
1997, compared to $289,000 for the year ended December 31, 1996, as discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The expansion of Birch's business will require significant capital to
fund capital expenditures, working capital needs, debt service and the cash flow
deficits generated by operating losses. Birch's principal capital expenditure
requirements include the purchase and installation of switches and transmission
equipment collocated in ILEC central offices and the further development of
operations support systems and other automated back office systems. Management
does not expect that the growth of Birch's long distance and CPE business will
require significant capital expenditures.
To date, Birch has primarily funded its expenditures through the Senior
Notes, private sale of equity securities, and the convertible notes. During the
first quarter of 1997, the Company sold equity securities worth $1.8 million. In
February and March 1998, Birch raised approximately $12.4 million in a private
placement of its Series B Preferred Stock and Convertible Notes.
On June 18, 1998, the Company sold Senior Notes for net proceeds of $110.2
million.
Birch expects to make significant capital outlays for the foreseeable
future in order to continue the development activities called for in its current
business plan and to fund expected operating losses. Birch currently estimates
that the cash required to fund capital expenditures for its expansion plans will
be approximately $35.0 million in 1999. In order for the Company to implement
its current business plan and finance its projected capital expenditures for
1999 and thereafter, Birch will be required to seek and obtain significant
amounts of additional financing (debt and/or equity) within the next year. The
Company's expansion into Texas is dependent upon raising substantial additional
financing in the near term. If Birch's plans or assumptions change, if its
assumptions prove to be inaccurate, or if it experiences unanticipated costs or
competitive pressures, Birch will be required to seek additional capital sooner
than currently anticipated, possibly within the next six months. In particular,
if Birch elects to pursue significant additional acquisition opportunities or to
deploy more switches than currently planned, its cash needs may be increased
substantially. There can be no assurance that Birch's current projection of cash
flow (and losses) from operations (which will depend upon numerous future
factors and conditions, many of which are outside of Birch's control) will be
accurate. Because Birch's cost of developing new networks and services, funding
other strategic initiatives and operating its business will depend on a variety
of factors (including, among other things, the number of subscribers and the
service for which they subscribe, the nature and penetration of services that
may be offered by Birch, regulatory changes, and actions taken by competitors in
response to Birch's strategic initiatives), it is almost certain that actual
costs and revenue will vary from expected amounts, very likely to a material
degree, and that such variations are likely to affect Birch's future capital
requirements. Current cash balances will not be sufficient to fund Birch's
current business plan beyond the next year. As a consequence, Birch intends to
seek additional debt and/or equity financing to fund Birch's liquidity. There
can be no assurance that Birch will be able to raise additional capital on
satisfactory terms or at all. In the event that Birch is unable to obtain such
additional capital or to obtain it on acceptable terms or in sufficient amounts,
Birch will be required to delay the development of its network or take other
actions that could have a material adverse effect on Birch's business, operating
results and financial condition and its ability to achieve sufficient cash flow
to service debt requirements.
The ability of Birch to fund the capital expenditures and other costs
contemplated by its business plan and to make scheduled payments with respect to
the Senior Notes, will depend upon, among other things, its ability to seek and
obtain additional financing within the next year, to implement its business
plan, to deploy its network and expand its operations and to obtain and retain a
significant number of customers in its target markets, and the future operating
performance of Birch and its subsidiaries. Each of these factors is, to a large
extent, subject to economic, financial, competitive, political, regulatory and
other factors, many of which are beyond Birch's control. Birch expects that it
will generate operating losses for the foreseeable future and that its business
will not generate positive cash flow for the foreseeable future. In addition,
the Company will require significant amounts of additional financing, which may
not be available, before it will be able to generate positive cash flow. No
assurance can be given that Birch will be successful in developing and
maintaining a level of cash flow from operations sufficient to permit it to pay
the principal of, and interest and any other payments on, the Senior Notes. If
Birch is unable to generate sufficient cash flow from operations to service its
indebtedness, including the senior notes, it may have to
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<PAGE> 32
modify its growth plans, limit its capital expenditures, restructure or
refinance its indebtedness or seek additional capital or liquidate its assets.
There can be no assurance (i) that any of these strategies could be effected on
satisfactory terms, if at all, in light of Birch's high leverage or (ii) that
any such strategy would yield sufficient proceeds to service the Senior Notes.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of Birch's
computer programs that have date-sensitive software may recognize the date using
"00" as the year 1900 rather than the year 2000. The Company anticipates
spending $20 million on new systems from inception through the end of 1999 from
funds provided by the Senior Notes or from new sources of capital. Specific
expenditures for year 2000 costs are not being made related to the new systems.
The Company has completed its assessment on the consequences of the year 2000 on
information technology systems. As the Company has a relatively short history,
virtually all systems are newly created or are being created. During information
technology development, year 2000 issues have been consistently addressed. The
new information technology systems will, in certain cases, replace systems of
acquired companies in order to provide consistent and integrated systems. The
acquired companies' systems are not all year 2000 compliant, however, these
systems will be replaced by the third quarter of 1999. If all such systems are
not replaced and year 2000 issues occur, significant disruption to the Company's
operations could occur. The most significant system of the acquired companies
relates to the provisioning and billing of resale local and long distance
services which, if not replaced, could prevent the Company from billing or
provisioning service to existing and future customers. Installation of the
integrated billing and provisioning system is on schedule to date.
Other non-information technology systems which may be affected by the
year 2000 issue include systems provided to the Company by third parties. The
most significant third party systems are those which operate SWBT's interfaces
and billing records, switching equipment and customer premises equipment. The
Company has been assured by significant third parties that year 2000 compliance
will be accomplished by the end of 1999. If such compliance is not achieved by
these third parties, it would have a material adverse effect on Birch's
business, operating results and financial condition and its ability to achieve
sufficient cash flow.
IMPACT OF INFLATION
The Company does not believe that inflation has had a significant
impact on the Company's consolidated operations.
SEASONALITY
The Company's business is not considered to be seasonal.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" during 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general purpose
financial statements. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 had no material impact on the
Company's consolidated financial statements.
The Company also adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" in 1998. SFAS No. 131 established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 required no additional disclosures in the Company's
consolidated financial statements.
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<PAGE> 33
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which supersedes SFAS No. 80, "Accounting
for Futures Contracts," SFAS No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk," and SFAS No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments," and also amends
certain aspects of other SFAS's previously issued. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 is effective for the Company's consolidated financial
statements for the year ending December 31, 2000. The Company does not expect
the impact of SFAS No. 133 to be material in relation to its consolidated
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk - through derivative financial
instruments and other financial instruments, such as investments in marketable
securities and long-term debt - is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required by Item 8, refer to the "Consolidated
Financial Statements" section of the Financial Statements and Financial
Statement Schedules filed as part of this document.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
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<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information concerning the
directors, executive officers and other key personnel of Birch, including their
ages as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Henry H. Bradley............................ 53 Chairman of the Board
David E. Scott.............................. 39 President, Chief Executive Officer and Director
Gregory C. Lawhon........................... 39 Senior Vice President of Public Policy and General Counsel
Gary L. Chesser............................. 52 Senior Vice President of Engineering and Operations
David W. Vranicar........................... 40 Senior Vice President of Business Development
Bradley A. Moline........................... 31 Senior Vice President of Finance and Chief Financial Officer
Jeffrey D. Shackelford...................... 38 Senior Vice President of Sales
Donald H. Goldman........................... 39 Senior Vice President of Internet Services
Stephen L. Sauder........................... 52 Vice President and Director
Ian R. N. Bund.............................. 55 Director
David W. Bergmann........................... 49 Director
</TABLE>
Henry H. Bradley is Birch's Chairman of the Board of Directors (the
Board). Mr. Bradley also is the Chairman of the Board of News-Press & Gazette
Company (NPG), a co-founder of Birch. NPG is a family-owned company that owns
and operates a daily newspaper, cable television systems, network affiliate
broadcast television stations and FM and AM radio stations. Mr. Bradley has held
a number of other positions with NPG since joining NPG in 1971, including terms
as the Editor and Publisher of the St. Joseph News-Press.
David E. Scott, a co-founder and Director of Birch, is also its
President and Chief Executive Officer. Mr. Scott has 16 years of managerial
experience in the telecommunications industry. Prior to joining Birch, Mr. Scott
was President and General Manager of Kansas City FiberNet, a CLEC owned jointly
by the country's two largest cable operators, TCI and Time Warner. Prior to his
tenure at Kansas City FiberNet, Mr. Scott was Vice President of Strategic
Development for Sprint, responsible for developing investment plans in the
competitive local exchange, wireless (PCS) and international marketplaces. Mr.
Scott also served as Director of Strategic Planning for Sprint from 1988 to
1991. Mr. Scott also serves as a Director of DNS Publishing, an Internet
publishing company he co-founded with Donald H. Goldman. DNS Publishing produces
web sites that serve as on-line trade publications. Their first web site,
C-LECinfo (www.clec.com), serves the competitive local exchange carrier
industry.
Gregory C. Lawhon joined Birch in January 1997 as its Senior Vice
President of Public Policy and General Counsel. Prior to joining Birch, Mr.
Lawhon practiced law for twelve years with the 90-lawyer Kansas City firm of
Spencer Fane Britt & Browne. A partner in the firm since 1990, he was head of
the firm's Communications and Media Group and a member of its Business Group.
Mr. Lawhon's areas of practice were mergers and acquisitions, with an emphasis
on communications industry acquisitions, cable television franchising, and
commercial and regulatory issues with respect to the telecommunications
industry.
Gary L. Chesser joined Birch in March 1997 as its Senior Vice President
of Engineering and Operations. Prior to joining Birch, Mr. Chesser was Vice
President-Director of Engineering & Operations with Time Warner Connect, a
startup business unit offering local and long distance telephony, cable
television, and home security
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<PAGE> 35
services. Prior to joining Time Warner, Mr. Chesser was employed by US West
leading business process development and implementation for a startup data
communications business unit called !NTERPRISE. Prior to joining US West, Mr.
Chesser was employed by SWBT from 1965 to 1991 in a variety of engineering and
operations and managerial positions.
David W. Vranicar joined Birch in March 1997 as its Senior Vice
President of Business Development. Prior to joining Birch, Mr. Vranicar was Vice
President, International Business Development, at Sprint. In that capacity, he
directed Sprint's pursuit of numerous international strategic partnering
opportunities, including ventures in China, Israel, Taiwan, Japan, Italy and
Spain. During his tenure at Sprint, which began in 1992, Mr. Vranicar played a
key role in many domestic business development activities, including a PCS joint
venture with TCI, Cox Cable Communications, Inc. and Comcast Corp.
Bradley A. Moline joined Birch in July 1997 as its Senior Vice
President of Finance and Chief Financial Officer. From 1994 to 1997, Mr. Moline
was the Treasurer and Chief Financial Officer of Covenant Transport, Inc., a
transportation company in Chattanooga, Tennessee that became publicly traded
during his tenure. Prior to joining Covenant Transport, Mr. Moline worked for
Ernst & Young LLP in Kansas City, Missouri and Grant Thornton in Lincoln,
Nebraska, providing client services in the auditing and consulting areas.
Jeffrey D. Shackelford, a co-founder of Birch, is Senior Vice President
of Sales. Mr. Shackelford has 13 years of experience in the telecommunications
industry. Prior to joining Birch, Mr. Shackelford served as Director of Sales
and Marketing for Kansas City FiberNet. Prior to joining Kansas City FiberNet,
Mr. Shackelford was the Branch Manager for Sprint's Commercial Sales office in
Kansas City and was responsible for sales and service of small to large business
clients. During his tenure at Sprint, which began in 1988, Mr. Shackelford also
developed the long distance industry's first PC-based call management system,
FONVIEW.
Donald H. Goldman joined Birch in March 1998 as its Senior Vice
President of Internet Services. Mr. Goldman has over 13 years of managerial
experience in the telecommunications industry. Prior to joining Birch, Mr.
Goldman served as Vice President, Corporate Development at Sprint where he
developed the strategy and managed the acquisition of companies in the areas of
systems integration, Internet telephony, and wireless (PCS) services among
others. Mr. Goldman also serves as a Director of DNS Publishing, an Internet
publishing company he co-founded with David E. Scott.
Stephen L. Sauder is a Vice President and Director of the Company. Mr.
Sauder was elected as a Director of Birch in February 1998, as the designee of
the holders of the Company's Series C Preferred Stock. Mr. Sauder was a
co-founder of Valu-Line in 1982, and served as President and Chief Executive
Officer of Valu-Line until February 1998, when Birch and Valu-Line were merged.
Ian R. N. Bund was elected as a director of Birch in February 1998, as
the designee of White Pines Management L.L.C. (White Pines). Mr. Bund also has
been President of White Pines since 1996. From 1990 to 1996, Mr. Bund served as
president of White Pines Corporation, a management company, and predecessor to
White Pines. From 1993 to 1995, while continuing to operate his management
company, Mr. Bund served as Senior Vice President -- Corporate Finance of First
Michigan Corporation, a leading Michigan investment banking and brokerage firm.
Mr. Bund also currently serves on the boards of directors of several private
companies.
David W. Bergmann was elected as a director of Birch in February 1998,
as the designee of Advantage Capital Missouri Partners I, L.P. (Advantage).
Since 1992, he has been involved in the analysis, negotiation of terms, and
structuring of various portfolio company investments at Advantage Capital
Partners, which he co-founded. Mr. Bergmann also serves on the boards of
directors of several private companies as well as one commercial bank. In
addition, he is the Chairman of the Board of Interface Security, L.L.C., an
electronic security firm. He also serves as a consultant to Barnes Associates,
an investment banking firm specializing in evaluations, mergers, acquisitions,
and financing in the electronic security and communications fields.
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<PAGE> 36
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors do not receive compensation for their service as directors,
except that [NON-EMPLOYEE] directors are reimbursed for out-of-pocket expenses
incurred in connection with attendance at meetings of the Board and its
committees.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table sets forth the cash and non-cash compensation paid
or incurred on behalf of Birch to its Chief Executive Officer and four other
executive officers (the Named Executive Officers) for the years ended December
31, 1998 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
----------------------
ANNUAL COMPENSATION SECURITIES UNDERLYING ALL OTHER
NAME AND ------------------- OTHER ANNUAL OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUSES COMPENSATION($) (#)(A) ($)(E)
- -------------------------- ---- ---------- ---------- --------------- ----------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott............. 1998 175,000 -- -- 1,052,362 7,000
President and Chief 1997 164,904 -- -- -- --
Executive Officer(b)
Gregory C. Lawhon.......... 1998 175,000 -- -- 328,863 5,386
Senior Vice President of 1997 164,904 -- -- -- --
Public Policy and
General Counsel(b)
Gary L. Chesser............ 1998 140,000 35,000 -- 301,458 --
Senior Vice President of 1997 115,769 35,000 -- -- --
Engineering and
Operations(c)
David W. Vranicar.......... 1998 150,000 -- -- 274,052 6,000
Senior Vice President of 1997 118,269 -- -- -- --
Business Development(c)
Stephen L. Sauder.......... 1998 226,471 -- -- -- --
Vice President(d) 1997 134,577 -- 128,667 -- --
</TABLE>
- --------------------------------------------
(a) Includes options to purchase shares of the Company's Common Stock, which
were issued pursuant to the 1998 Stock Option Plan. Prior to the private
placement of the Company's Series B Preferred Stock, Birch was a party to
various stock option agreements with employees of the Company, all of which
were governed by the Company's 1997 Stock Option Plan. In connection with
the private placement of Series B Preferred Stock, the 1997 Stock Option
Plan was replaced with the 1998 Stock Option Plan, and all stock option
agreements governed by the 1997 Stock Option Plan were terminated. Options
issued to the members of management listed above pursuant to the 1998 Stock
Option Plan are exercisable immediately on grant at an exercise price of
$.001 per share, and vest over a four-year period, at a rate of 6.25% per
quarter. The stock options have been adjusted to reflect the Stock Dividend
on June 23, 1998. Holders of exercised options have voting power with
respect to all shares of Common Stock underlying the options. Upon
termination of employment with the Company, Birch has the right to purchase
all options which have not vested as of that date, subject to certain
exceptions.
(b) Reflects compensation paid to Messrs. Scott and Lawhon commencing in
January 1997.
(c) Reflects compensation paid to Messrs. Chesser and Vranicar commencing in
March 1997.
(d) Mr. Sauder joined Birch after the Valu-Line acquisition and currently
serves as Vice President of the Company. Compensation listed was paid by
Valu-Line from January 1997 to February 1998.
(e) Reflects matching contributions made by the Company under its 401(k) plan.
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<PAGE> 37
OPTIONS GRANTS
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1998
Stock Option Plan (the Plan). As of March 29, 1999, options to purchase a total
of 5,352,934 shares were outstanding under the Plan and options to purchase
842,911 shares remained available for grant thereunder.
The following table shows, for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at year
end by the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
-------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(c)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------
NAME GRANTED(#)(a) FISCAL YEAR(b) ($/Sh) DATE 5%($) 10%($)
- ---- ------------- -------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott ............ 931,696 18.4% .001 2/10/2008 555 1,407
120,666 2.4% .001 3/13/2008 72 182
Gregory C. Lawhon.......... 291,155 5.7% .001 2/10/2008 174 440
37,708 0.7% .001 3/13/2008 22 57
Gary L. Chesser............ 266,893 5.3% .001 2/10/2008 159 403
34,565 0.7% .001 3/13/2008 21 52
David W. Vranicar.......... 242,628 4.8% .001 2/10/2008 145 367
31,424 0.6% .001 3/13/2008 19 47
Stephen L. Sauder.......... -- -- -- -- -- --
</TABLE>
- ---------------------
(a) Includes options to purchase shares of Common Stock, which were issued
pursuant to the 1998 Stock Option Plan. Prior to the private placement of
Series B Preferred Stock, Birch was a party to various stock option
agreements with employees of the Company, all of which were governed by the
Company's 1997 Stock Option Plan. In connection with this private placement
of Series B Preferred Stock, the 1997 Stock Option Plan was replaced with
the 1998 Stock Option Plan, and all stock option agreements governed by the
1997 Stock Option Plan were terminated. Options issued pursuant to the 1998
Stock Option Plan are exercisable immediately on grant at an exercise price
of $.001 per share, and vest over a four-year period, at a rate of 6.25%
per quarter. The stock options have been adjusted to reflect the Stock
Dividend on June 23, 1998. Holders of exercised options have voting power
with respect to all shares of Common Stock underlying the options. Upon
termination of employment with the Company, Birch has the right to purchase
all options which have not vested as of that date, subject to certain
exceptions.
(b) Based on an aggregate of options to purchase 5,352,934 shares of Birch's
Common Stock granted to employees of Birch in fiscal 1998, including the
Named Executive Officers.
(c) The potential realizable value assumes a per-share market price at the time
of the grant to be approximately $.001 with an assumed rate of appreciation
of 5% and 10%, respectively, compounded annually for 10 years.
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<PAGE> 38
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES(a)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS(#) OPTIONS($)
ACQUIRED ON VALUE EXERCISABLE(E) EXERCISABLE(E)
NAME EXERCISE(#)(b) REALIZED($) UNEXERCISABLE(U)(c) UNEXERCISABLE(U)(c)
- ---- -------------- ---------- -------------------- -------------------
<S> <C> <C> <C> <C>
David E. Scott.................. 197,318 -- -- (E) -- (E)
855,044 (U) -- (U)
Gregory C. Lawhon............... 61,662 -- -- (E) -- (E)
267,201 (U) -- (U)
Gary L. Chesser................. 56,523 -- -- (E) -- (E)
244,935 (U) -- (U)
David W. Vranicar............... 51,385 -- -- (E) -- (E)
222,667 (U) -- (U)
Stephen L. Sauder............... -- -- -- (E) -- (E)
-- (U) -- (U)
</TABLE>
- -----------------------------------
(a) The option shown reflect options granted as of December 31, 1998.
(b) For purposes of this table alone, "exercise" means an employee's
acquisition of shares of Common Stock which have already vested,
"exercisable" means options to purchase shares of Common Stock which are
subject to exercise and "unexercisable" means all other options to
purchase shares of Common Stock
(c) Includes options to purchase shares of Common Stock, which were issued
pursuant to the 1998 Stock Option Plan. Prior to the private placement of
Series B Preferred Stock, Birch was a party to various stock option
agreements with employees of the Company, all of which were governed by the
Company's 1997 Stock Option Plan. In connection with this private placement
of Series B Preferred Stock, the 1997 Stock Option Plan was replaced with
the 1998 Stock Option Plan, and all stock option agreements governed by the
1997 Stock Option Plan were terminated. Options issued pursuant to the 1998
Stock Option Plan are exercisable immediately on grant at an exercise price
of $.001 per share, and vest over a four-year period, at a rate of 6.25%
per quarter. The stock options have been adjusted to reflect the Stock
Dividend on June 23, 1998. Holders of exercised options have voting power
with respect to all shares of Common Stock underlying the options. Upon
termination of employment with the Company, Birch has the right to purchase
all options which have not vested as of that date, subject to certain
exceptions.
EMPLOYMENT AGREEMENTS
David E. Scott. Mr. Scott is party to an employment agreement with Birch
dated as of February 10, 1998. Under his employment agreement, Mr. Scott
receives a base salary of $175,000 per annum. Mr. Scott is also eligible for a
bonus based on achievement of performance criteria established by the Board. Mr.
Scott's employment agreement is for an initial three-year term, and
automatically renews for additional one-year terms unless either Mr. Scott or
Birch provides written notice to each other at least 90 days prior to such
renewal. Mr. Scott's employment agreement provides that upon termination of
employment by Birch, other than for cause, disability or death, Birch shall pay
Mr. Scott's salary for the remainder, if any, of the calendar month in which
such termination is effective and for 24 consecutive calendar months thereafter.
The agreement also provides for noncompetition, nonsolicitation and
nondisclosure covenants.
Gregory C. Lawhon. Mr. Lawhon is party to an employment agreement with
Birch dated as of February 10, 1998. Under his employment agreement, Mr. Lawhon
receives a base salary of $175,000 per annum. Mr. Lawhon is also eligible for a
bonus based on achievement of performance criteria established by the Board. Mr.
Lawhon's employment agreement is for an initial one-year term, and automatically
renews for additional one-year terms unless either Mr. Lawhon or Birch provides
written notice to each other at least 90 days prior to such renewal. Mr.
Lawhon's employment agreement provides that upon termination of employment by
Birch, other than for cause, disability or death, Birch shall pay Mr. Lawhon's
salary for the remainder, if any, of the calendar month in which
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<PAGE> 39
such termination is effective and for 12 consecutive calendar months thereafter.
The agreement also provides for noncompetition, nonsolicitation and
nondisclosure covenants.
Gary L. Chesser. Mr. Chesser is party to an employment agreement with Birch
dated as of February 10, 1998. Under his employment agreement, Mr. Chesser
receives a base salary of $150,000 per annum. Mr. Chesser is also eligible for a
bonus based on achievement of performance criteria established by the Board. Mr.
Chesser's employment agreement is for an initial one-year term, and
automatically renews for additional one-year terms unless either Mr. Chesser or
Birch provides written notice to each other at least 90 days prior to such
renewal. Mr. Chesser's employment agreement provides that upon termination of
employment by Birch, other than for cause, disability or death, Birch shall pay
Mr. Chesser's salary for the remainder, if any, of the calendar month in which
such termination is effective and for 12 consecutive calendar months thereafter.
The agreement also provides for noncompetition, nonsolicitation and
nondisclosure covenants.
David W. Vranicar. Mr. Vranicar is party to an employment agreement with
Birch dated as of February 10, 1998. Under his employment agreement, Mr.
Vranicar receives a base salary of $150,000 per annum. Mr. Vranicar is also
eligible for a bonus based on achievement of performance criteria established by
the Board. Mr. Vranicar's employment agreement is for an initial one-year term,
and automatically renews for additional one-year terms unless either Mr.
Vranicar or Birch provides written notice to each other at least 90 days prior
to such renewal. Mr. Vranicar's employment agreement provides that upon
termination of employment by Birch, other than for cause, disability or death,
Birch shall pay Mr. Vranicar's salary for the remainder, if any, of the calendar
month in which such termination is effective and for 12 consecutive calendar
months thereafter. The agreement also provides for noncompetition,
nonsolicitation and nondisclosure covenants.
Stephen L. Sauder. Mr. Sauder is party to an employment agreement with
Birch dated as of February 10, 1998. Under his employment agreement, Mr. Sauder
receives a base salary of $213,000 per annum. Mr. Sauder is also eligible for a
bonus based on achievement of performance criteria established by the Board. Mr.
Sauder's employment agreement is for an initial one-year term, and automatically
renews for additional one-year terms unless either Mr. Sauder or Birch provides
written notice to each other at least 90 days prior to such renewal. Mr.
Sauder's employment agreement provides that upon termination of employment by
Birch, other than for cause, disability or death, Birch shall pay Mr. Sauder's
salary for the remainder, if any, of the calendar month in which such
termination is effective and for 12 consecutive calendar months thereafter. The
agreement also provides for noncompetition, nonsolicitation and nondisclosure
covenants.
-39-
<PAGE> 40
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Ian R. N.
Bund, Henry H. Bradley and David E. Scott.
Report of the Compensation Committee of the Board of Directors
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is a report of the Compensation Committee of the Board
(the Committee) describing the compensation policies applicable to the Company's
executive officers (including the Named Executive Officers) during the fiscal
year ended December 31, 1998.
GENERAL POLICIES
The Committee is responsible for assisting the Company's Chief
Executive Officer (the CEO) in devising the general compensation policies and
compensation plans of the Company, as well as the specific compensation levels
for individual executive officers. The Committee also administers the Company's
stock option, employee stock purchase and 401(k) plans and determines the terms
and conditions of grants thereunder. The Committee consists of two non-employee
Board members and the CEO. The CEO does not participate in Committee
deliberations or decisions involving his own compensation.
The Company's compensation policies are designed to link the executive
officers' compensation to the annual and long-term performance of the Company,
to provide compensation that is competitive with that of executives in the
industry, to reward performance and teamwork, and to attract and retain superior
talent. The compensation mix reflects a balance of annual cash payments,
consisting of annual base salary payments and incentive bonus payments, and
long-term stock-based incentives in the form of stock options. The emphasis in
incentive compensation is placed on strategic, stock-based options that align
the financial interests of the Company's employees with those of its
stockholders.
BASE SALARIES
The salary component of executive compensation is based on the
executive's level of responsibility for meeting Company objectives and
performance. Base salaries for executives are reviewed and adjusted at least
annually based on information regarding competitive salaries, the results of
industry compensation surveys, individual experience and performance.
CASH BONUSES
The Company's incentive program for executive officers provides direct
financial incentives in the form of cash bonuses based on previous year
performance.
STOCK OPTIONS
The Company's 1998 Stock Option Plan provides for the issuance of stock
options to officers and employees of the Company to purchase shares of the
Company's common stock at an exercise price equal to the fair market value of
such stock on the date of grant. The Company's stock options typically vest over
a 48-month period.
The Company's compensation policies recognize the importance of stock
ownership by senior executives, and stock options are an integral part of each
executive's compensation. The Committee believes that the
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<PAGE> 41
opportunity for stock appreciation through stock options that vest over time
promotes the relationship between long-term interests of executive officers and
stockholders. The size of specific grants takes into account the executive
officer's salary and the number of options previously granted to the officer, as
well as his or her contributions to the Company's success.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
David E. Scott has served as President and CEO since the Company's
inception. In February 1998 he entered into an employment agreement with the
Company, the terms of which are described in more detail in "Employment
Agreements."
During fiscal 1998, Mr. Scott received a base salary of $175,000 and
options to purchase an aggregate of 1,052,362 shares of the Company's common
stock. In reviewing the compensation paid to Mr. Scott for fiscal 1998, the
Committee applied the factors discussed above in this Report under the headings
"Base Salaries," "Cash Bonuses," and "Stock Options." In addition, the Committee
considered a number of other factors, including competitive market compensation
packages, Mr. Scott's past performance at the Company and the responsibilities
he was undertaking in assuming the position of CEO. Based on its internal review
and informal information reviewed by the Committee, the Committee believes that
the base salary level for the CEO is commensurate with salaries paid to chief
executive officers of comparable companies engaged in similar industries.
Overall, the Committee believes that Mr. Scott is being appropriately
compensated in a manner that is consistent with the long-term interests of
stockholders.
The members of the Committee submit the foregoing report.
COMPENSATION COMMITTEE:
Henry H. Bradley
Ian R. N. Bund
David E. Scott
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Birch's outstanding capital stock as of December 31, 1998 consisted of
5,000,296 shares of Common Stock, 8,572,039 shares of Series B Preferred Stock
and 8,492,749 shares of Series C Preferred Stock.
The following table sets forth certain information regarding the
beneficial ownership of the capital stock of Birch by: (i) each of the directors
and the Named Executive Officers of Birch; (ii) all directors and Named
Executive Officers as a group and (iii) each owner of more than 5% of the equity
securities of Birch (5% Owners). Unless otherwise noted, the address for each
director and Named Executive Officer of Birch is c/o Birch Telecom, Inc., 2020
Baltimore Avenue, Kansas City, Missouri 64108.
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NUMBER OF SHARES PERCENTAGE OF VOTING POWER
BENEFICIALLY OWNED CLASS OWNED OF
NAME AND ADDRESS OF ------------------------------------- ------------------------------ FULLY DILUTED
BENEFICIAL OWNER(a) COMMON(b) SERIES B SERIES C COMMON(b) SERIES B SERIES C COMMON STOCK
- ----------------------------- --------- ---------- ---------- --------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
Henry H. Bradley(c) .......... -- 1,978,128 1,582,500 --% 23.1% 18.6% 15.2%
David E. Scott ............... 1,190,768 -- 189,900 18.6 -- 2.2 5.9
Gregory C. Lawhon ............ 380,137 49,453 -- 5.9 * -- 1.8
Gary L. Chesser .............. 348,459 32,969 -- 5.4 * -- 1.6
David W. Vranicar ............ 316,780 36,266 -- 4.9 * -- 1.5
Bradley A. Moline(d) ......... 297,932 70,625 -- 4.6 * -- 1.6
Jeffrey D. Shackelford ....... 794,160 -- 126,600 12.4 -- 1.5 3.9
Stephen L. Sauder(e) ......... -- 85,719 6,311,797 -- 1.0 74.3 27.3
Donald H. Goldman ............ 263,750 -- -- 4.1 -- -- 1.1
Ian R. N. Bund(f) ............ -- 47,808 -- -- * -- *
David W. Bergmann(g) ......... -- -- -- -- -- -- --
All directors and
executive officers as
a group (11 persons) ....... 3,591,987 2,300,968 8,210,797 56.0 26.8 96.7 60.1
5% OWNERS:
News-Press & Gazette
Company(h) ................. -- 1,648,438 1,582,500 -- 19.2 18.6 13.8
Advantage Capital
Missouri Partners I,
L.P.(g)(i) ................. -- 1,318,750 -- -- 15.4 -- 5.6
Pacific Capital, L.P.(f)(j) .. -- 1,219,925 -- -- 14.2 -- 5.2
</TABLE>
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<PAGE> 42
- --------------------------------------------
* Less than one percent
(a) Beneficial ownership is determined in accordance with the Commission's
rules and includes voting and investment power with respect to the shares.
(b) Includes options to purchase shares of the Common Stock, which were issued
pursuant to the 1998 Stock Option Plan. Certain options are exercisable
immediately on grant at an exercise price of $.001 per share, and vest
over a four-year period, at a rate of 6.25% per quarter. Holders of
exercised options have voting power with respect to all shares of Common
Stock underlying the options. Upon termination of employment with the
Company, Birch has the right to purchase all options which have not vested
as of that date, subject to certain exceptions.
(c) Includes 1,648,438 shares of Series B Preferred Stock and 1,582,500 shares
of Series C Preferred Stock held by NPG. Mr. Bradley and his brother hold
voting power of NPG. Also includes 329,687 shares of Series B Preferred
Stock held by various trusts and relatives of the Bradley family.
(d) Includes 5,275 shares of Series B Preferred Stock held by Mr. Moline's
father.
(e) Includes 65,937 shares of Series B Preferred Stock held by Mr. Sauder's
father.
(f) Mr. Bund is the president of White Pines which provides management
services to White Pines L.P. I and the Pacific Capital, L.P. partnership.
Mr. Bund serves on the Board of Birch.
(g) Mr. Bergmann is a general partner of Advantage Capital Missouri Partners
I, L.P. and serves on the Board of Birch.
(h) The principal business address of NPG is 825 Edmond Street, St. Joseph, MO
64501.
(i) The principal business address of Advantage is 7733 Forsyth Boulevard,
Suite 1850, St. Louis, MO 63105.
(j) The principal business address of Pacific Capital, L.P. is 2401 Plymouth
Road, Suite B, Ann Arbor, MI 48105.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PURCHASE OF SERIES A PREFERRED STOCK BY STEPHEN L. SAUDER
In connection with the merger of Birch and Valu-Line, the Company paid
to Stephen L. Sauder, the principal stockholder of Valu-Line, 2,968,750 shares
of its Series A Preferred Stock, 5,982,746 shares of its Series C Preferred
Stock and $4,500,000.00 in cash. During the year ended December 31, 1998, the
Company paid dividends of $168,000 to Mr. Sauder, the holder of all of the
Company's Series A Preferred Stock. Pursuant to the Purchasers Rights Agreement
dated February 10, 1998 (the Purchasers Rights Agreement), Mr. Sauder was
elected as a Director of the Company. In June 1998, Birch repurchased all of the
outstanding shares of Birch's Series A Preferred Stock held by Mr. Sauder.
SERIES B PREFERRED STOCK OFFERING
On March 13, 1998, Birch completed a private placement of 6,264,074
shares of its Series B Preferred Stock (the Series B Preferred Stock Offering)
having an aggregate liquidation preference of $9.5 million and $3.5 million in
aggregate principal amount of its Convertible Notes which on June 18, 1998 were
converted to 2,307,965 shares of Series B Preferred Stock, raising aggregate net
proceeds of approximately $12.4 million. The transaction was consummated
pursuant to the Purchasers Rights Agreement and the Securities Purchase
Agreement, agreements
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<PAGE> 43
which designate certain rights and obligations of the Series B Preferred Stock.
See "-- Purchasers Rights Agreement" and "-- Securities Purchase Agreement."
Pursuant to the Securities Purchase Agreement, NPG, a stockholder which owns in
excess of 5% of the Company's voting securities, purchased $2,500,000 of Series
B Preferred Stock, and certain parties affiliated with NPG, including Henry H.
Bradley, Chairman of the Board of the Company, purchased $500,000 of Series B
Preferred Stock. In addition, pursuant to the Securities Purchase Agreement,
Bradley A. Moline and Gregory C. Lawhon, executive officers of Birch, purchased
$105,000 and $75,000 of Series B Preferred Stock, respectively. In connection
with this Series B Preferred Stock Offering, NPG surrendered 1,500,000 shares of
Common Stock and 1,500,000 warrants exercisable into shares of Common Stock in
exchange for 1,582,500 shares of Series C Preferred Stock; David E. Scott,
Birch's President, Chief Executive Officer and Director, surrendered 180,000
shares of Common Stock and 180,000 warrants exercisable into shares of Common
Stock in exchange for 189,900 shares of Series C Preferred Stock; and Jeffrey D.
Shackleford, Birch's Senior Vice President of Sales and Marketing, surrendered
120,000 shares of Common Stock and 120,000 warrants exercisable into shares of
Common Stock in exchange for 126,600 shares of Series C Preferred Stock. The
Company then cancelled the exchanged shares and warrants exercisable into shares
of common stock.
In connection with this Series B Preferred Stock transaction, Gregory
C. Lawhon, Birch's Senior Vice President of Public Policy and General Counsel,
purchased 49,453 shares, Gary L. Chesser, Birch's Senior Vice President of
Engineering and Operations, purchased 32,969 shares, David W. Vranicar, Senior
Vice President of Business Development, purchased 36,266 shares and Bradley A.
Moline, Birch's Senior Vice President of Finance and Chief Financial Officer,
purchased 70,625 shares.
PURCHASERS RIGHTS AGREEMENT
Current stockholders of Birch are parties to the Purchasers Rights
Agreement, pursuant to which they agreed to vote their respective shares in such
a manner as to elect certain persons to serve as Directors. The holders of
Series B Preferred Stock have agreed to vote their shares to elect one designee
of NPG; one designee of Advantage and one designee of White Pines. In addition,
the holders of Series C Preferred Stock agreed to vote their shares to elect
Stephen L. Sauder, and the holders of Common Stock agreed to vote their shares
for the election of David E. Scott. As a result, so long as the Purchasers
Rights Agreement is in effect, these investors will effectively control the
election of the Company's Board of Directors.
Registration Rights
The parties to the Purchasers Rights Agreement, subject to certain
conditions, have certain registration rights with respect to shares of Common
Stock, including shares of Common Stock issuable upon conversion or redemption
of shares of Series B Preferred Stock or upon conversion of shares of Series C
Preferred Stock. Such purchasers may, subject to certain conditions, require
Birch to register their shares of Common Stock pursuant to the Securities Act in
connection with an underwritten public offering of the Common Stock to the
general public. Each purchaser of stock pursuant to the Purchasers Rights
Agreement is subject to lock-up restrictions in the event of a public offering
of Birch's securities.
Restrictions on Transfer
Birch's outstanding Common Stock (including shares issued pursuant to
Options), Series B Preferred Stock and Series C Preferred Stock are subject to
certain restrictions on transfer. Holders of Common Stock, Series B Preferred
Stock and Series C Preferred Stock that are parties to the Purchasers Rights
Agreement, subject to certain exceptions, may not transfer their shares without
first giving Birch the opportunity to purchase such shares (a Right of First
Refusal). In addition, holders of Common Stock and Series C Preferred Stock that
are parties to the Purchasers Rights Agreement, subject to certain exceptions,
may not transfer their shares without first giving the holders of Series B
Preferred Stock the opportunity to participate in such transfer (a Co-Sale
Right). Holders of Common Stock, Series B Preferred Stock and Series C Preferred
Stock that are parties to the Purchasers Rights Agreement are required to sell
their shares in the event of an agreement by 66-2/3% of the outstanding shares
of Common Stock (assuming conversion or exercise of all convertible securities,
options or warrants) to sell or transfer their shares, or to sell all or
substantially all of the assets of Birch to a third party.
-43-
<PAGE> 44
Pre-Emptive Rights
Holders of Birch's Series B Preferred Stock and Series C Preferred
Stock have the right to purchase a pro rata portion of any Common Stock or
Preferred Stock that Birch proposes to sell and issue, subject to certain
exceptions.
Size of the Board of Directors
The Purchasers Rights Agreement provides that so long as 10% or more of
the outstanding shares of Series B Preferred Stock are held by the parties to
the Purchasers Rights Agreement, the approval by the vote or written consent of
the holders of at least a majority of the then-outstanding shares of Series B
Preferred Stock shall be necessary to change the size of the Board of Directors.
SECURITIES PURCHASE AGREEMENT
In connection with the Series B Preferred Stock Offering, the current
stockholders entered into the Securities Purchase Agreement. Pursuant to this
agreement, Birch sold shares of its Common Stock to certain of its employees
pursuant to the Stock Purchase Plan and sold shares of its Series B Preferred
Stock and Convertible Notes to certain investors. In addition, pursuant to the
Securities Purchase Agreement, Birch implemented a plan of recapitalization
whereby it exchanged all shares of its Common Stock and warrants for shares of
its Common Stock issued and outstanding prior to the Securities Purchase
Agreement for shares of its Series C Preferred Stock. Birch then cancelled the
exchanged shares of common stock and warrants exercisable into shares of common
stock.
SALES OF COMMON STOCK TO EXECUTIVE OFFICERS OF THE COMPANY
In connection with the Series B Preferred Stock Offering, 474,750
shares of the Company's Common Stock were sold to certain employees of the
Company for an aggregate purchase price of $450.00. The shares were sold
pursuant to the Company's Stock Purchase Plan. In connection with this
transaction, David E. Scott, Birch's President, Chief Executive Officer and
Director, purchased 138,405 shares of Common Stock, Jeffrey D. Shackelford,
Birch's Senior Vice President of Sales and Marketing, purchased 92,587 shares of
Common Stock, Gregory C. Lawhon, Birch's Senior Vice President of Public Policy
and General Counsel, purchased 51,273 shares of Common Stock, Gary L. Chesser,
Birch's Senior Vice President of Engineering and Operations, purchased 47,000
shares of Common Stock, David W. Vranicar, Senior Vice President of Business
Development, purchased 42,728 shares of Common Stock and Bradley A. Moline,
Birch's Senior Vice President of Finance and Chief Financial Officer, purchased
34,182 shares of Common Stock.
NPG LOAN
On December 16, 1997, the Company borrowed $250,000 from NPG in order
to satisfy its working capital needs. NPG is a stockholder which owns in excess
of 5% of the Company's voting securities. The loan was repaid with the proceeds
of the Company's private placement of its Series B Preferred Stock and
Convertible Notes.
VALU-LINE LOANS
As of December 31, 1997, Valu-Line, which merged into Birch on February
10, 1998, had notes payable of $111,870 from Stephen L. Sauder. Mr. Sauder was
the President and principal stockholder of Valu-Line at the time the loan was
made and is currently a Vice President and a Director of the Company. In
addition, as of December 31, 1997, Valu-Line had notes payable of $105,457 from
Mr. Sauder's father. The loans were due on demand. As of December 31, 1998, the
amounts outstanding under these loans were fully repaid.
DEALINGS WITH VALU-BROADCASTING, INC.
In 1996, 1997, and 1998, Valu-Line provided services principally
related to rent and operating costs to Valu-Broadcasting, Inc., an affiliate of
Valu-Line and owned by a Birch stockholder at the time of the transactions, in
the amounts of $74,000, $81,000 and $30,000 respectively. Valu-Line also
received services principally related to advertising from Valu-Broadcasting,
Inc. in the amounts of $31,000, $41,000 and $40,000 in 1996, 1997 and
1998,respectively.
-44-
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data" for
Financial Statements included with this Annual Report on Form
10-K.
(2) Financial Statement Schedules
All schedules have been omitted because they are not required, not
applicable, or the information is otherwise set forth in the financial
statements or notes thereto.
(3) Exhibits
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger among Birch Telecom, Inc.,
Valu-Line Companies, Inc., Stephen L. Sauder, Paula K. Sauder,
Richard L. Tidwell, Sarah J. Tidwell, Stormy Supiran and Carla
S. Supiran. (incorporated by reference to Exhibit 2.1 to Birch
Telecom, Inc.'s Registration Statement on Form S-4, as amended
(SEC File No. 333-62797), originally filed September 3, 1998
(the "Form S-4")).
3.1 Amended and Restated Certificate of Incorporation of Birch
Telecom, Inc. (incorporated by reference to Exhibit 3.1 to the
Form S-4).
*3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.
3.3 Restated Bylaws of Birch Telecom, Inc. (incorporated by
reference to Exhibit 3.2 to the Form S-4).
4.1 Indenture, dated as of June 23, 1998, between Birch Telecom,
Inc. and Norwest Bank Minnesota, National Association, as
trustee, relating to $115,000,000 aggregate principal amount of
14% Senior Notes due 2008 (incorporated by reference to Exhibit
4.1 to the Form S-4).
4.2 Specimen Certificate of 14% Senior Notes due 2008 (the "Exchange
Notes") (included in Exhibit 4.1, which is incorporated by
reference to Exhibit 4.1 to the Form S-4).
4.4 Collateral Pledge and Security Agreement, dated as of June 23,
1998 from Birch Telecom, Inc., Pledgor, to Norwest Bank
Minnesota, National Association, Trustee (incorporated by
reference to Exhibit 4.5 to the Form S-4).
10.1 Birch Telecom, Inc. Securities Purchase Agreement (incorporated
by reference to Exhibit 10.1 to the Form S-4).
10.2 Birch Telecom, Inc. Purchasers Rights Agreement (incorporated by
reference to Exhibit 10.2 to the Form S-4).
10.3 Employment Agreement dated as of February 10, 1998 between Birch
Telecom, Inc. and David E. Scott (incorporated by reference to
Exhibit 10.3 to the Form S-4).
</TABLE>
-45-
<PAGE> 46
<TABLE>
<S> <C>
10.4 Employment Agreement dated as of February 10, 1998 between Birch
Telecom, Inc. and Gregory C. Lawhon (incorporated by reference
to Exhibit 10.4 to the Form S-4).
10.5 Employment Agreement dated as of February 10, 1998 between Birch
Telecom, Inc. and Gary L. Chesser (incorporated by reference to
Exhibit 10.5 to the Form S-4).
10.6 Employment Agreement dated as of February 10, 1998 between Birch
Telecom, Inc. and David W. Vranicar (incorporated by reference
to Exhibit 10.6 to the Form S-4).
10.7 Employment Agreement dated as of February 10, 1998 between Birch
Telecom, Inc. and Stephen L. Sauder (incorporated by reference
to Exhibit 10.7 to the Form S-4).
10.8 General Agreement between Birch Telecom, Inc. and Lucent
Technologies Inc. (incorporated by reference to Exhibit 10.12 to
the Form S-4).
10.9 Interconnection Agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern Bell
Telephone Company and Birch Telecom of Missouri, Inc. (the
"Missouri Interconnection Agreement") (incorporated by reference
to Exhibit 10.13 to the Form S-4).
10.10 Amendment No. 1 dated May 27, 1998 to Missouri Interconnection
Agreement (incorporated by reference to Exhibit 10.10 to the
Form 10-K).
+10.11 Software License Agreement between Birch Telecom, Inc. and
Saville Systems Inc. (incorporated by reference to Exhibit 10.14
to the Form S-4).
10.12 Interconnection Agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern Bell
Telephone Company and Birch Telecom of Kansas, Inc.
(incorporated by reference to Exhibit 10.12 to the Form 10-K).
10.13 Interconnection Agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern Bell
Telephone Company and Birch Telecom of Texas Ltd., LLP
(incorporated by reference to Exhibit 10.15 to the Form 10-K).
*10.14 1998 Stock Option Plan
*10.15 Form of Incentive Stock Option Agreement under 1998 Stock
Option Plan
*10.16 Form of Nonstatutory Stock Option Agreement under 1998 Stock
Option Plan
*10.17 Lease Agreement between Francor, L.L.C. and Birch Telecom, Inc.
dated July 20, 1998
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to Exhibit 12.1 to the Form S-4).
21.1 Subsidiaries of Birch Telecom, Inc. (incorporated by reference
to Exhibit 21.1 to the Form S-4).
24.1 Power of Attorney (included on the signature page to this Form
10-K).
27.1 Financial Data Schedule
</TABLE>
* Filed herewith.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Such portions have been filed separately with the
Commission.
(B) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the fourth quarter of fiscal
1998.
-46-
<PAGE> 47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED
THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON MAY 6, 1999.
BIRCH TELECOM, INC.
By: /s/ David E. Scott
-------------------------------------------
David E. Scott
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David E. Scott and Bradley A. Moline, and
each of them, his attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all such attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF
1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
AS OF THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID E. SCOTT President and Chief Executive Officer May 6, 1999
- ---------------------------------------- (Principal Executive Officer)
DAVID E. SCOTT
/s/ BRADLEY A. MOLINE Chief Financial Officer (Principal May 6, 1999
- ---------------------------------------- Financial and Accounting Officer)
BRADLEY A. MOLINE
/s/ HENRY H. BRADLEY Director May 6, 1999
- ----------------------------------------
HENRY H. BRADLEY
/s/ STEPHEN L. SAUDER Director May 6, 1999
- ----------------------------------------
STEPHEN L. SAUDER
Director May , 1999
- ----------------------------------------
IAN R. N. BUND
Director May 6, 1999
/s/ DAVID W. BERGMANN
- ----------------------------------------
DAVID W. BERGMANN
</TABLE>
-47-
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BIRCH TELECOM, INC.
Report of Independent Auditors..................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998....................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1997 and 1998............... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997
and 1998......................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1998............... F-6
Notes to Consolidated Financial Statements......................................................... F-7
VALU-LINE COMPANIES, INC.
Report of Independent Auditors..................................................................... F-16
Consolidated Balance Sheets as of December 31, 1997................................................ F-17
Consolidated Statements of Income and Retained Earnings for the years ended December 31,
1996 and 1997.................................................................................... F-18
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997............... F-19
Notes to Consolidated Financial Statements......................................................... F-20
</TABLE>
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
BIRCH TELECOM, INC.
We have audited the accompanying consolidated balance sheets of Birch
Telecom, Inc. (the Company) as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Birch
Telecom, Inc. at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
February 19, 1999
F-2
<PAGE> 50
BIRCH TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(In thousands except share data)
<TABLE>
<CAPTION>
1997 1998
------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 210 $ 39,745
Pledged securities ..................................................... -- 15,888
Accounts receivable, net ............................................... -- 4,039
Inventory .............................................................. -- 916
Prepaid expenses and other ............................................. 7 526
------- ---------
Total current assets ...................................................... 217 61,114
Property and equipment, net ............................................... 101 26,153
Pledged securities - noncurrent ........................................... -- 21,897
Goodwill, net ............................................................. -- 16,863
Other intangibles, net .................................................... -- 7,689
Other assets .............................................................. 216 433
------- ---------
Total assets .............................................................. $ 534 $ 134,149
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations ..... $ -- $ 335
Notes payable to related parties ....................................... 250 --
Accounts payable ....................................................... 255 8,503
Accrued expenses ....................................................... -- 2,556
------- ---------
Total current liabilities ................................................. 505 11,394
14% Senior Notes .......................................................... -- 114,681
Capital lease obligations, net of current maturities ...................... -- 778
Other long-term debt, net of current maturities ........................... -- 332
Preferred stock, $.001 par value; 25,000,000 shares authorized:
Series B Redeemable Preferred Stock, 8,572,039 shares issued and
outstanding (stated at redemption and aggregate liquidation value) ... -- 14,063
Stockholders' equity:
Series C Preferred Stock, 8,492,749 shares issued and outstanding ...... -- 8
Common stock, $.01 par value, 20,000,000 shares authorized,
1,800,000 shares issued and outstanding at December 31, 1997 ......... 18 --
Common stock, $.001 par value, 27,000,000 shares authorized,
5,000,296 shares issued and outstanding at December 31, 1998 ......... -- 5
Warrants ............................................................... 18 337
Additional paid-in capital ............................................. 1,782 12,273
Accumulated deficit .................................................... (1,789) (19,722)
------- ---------
Total stockholders' equity (deficit) ...................................... 29 (7,099)
------- ---------
Total liabilities and stockholders' equity (deficit) ...................... $ 534 $ 134,149
======= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 51
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(In thousands except share data)
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Revenue:
Communications services, net ......................... $ -- $ 21,783
Equipment sales, net ................................. -- 4,304
------- --------
Total revenue .......................................... -- 26,087
Cost of services:
Cost of communications services ...................... -- 16,339
Cost of equipment sales .............................. -- 2,547
------- --------
Total cost of services ................................. -- 18,886
------- --------
Gross margin ........................................... -- 7,201
Selling, general and administrative expense ............ 1,776 15,769
Depreciation and amortization expense .................. 27 2,308
------- --------
Loss from operations ................................... (1,803) (10,876)
Interest expense ....................................... -- (8,254)
Interest income ........................................ 14 2,922
------- --------
Net loss ............................................... (1,789) (16,208)
Preferred stock dividends .............................. -- (1,696)
Amortization of preferred stock issuance costs ......... -- (29)
------- --------
Loss applicable to common stock ........................ $(1,789) $(17,933)
======= ========
Loss per common share-- basic and diluted .............. $ (1.45) $ (4.71)
======= ========
Weighted average number of common shares outstanding ... 1,235 3,809
</TABLE>
See accompanying notes.
F-4
<PAGE> 52
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK SERIES C PREFERRED STOCK COMMON STOCK
------------------------ ------------------------ -----------------------
NUMBER NUMBER OF NUMBER OF
OF SHARES $.001 PAR SHARES $.001 PAR SHARES $.01 PAR
--------- --------- ------ --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 23,
1996 (date of
inception) and
December 31, 1996 ....... -- $ -- -- $ - -- $ --
Issuance of common
stock and warrants ...... -- -- -- - 1,800 18
Net loss ................... -- -- -- - -- --
Balance at December 31,
1997 .................... -- -- -- - 1,800 18
Recapitalization ........... -- -- 1,800 2 (1,800) (18)
Issuance of common
stock ................... -- -- -- - -- --
Merger with Valu-
Line .................... 2,969 3 6,250 6 -- --
Issuance of Warrants in
connection with 14%
Senior Notes ............ -- -- -- - -- --
Redemption of
Series A Preferred
Stock ................... (2,969) (3) -- - -- --
Stock dividend ............. -- -- 443 - -- --
Option exercise ............ -- -- -- - -- --
Early exercised options
terminated .............. -- -- -- - -- --
Restatement of Series B
Preferred Stock
dividends ............... -- -- -- - -- --
Amortization of
Preferred Stock
issuance costs .......... -- -- -- - -- --
Series A Preferred
Stock dividends ......... -- -- -- - -- --
Series B Preferred
Stock dividends ......... -- -- -- - -- --
Net loss ................... -- -- -- - -- --
Balance at December 31,
1998 .................... -- $ -- 8,493 $ 8 -- $ --
<CAPTION>
COMMON STOCK
-------------------------------
NUMBER OF ADDITIONAL ACCUMULATED
WARRANTS SHARES $.001 PAR WARRANTS PAID-IN CAPITAL DEFICIT TOTAL
-------- ------ --------- -------- --------------- ------- -----
<C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 23,
1996 (date of
inception) and
December 31, 1996 ....... $ -- -- $- $ -- $ -- $ -- $ --
Issuance of common
stock and warrants ...... 18 -- - -- 1,782 -- 1,818
Net loss ................... -- -- - -- -- (1,789) (1,789)
Balance at December 31,
1997 .................... 18 -- - -- 1,782 (1,789) 29
Recapitalization ........... (18) -- - -- 34 -- --
Issuance of common
stock ................... -- 450 - -- -- -- --
Merger with Valu-
Line .................... -- -- - -- 14,741 -- 14,750
Issuance of Warrants in
connection with 14%
Senior Notes ............ -- -- - 337 -- -- 337
Redemption of
Series A Preferred
Stock ................... -- -- - -- (4,747) -- (4,750)
Stock dividend ............. -- 262 1 -- (1) -- --
Option exercise ............ -- 4,305 4 -- -- -- 4
Early exercised options
terminated .............. -- (17) - -- -- -- --
Restatement of Series B
Preferred Stock
dividends ............... -- -- - -- 64 -- 464
Amortization of
Preferred Stock
issuance costs .......... -- -- - -- -- (29) (29)
Series A Preferred
Stock dividends ......... -- -- - -- -- (168) (168)
Series B Preferred
Stock dividends ......... -- -- - -- -- (1,528) (1,528)
Net loss ................... -- -- - -- -- (16,208) (16,208)
Balance at December 31,
1998 .................... $ -- 5,000 $5 $337 $ 12,273 $ (19,722) $ (7,099)
</TABLE>
See accompanying notes
F-5
<PAGE> 53
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss.................................................................. $ (1,789) $ (16,208)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation............................................................ 27 720
Amortization............................................................ -- 1,588
Provision for losses on accounts receivable............................. -- 140
Other .................................................................. 50 16
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................................. -- (1,905)
Inventory............................................................ -- (300)
Prepaid expenses..................................................... (7) (370)
Other assets......................................................... -- (198)
Accounts payable..................................................... 255 3,888
Accrued expenses..................................................... -- 1,986
--------- ---------
Net cash from operating activities........................................ (1,464) (10,643)
INVESTING ACTIVITIES
Purchase of property and equipment........................................ (128) (21,550)
Costs of interconnection agreements....................................... (87) --
Business acquisitions, net of cash acquired............................... -- (7,757)
Amortization of discount on pledged securities............................ -- (1,231)
Maturity of pledged securities............................................ -- 7,692
Purchase of pledged securities............................................ -- (44,247)
--------- ---------
Net cash from investing activities........................................ (215) (67,093)
FINANCING ACTIVITIES
Proceeds from issuance of common stock and warrants....................... 1,768 342
Proceeds from issuance of preferred stock................................. -- 9,500
Deferred financing costs.................................................. (129) (4,922)
Payment of Series A Preferred Stock dividends............................. -- (168)
Proceeds from convertible notes........................................... -- 3,500
Proceeds from 14% Senior Notes........................................... -- 114,663
Redemption of Series A Preferred Stock................................... -- (4,750)
Repayment of capital lease obligations.................................... -- (172)
Proceeds from long-term debt.............................................. -- 123
Repayment of long-term debt............................................... -- (321)
Borrowing (repayment) of notes payable to stockholder..................... 250 (524)
--------- ---------
Net cash from financing activities........................................ 1,889 117,271
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 210 39,535
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ -- 210
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................. $ 210 $ 39,745
========= =========
Supplementary schedule of non-cash investing and financing activities:
Amounts recorded in connection with acquisitions:
Fair value of net assets acquired, net of cash acquired.............. $ -- $ 5,735
Fair value of intangible assets..................................... -- 20,839
Assumption of long-term debt and capital lease obligations........... -- (3,999)
Issuance of Series A Preferred Stock................................. -- (10,000)
Issuance of Series C Preferred Stock................................. -- (4,750)
Common stock issued in exchange for other assets........................ 50 --
Property and equipment acquired through capital lease................... -- 728
Property and equipment additions included in accounts payable........... -- 2,157
Supplemental disclosure of cash flow information:
Cash payment for interest, net of interest capitalized of $436 in 1998.. -- 7,725
</TABLE>
See accompanying notes.
F-6
<PAGE> 54
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Birch Telecom, Inc. was incorporated December 23, 1996, as a Delaware
corporation for the purpose of providing local, long distance, Internet access,
and other communications services to business and residential customers
initially in Kansas and Missouri. The consolidated financial statements of Birch
Telecom, Inc. include the accounts of Birch Telecom, Inc. and the accounts of
its subsidiaries, all of which are wholly owned (collectively, the Company). The
Company's business is highly competitive and is subject to various federal,
state and local regulations.
The Company was in the development stage for the period from December
23, 1996 (date of inception) to February 10, 1998. Accordingly, the Company had
no operating revenue and incurred operating losses and operating cash flow
deficits during that period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes as cash and
cash equivalents highly liquid investments with original maturities of three
months or less.
Revenue Recognition
Revenue for communications services are recognized when customers use
the associated services. Equipment revenue is recognized when systems or
services are substantially complete. Revenue on billings to customers in advance
of providing services is deferred and recognized when earned.
Cost of Services
Cost of services includes local and long-distance services purchased
from Southwestern Bell Telephone, interexchange carriers and certain providers
of fiber optic telephone networks. Cost of services also includes costs
associated with the sale and installation of telephone systems.
Inventory
Inventory is carried at the lower of average cost or market determined
on a first-in, first-out basis and consists primarily of parts and equipment
used in the maintenance and installation of telephone systems.
Advertising Costs
Advertising costs are expensed as incurred and totaled $895,000 for the
year ended December 31, 1998.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the following estimated useful lives of the assets:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Communications network..................................... 3-10
Buildings, furniture, fixtures and equipment............... 3-40
</TABLE>
F-7
<PAGE> 55
Goodwill
Goodwill represents the excess of the purchase price paid over the fair
value of the net assets acquired in the Company's acquisitions. Goodwill is
being amortized over 25 years using the straight-line method and is periodically
reviewed for impairment based upon an assessment of future operations to ensure
that it is appropriately valued. Accumulated amortization on goodwill totaled
$599,000 at December 31, 1998.
Other Intangibles
Other intangibles consist primarily of customer lists and noncompete
agreements related to the Company's acquisitions and deferred financing costs.
Customer lists and noncompete agreements are amortized over periods ranging from
1 to 5 years using the straight-line method. The deferred financing costs are
amortized over 5 to 10 years, the term of the associated financing, using the
straight-line method. Accumulated amortization on other intangibles totaled
$1,050,000 at December 31, 1998.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Net
deferred tax assets are reduced by a valuation allowance when appropriate (see
Note 11). Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Stock Options
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for the financial
reporting of its stock-based employee compensation plans. However, as allowed by
SFAS No. 123, the Company has elected to continue to measure compensation using
the intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Under this method,
compensation is measured as the difference between the market value of the stock
on the grant date, less the amount required to be paid for the stock. The
difference, if any, is charged to expense over the vesting period of the
options. The estimated market value used for the stock options granted was
determined on a periodic basis by the Company's Board of Directors.
Fair Values of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair
value due to the short maturity of the instruments. The fair value of the
Company's pledged securities was $38 million at December 31, 1998. The fair
value of the Company's senior notes is estimated to be $106 million at December
31, 1998 based on the quoted market rates for the debt. The fair value of other
long-term debt approximates the recorded value.
Use of Estimates in Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Loss Per Share
The net loss per share amount reflected on the consolidated statement
of operations is based on the weighted-average number of common shares
outstanding. Stock options and convertible preferred stock are anti-
F-8
<PAGE> 56
dilutive, and therefore excluded from the computation of earnings per share. In
the future, these stock equivalents may become dilutive.
Reclassifications
Certain items in the 1997 consolidated financial statements have been
reclassified to be consistent with the classification in the 1998 consolidated
financial statements.
3. ACQUISITIONS
In February 1998, Birch merged with Valu-Line in a transaction valued
at $19.5 million, consisting of $4.75 million in cash, 2,968,750 shares of
Series A Preferred Stock having an aggregate liquidation preference of $4.75
million and 6,250,000 shares of Series C Preferred Stock having an aggregate
liquidation preference of $10.0 million. Since 1982, Valu-Line has been
primarily providing switched long distance services, customer premises equipment
(CPE) sales and services and, since March 1997, local service. In connection
with the merger, intangible assets were recorded related to customer lists and
goodwill totaling $2,000,000 and $15,541,878, respectively.
In May 1998, Birch acquired Boulevard Phone Company, a shared tenant
service provider in the Kansas City metropolitan area, for $300,000 in cash.
Goodwill totaling $274,000 was recorded related to the acquisition.
In May 1998, Birch acquired Telesource Communications, Inc.
(Telesource), a CPE provider in the Kansas City metropolitan area, for $325,000
in cash. In connection with the Telesource acquisition, the Company assumed
$290,000 of Telesource's liabilities. Goodwill and customer lists associated
with the acquisition were recorded totaling $325,000 and $328,000, respectively.
In September 1998, Birch acquired TFSnet, Inc., an Internet service
provider based in the Kansas City metropolitan area, for $2.65 million in cash.
Goodwill and customer lists associated with the acquisition were recorded
totaling $1.1 million and $1.2 million, respectively.
All acquisitions were recorded using the purchase method of accounting.
Results from the acquired companies are included in the consolidated financial
statements from the date of the respective acquisitions.
The following is unaudited pro forma information reflecting the affect
of the acquisitions on the Company's results as though they had been completed
effective January 1, 1997 and 1998 (in thousands except per share amounts):
<TABLE>
<CAPTION>
December 31,
1997 1998
--------------- ----------------
<S> <C> <C>
Revenue................................. $ 18,847 $ 29,193
Net loss................................ 19,325 28,921
Loss per common share................... 15.65 8.05
</TABLE>
4. ACCOUNTS RECEIVABLE
The composition of accounts receivable, net is as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1997 1998
--------------- ----------------
<S> <C> <C>
Billed.................................. $ -- $ 3,144
Unbilled................................ -- 1,129
-- 4,273
--------- ------------
Less allowance for doubtful accounts.... -- 234
--------- ------------
$ -- $ 4,039
========= ============
</TABLE>
F-9
<PAGE> 57
5. PROPERTY AND EQUIPMENT
The following is a summary of the Company's property and equipment as
of December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ --------
<S> <C> <C>
Communications network................................ $ -- $ 5,966
Buildings, furniture, fixtures and equipment.......... 128 6,529
Construction in progress.............................. -- 14,405
----- --------
128 26,900
Less accumulated depreciation and amortization........ 27 747
----- --------
Property and equipment, net........................... $ 101 $ 26,153
===== ========
</TABLE>
6. PLEDGED SECURITIES, WARRANTS, AND DEBT
During June 1998, the Company completed a $115 million private offering
of 14% Senior Notes (the Senior Notes) due June 2008 and 115,000 warrants to
purchase 1,409,734 shares of common stock. Interest on the Senior Notes is
payable semi-annually in arrears on June 15 and December 15 of each year.
Warrants are exercisable at $0.01 per share and expire June 2008. The Company
received net proceeds from the Senior Notes of $110.2 million and concurrently
purchased pledged securities of $44.2 million. The pledged securities are
restricted for interest payments on the Senior Notes and, together with the
interest accruing thereon, will be used to satisfy such interest payments
through June 2001. The Company classifies its pledged securities, consisting of
$37.8 million of U.S. Treasury securities at December 31, 1998, as held to
maturity recorded at amortized cost and maturing between six and thirty months.
A portion of the proceeds of this offering, $337,000, was allocated to the
warrants, and the resulting debt discount is being amortized over the life of
the debt on the straight-line method, which does not differ materially from the
effective interest method. Unamortized discount was $319,000 at December 31,
1998. The amount allocated to the warrants represents the estimated fair value
of the warrants at the date of issuance. The Senior Notes rank pari pasu in
right of payment to all existing and future senior indebtedness of the Company
and rank senior in the right of payment to all existing and future subordinated
indebtedness of the Company.
The Company filed a registration statement with the Securities and
Exchange Commission (SEC) for the registration of $115 million aggregate
principal amount of 14% Senior Notes due December 2008 (the Exchange Notes) to
be offered in exchange for the Senior Notes (the Exchange Offer). The
registration statement was declared effective by the SEC in February 1999, and
the Exchange Offer was commenced at that time. The Exchange Offer will expire in
March 1999, at which time all of the Senior Notes will be exchanged for the
Exchange Notes. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Senior Notes except the Exchange
Notes will have been registered under the Securities Act and holders of the
Exchange Notes will not be entitled to certain rights under a registration
agreement relating to the Senior Notes.
The indenture related to the Senior Notes contains certain covenants
which, among other things, restrict the ability of the Company to incur
additional indebtedness, pay dividends or make distributions of the Company's or
its subsidiaries' stock, enter into sale and leaseback transactions, create
liens, enter into transactions with affiliates or related persons, consolidate,
merge or sell all of its assets. The Company was in compliance with these
covenants at December 31, 1998.
F-10
<PAGE> 58
The Company's debt consisted of the following at December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1998
--------- -----------
<S> <C> <C>
14 % Senior Notes...................................................... $ -- $ 114,681
========= ============
Other long-term debt, interest accruing between 8.9% and 9.8%, maturing
through 2013, secured by buildings..................................... -- 345
Less current maturities................................................ -- 13
--------- ------------
$ -- $ 332
========= ============
</TABLE>
Assets securing the other long-term debt total $814,000, net of
accumulated depreciation of $19,000.
Principal payments required on the outstanding debt during each of the
next five years are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................. $ 13
2000.............................................. 14
2001.............................................. 16
2002.............................................. 17
2003.............................................. 19
</TABLE>
7. CAPITAL LEASE OBLIGATIONS
The Company leases telecommunications equipment and computer equipment
under capital leases with imputed interest between 8.0% and 10.2%. Assets under
capital lease total $1,459,000, net of accumulated amortization of $210,000 at
December 31, 1998. The future minimum lease payments under the capital leases
and the present value of the net minimum lease payments as of December 31, 1998
are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................. $ 447
2000.............................................. 447
2001.............................................. 257
2002.............................................. 58
2003.............................................. 58
=======
Total minimum lease payments...................... 1,267
Less amount representing interest................. 167
-------
Present value of net minimum lease payments....... 1,100
Less current maturities........................... 322
-------
$ 778
=======
</TABLE>
Amortization expense for assets under capital lease was $157,000 for the year
ended December 31, 1998.
8. CAPITAL STRUCTURE
During 1997, 1,750,000 shares of common stock and 1,800,000 warrants
were sold to management and equity investors for $1.00 and $0.01 per share,
respectively. The warrants entitled the holders to purchase an additional 1.8
million shares in the aggregate of common stock at $1.00 per share. In addition
to cash investments, members of management contributed the business plan to the
Company in exchange for 50,000 shares of common stock valued at $1.00 per share.
During 1998, all common stock was exchanged for Series C Preferred Stock and the
warrants were surrendered.
F-11
<PAGE> 59
First Quarter 1998 Recapitalization
During February and March 1998, the Company issued $9.5 million of
Series B Preferred Stock, issued $3.5 million of Convertible Notes, converted
common stock to Series C Preferred Stock, canceled the 1997 Stock Option Plan,
and created the 1998 Stock Option Plan in transactions related to new investors.
The Series B Preferred Stock and Convertible Notes generated net
proceeds of $12.4 million. In June 1998, the Convertible Notes were converted
into Series B Preferred Stock. The Series B Preferred Stock accrues cumulative
compounding dividends at 15% per annum and is mandatorily redeemable in equal
annual installments in 2003, 2004 and 2005 provided, however, that so long as
any of the Company's Senior Notes due 2008 are outstanding, none of the Series B
Preferred Stock may be redeemed until the earlier of June 15, 2008 or the 91st
day after redemption in full of the Senior Notes. During the year ended December
31, 1998 cumulative dividends on the Series B Preferred Stock totaled 1,063,000.
The Series B Preferred Stock is convertible into 8,572,039 (after considering
stock dividend described below) shares of common stock at the option of the
holders. The shares have liquidation preference over the Series C Preferred
Stock and common stock at the greater of (1) par value plus accrued but unpaid
dividends or (2) par value plus the fair market value of common stock into which
the shares could be converted. Each share can be converted into a share of
common stock at the option of the holder.
In February 1998, the old common stockholders exchanged all of the
previously issued and outstanding $1.00 par value common stock for an equal
number of shares of Series C Preferred Stock and relinquished all rights to the
warrants previously held. The Series C Preferred Stock outstanding after the
conversion and merger transactions total 8,492,750 shares (after considering
stock dividend described below). All shares were issued at $1.52 per share and
have a $0.001 par value. The convertible, voting shares have a 10%
non-cumulative dividend. The shares have liquidation preference over the common
stock at the greater of (1) par value plus accrued but unpaid dividends or (2)
par value plus the fair market value of common stock into which the shares could
be converted. Each share can be converted into a share of common stock at the
option of the holder. Voting rights are exercised together with Series B and
Series C Preferred Stocks but not common stock. The Series C Preferred Stock is
subordinate to the Series B Preferred Stock.
The 1997 Stock Option Plan was canceled and vested options were
forfeited and the 1998 Stock Option Plan was created (See Note 12). Certain
employees were allowed to purchase 474,750 (after considering stock dividend
described below) shares of new common stock at par value ($0.001 per share) in
exchange for the forfeiture of the vested options.
The new common stock has voting rights equal to the Series B and C
Preferred Stock. Common stock dividends, if any, will be declared at the
discretion of the board of directors.
The Series A Preferred Stock issued in connection with the Valu-Line
Merger (See Note 3) was fully redeemed in June 1998. Dividends paid totaled
$168,000 in 1998.
Stock Dividend
On June 23, 1998, the Company paid a dividend in kind, in the amount of
0.055 shares per share, to the holders of the Company's Series B Preferred
Stock, Series C Preferred Stock, and common stock as of June 15, 1998.
9. RELATED-PARTY TRANSACTIONS
During December 1997, the Company borrowed $250,000 from the Company's
principal stockholder under a note payable. The note payable was fully repaid in
February 1998.
The Company acquired notes payable to Valu-Line shareholders totaling
$274,000 in the Valu-Line merger. These notes were fully repaid during 1998.
During 1998, a broadcasting company owned by one of the Birch's
shareholders rented office space from Birch for $30,000. Birch purchased
advertising from the broadcasting company totaling $40,000 in 1998.
F-12
<PAGE> 60
10. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments at December 31, 1998 for all
noncancelable operating leases, consisting mainly of leases for office space and
equipment, are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................ $ 1,180
2000................................................ 1,050
2001................................................ 1,060
2002................................................ 945
2003................................................ 836
Thereafter.......................................... 2,891
-------
Total............................................... $ 7,962
=======
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1998 was
$81,000 and $485,000, respectively.
In February 1998, the Company entered into a five-year general
agreement with Lucent Technologies, Inc. (Lucent) establishing terms and
conditions for the purchase of Lucent products, services and licensed materials.
This agreement includes a five-year exclusivity commitment for the purchase of
products and services related to new switches. The agreement contains no minimum
purchase requirements.
11. INCOME TAXES
Net deferred taxes consist of the following as of December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ -- $ 5,528
Accruals and reserves not currently deductible............. -- 91
Other...................................................... 681 668
----- -------
681 6,287
Valuation allowance........................................ (681) (5,799)
----- -------
-- 488
----- -------
Deferred tax liabilities:
Property and equipment..................................... -- 488
----- -------
$ -- $ --
===== =======
</TABLE>
In the years ended December 31, 1997 and 1998, the net income tax
benefits of approximately $681,000 and $6.0 million, respectively, have been
offset by increases in the valuation allowance. At December 31, 1998, the
Company had operating loss carryforwards for federal income tax purposes of
approximately $13.8 million, expiring in 2013.
The primary difference that caused the effective tax rate to vary from
the statutory federal income tax rate of 35% was the valuation allowance.
F-13
<PAGE> 61
12. STOCK OPTION PLAN
At December 31, 1997, the Company had granted options to purchase
common stock under the 1997 Stock Option Plan. The options granted had a term of
10 years and vested over a four-year period. This plan was terminated and
superseded in 1998 by the 1998 Stock Option Plan. No options were or ever will
be exercised and no shares were or will ever be issued under the terminated and
superseded 1997 Stock Option Plan.
Stock option activity under the 1997 Stock Option Plan was as follows:
<TABLE>
<CAPTION>
Weighted-Average
Per Share
Exercise
Shares Price
--------- ----------------
<S> <C> <C>
Granted.................................................... 2,783,000 $ 1.00
Exercised.................................................. -- --
Forfeited.................................................. -- --
---------- --------
Outstanding at December 31, 1997........................... 2,783,000 1.00
Terminated................................................. (2,783,000) (1.00)
---------- --------
Outstanding at December 31, 1998........................... -- $ --
==========
</TABLE>
Stock option activity under the 1998 Stock Option Plan was as follows:
<TABLE>
<CAPTION>
Weighted-Average
Per Share
Exercise
Shares Price
----------- ----------------
<S> <C> <C>
Granted.................................................... 5,065,984 $ 0.26
Exercised.................................................. 4,542,139 0.01
Forfeited.................................................. 44,918 1.55
--------- -------
Outstanding at December 31, 1998........................... 478,927 $ 2.48
=========
Exercisable at December 31, 1998........................... --
=========
</TABLE>
The 1998 Stock Option Plan authorized the grant of options for up to
6,195,844 shares of the Company's common stock. The options have a term of 10
years and vest over a four-year period. All options exercised during 1998 were
for options granted with an early exercise provision. The shares from exercised
options continue to be subject to the four-year vesting period.
Options granted in 1998 had exercise prices approximating the market
value. Exercise prices for options outstanding at December 31, 1998 ranged from
$0.001 to $2.50. The weighted average remaining contractual life of those
options is 3.1 years. At December 31, 1998, the Company has reserved 1,129,860
shares of common stock for issuance under the 1998 Stock Option Plan.
The Company estimated the fair value of each option grant using the
minimum value method permitted by SFAS No. 123 for entities not publicly traded.
The Company utilized the following assumptions in the calculation: risk-free
interest rate of 5.25%, expected life of four years and no dividends being paid
over the life of the options. Had compensation cost for the stock based
compensation plan been determined as prescribed by SFAS No. 123, the net loss
and loss per common share would have been as follows for the years ended
December 31, 1997 and 1998 (in thousands except per share data):
<TABLE>
<CAPTION>
1997 1998
---------------- -----------------
<S> <C> <C>
Net loss-- as reported........................................... $ (1,789) $ (16,208)
Net loss-- pro forma............................................. (1,921) (16,212)
Loss per share-- Basic and Diluted-- Pro Forma................... (1.56) (4.26)
</TABLE>
F-14
<PAGE> 62
13. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit-sharing plan covering substantially
all employees under which employees can contribute up to 15% of their annual
salary subject to annual maximum limitations. Employees can participate after
meeting the plan's eligibility requirements. The Company may also make
discretionary contributions. Company contributions to the plan were $148,000 for
the year ended December 31, 1998.
14. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain
executive employees, which provide for payments to be made in connection with
certain termination of employment or change of control. The benefits include
cash compensation, immediate vesting of outstanding stock options and coverage
under the Company's group health plan.
15. SIGNIFICANT SUPPLIERS
The Company purchased telephone services from Southwestern Bell
Telephone amounting to 29% of revenue in the year ended December 31, 1998. The
Company purchased switches and other network equipment and software from Lucent
Technologies amounting to $7.5 million in the year ended December 31, 1998.
16. SUBSEQUENT EVENTS
In February 1998, the Company acquired American Local
Telecommunications (ALT), a competitive local exchange carrier based in the
Dallas, Texas metropolitan area. The acquisition, which was recorded as a
purchase, included substantially all assets of ALT. The total purchase price was
approximately $700,000.
In February 1998, the Company signed a letter of intent to acquire the
stock of Capital Communications Corporation, a telecommunications equipment
provider based in the St. Louis, Missouri metropolitan area. The purchase price
is anticipated to be $3.0 million, plus the potential for additional
consideration based on lines converted to the Company's service from Capital
Communications Corporation's existing customer base.
17. QUARTERLY DATA -- UNAUDITEd
The following table includes summarized quarterly financial data for
the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
Quarters
-----------------------------------------------------------
First Second Third Fourth
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1998:
Revenue $ 3,705 $ 6,060 $ 7,478 $ 8,844
Gross margin 1,063 1,628 2,305 2,205
Operating loss (567) (1,486) (2,996) (5,827)
Net loss (623) (1,766) (5,468) (8,351)
Loss per common share (0.79) (0.55) (1.19) (1.76)
1997:
Revenue $ -- $ -- $ -- $ --
Gross margin -- -- -- --
Operating loss (111) (573) (549) (570)
Net loss (112) (570) (543) (564)
Loss per common share (0.22) (0.52) (0.35) (0.31)
</TABLE>
F-15
<PAGE> 63
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
VALU-LINE COMPANIES, INC.
We have audited the accompanying consolidated balance sheet of the
Valu-Line Companies, Inc. (the Company) as of December 31, 1997, and the related
consolidated statements of income and retained earnings, and cash flows for two
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Valu-Line Companies, Inc. at December 31, 1997 and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
May 15, 1998
F-16
<PAGE> 64
VALU-LINE COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1997
(In thousands except share data)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 258
Accounts receivable, net of allowance of $70............ 1,790
Other receivables -- related parties.................... 97
Inventories............................................. 530
Prepaid expenses........................................ 37
Income taxes receivable................................. 30
Other assets............................................ 60
Deferred income taxes................................... 71
------
Total current assets...................................... 2,873
Property and equipment, net............................... 1,612
Other assets.............................................. 317
------
Total assets.............................................. $4,802
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease $ 110
obligation...........................................
Notes payable -- related parties........................ 240
Accounts payable........................................ 1,262
Accrued expenses........................................ 225
Customer deposits....................................... 39
Accrued salaries and commissions........................ 266
Deferred revenue........................................ 287
------
Total current liabilities................................. 2,429
Long-term debt, net of current maturities................. 345
Capital lease obligation, net of current maturities....... 336
Deferred income taxes..................................... 27
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000 shares authorized;
10,360 issued and outstanding 181
Retained earnings 1,484
------
Total stockholders' equity 1,665
------
Total liabilities and stockholders' equity $4,802
======
</TABLE>
See accompanying notes.
F-17
<PAGE> 65
VALU-LINE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997
--------------- ---------------
(IN THOUSANDS EXCEPT SHARES AND
PER SHARE DATA)
<S> <C> <C>
Revenue:
Communications services, net........................... $ 10,686 $ 13,785
Equipment sales, net................................... 2,531 3,016
--------------- ---------------
Total revenue............................................. 13,217 16,801
Cost of services:
Cost of communications services........................ 7,308 9,859
Cost of equipment sales................................ 1,441 1,983
--------------- ---------------
Total cost of services.................................... 8,749 11,842
--------------- ---------------
Gross margin.............................................. 4,468 4,959
Selling, general and administrative....................... 3,561 4,067
Depreciation and amortization............................. 311 341
--------------- ---------------
Income from operations.................................... 596 551
Interest expense.......................................... 102 97
--------------- ---------------
Income before income taxes................................ 494 454
Income tax expense........................................ 205 186
--------------- ---------------
Net income................................................ 289 268
Retained earnings, beginning of year...................... 927 1,216
--------------- ---------------
Retained earnings, end of year............................ $ 1,216 $ 1,484
=============== ===============
Earnings per share -- basic and diluted................... $ 27.90 $ 25.87
=============== ===============
Common shares outstanding -- basic and diluted............ 10,360 10,360
=============== ===============
</TABLE>
See accompanying notes.
F-18
<PAGE> 66
VALU-LINE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
----------- -----------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................... $ 289 $ 268
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization......................................... 311 341
Deferred income taxes................................................. 7 (14)
Income tax expense.................................................... 43 73
Changes in operating assets and liabilities:
Accounts receivable................................................. 185 (660)
Other receivables -- related parties................................ (18) (52)
Inventory........................................................... (122) (94)
Income taxes receivable/payable..................................... 290 (56)
Accounts payable.................................................... (303) 520
Accrued expenses and other current liabilities...................... 188 304
Other............................................................... (36) (142)
----------- -----------
Net cash from operating activities....................................... 834 488
INVESTING ACTIVITIES
Purchase of property and equipment....................................... (513) (243)
----------- -----------
Net cash from investing activities....................................... (513) (243)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt................................. 92 --
Proceeds from issuance of note payable................................... -- --
Proceeds from issuance of notes payable -- related parties............... 33 --
Payment of notes payable................................................. (300) (11)
Payment of notes payable -- related parties.............................. -- (44)
Payment of long-term debt................................................ -- --
Payment of capital lease obligation...................................... (82) (90)
----------- -----------
Net cash from financing activities....................................... (257) (145)
----------- -----------
Net increase in cash and cash equivalents................................ 64 100
Cash and cash equivalents, beginning of year............................. 94 158
----------- -----------
Cash and cash equivalents, end of year................................... $ 158 $ 258
=========== ===========
</TABLE>
See accompanying notes.
F-19
<PAGE> 67
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. THE COMPANY
These consolidated financial statements include the accounts of
Valu-Line Companies, Inc., a Kansas Corporation, and its wholly-owned
subsidiaries (collectively, the "Company"), Valu-Line of Kansas, Inc. and IS
Advertising. The Company was acquired by Birch Telecom, Inc. in February 1998
(see Note 11). The accounts of Valu Broadcasting, Inc. and Steve Sauder Real
Estate, respectively, a wholly-owned subsidiary of and a division of Valu-Line
Companies, Inc., both of which were spun off in December 1997, have been
excluded for all periods from these consolidated financial statements in order
to reflect financial position and operating results on a basis consistent with
the businesses acquired by Birch Telecom, Inc. All intercompany balances and
transactions have been eliminated in consolidation.
The Company provides local, long distance, Internet, customer premises
equipment and other communications services to business and residential
customers in the state of Kansas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes as cash and
cash equivalents, cash and marketable securities with original maturities of
three months or less.
Revenue Recognition
Revenue from communications services is recognized when the services
are provided. Revenue on billings to customers in advance of providing services
is deferred and recognized when earned.
Concentration of Credit Risk
The Company is exposed to concentrations of credit risk principally
from customer accounts receivable. At December 31, 1997, the Company's customers
are located in the state of Kansas. The Company performs ongoing credit
evaluations of its customers as a means to reduce credit risk.
Fair Values of Financial Instruments
As of December 31, 1997, the fair values of the Company's financial
instruments, including cash equivalents and notes payable -- related parties,
approximate their carrying value.
Inventories
Inventories, which consist of customer premises communications
equipment held for sale and supplies, are valued at lower of average cost or
market.
Property and Equipment
Property and equipment, including assets held under capital leases, are
stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets or lease term.
F-20
<PAGE> 68
Use of Estimates in Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1997
------------ ----
(In thousands)
<S> <C> <C>
Telecommunications and other equipment....... 5 years $1,103
Office equipment, furniture and other........ 3 - 7 years 1,178
Buildings and improvements................... 40 years 683
------
2,964
Accumulated depreciation and amortization.... (1,352)
------
$1,612
======
</TABLE>
Telecommunication equipment under capital lease was $607,000 at
December 31, 1997. Accumulated amortization totaled $194,000 as of December 31,
1997. Amortization of assets under capital lease is included in depreciation and
amortization expense. Interest expense associated with the obligations under
these leases amounted to $47,000 in 1997.
4. CAPITAL LEASE OBLIGATION
The Company leases telecommunications equipment under a capital lease.
The future minimum lease payments under the capitalized lease and the present
value of the net minimum lease payments as of December 31, 1997 are as follows
(in thousands):
<TABLE>
<S> <C> <C>
1998......................................................... $137
1999......................................................... 137
2000......................................................... 137
2001......................................................... 57
2002......................................................... 57
2003......................................................... 57
----
Total minimum lease payments................................. 582
Less amount representing interest............................ (147)
----
Present value of net minimum lease payments with interest
at 10.0%................................................... 435
----
Less current maturities...................................... (99)
----
$336
====
</TABLE>
5. LONG TERM DEBT AND NOTES PAYABLE
The Company entered into a note payable with a financial institution in
the amount of $300,000 in 1992 to finance the remodeling of a building. The note
is payable in monthly installments through 2007. Interest is payable at prime
plus 1 1/2% (10.0% at December 31, 1997). The note is secured by the building
and the deposit accounts of the Company with the financial institution. The
outstanding principal balance on the note was $262,000 at December 31, 1997.
In 1996, the Company issued a note payable of $100,000 to finance the
purchase of an office building. The note is payable in monthly installments
through 2011. Interest is payable at a variable rate (8.90% at December, 31,
F-21
<PAGE> 69
1997). The note is secured by the building. The outstanding principal balance on
the note was $94,000 at December 31, 1997.
Maturities on the aforementioned notes payable are as follows (in
thousands):
<TABLE>
<S> <C> <C>
1998............................................... $ 11
1999............................................... 13
2000............................................... 14
2001............................................... 15
2002............................................... 17
Thereafter......................................... 286
----
Total.............................................. $356
====
</TABLE>
The Company also has notes payable to officers of the Company and
members of their families. The notes are unsecured and payable on demand.
Interest is payable at the treasury rate (5.85% at December 31, 1997). The
outstanding principal balance on these notes was $240,000 at December 31, 1997.
Principal and interest payments were $43,000 and $128,000 for 1996 and 1997,
respectively.
Total interest paid for the years 1996 and 1997 was $102,000 and
$97,000, respectively.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) profit-sharing plan covering
substantially all employees under which employees can contribute up to 15% of
their annual salary subject to annual Internal Revenue Code maximum limitations.
Employees can participate after meeting the plan's eligibility requirements. The
Company may make a discretionary contribution. Company contributions to the plan
were $72,000 and $81,000 for 1996 and 1997, respectively.
7. INCOME TAXES
The income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
(In thousands)
<S> <C> <C>
Current:
Federal........................... $174 $175
State............................. 24 25
---- ----
Total Current....................... 198 200
Deferred:
Federal........................... 6 (12)
State............................. 1 (2)
---- ----
Total deferred...................... 7 (14)
---- ----
Income tax expense.................. $205 $186
==== ====
</TABLE>
F-22
<PAGE> 70
The differences between the amount computed by applying the statutory
federal income tax rate to income before income taxes and the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
(In thousands)
<S> <C> <C>
Tax computed at statutory rate.......... $173 $159
State taxes, net of federal effect...... 24 22
Other, net.............................. 8 5
---- ----
Income tax expense...................... $205 $186
==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for federal and state income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities at December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets (current):
Accrued liabilities.............................. $32
Allowance for doubtful accounts.................. 28
Inventory capitalization......................... 11
---
71
Deferred tax liability (noncurrent):
Depreciation..................................... 27
---
Net deferred tax assets............................ $44
===
</TABLE>
Net cash paid (refunded) for income taxes for the years ended December
31, 1996 and 1997 was $(48,000) and $225,000, respectively.
8. ADDITIONAL FINANCIAL INFORMATION
Related Parties
In 1996 and 1997 Valu-Line provided services principally related to
rent and operating costs to Valu-Broadcasting, Inc., an affiliate of Valu-Line
at the time of the transactions, in the amounts of $74,000 and $81,000
respectively. Valu-Line also received services principally related to
advertising from Valu-Broadcasting, Inc. in the amounts of $31,000 and $41,000
in 1996 and 1997, respectively. In February 1998, Valu-Line merged with and into
the Company pursuant to the Merger.
Major Supplier Information
Cost of communications services provided by Southwestern Bell
approximated 39% and 40% of the total cost of communication services for the
years ended December 31, 1996 and 1997, respectively. Equipment purchases from
Toshiba approximated 76% and 59% of cost of equipment sales for the years ended
December 31, 1996 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments at year-end 1997 for all noncancelable
operating leases, consisting mainly of leases for office space and vehicles, are
as follows (in thousands):
<TABLE>
<S> <C>
1998............................................... $30
1999............................................... 19
2000............................................... 9
---
Thereafter......................................... $58
===
</TABLE>
Total rent expense for the years ended 1996 and 1997 was $48,000 and
$56,000, respectively.
F-23
<PAGE> 71
10. SUBSEQUENT EVENT
In February 1998, the Company was acquired by Birch Telecom, Inc. for
$19,500,000. Shareholders of the Company received $4,750,000 of cash and
$14,750,000 of preferred stock in Birch Telecom, Inc.
11. YEAR 2000 COMPLIANCE -- UNAUDITED
Year 2000 issues arise from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
Based on ongoing assessments, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the year 2000 issue will not pose
significant operational problems for its computer systems. The Company estimates
it will incur minimal expenses to modify and convert its systems and anticipates
completing the year 2000 project by the year ending December 31, 1998.
While the Company believes that its systems will be year 2000
compliant, there can be no assurance until the year 2000 occurs that all systems
will function adequately. In addition, the Company interconnects and uses
various local exchange companies' facilities to service its customers, and such
facilities currently utilize numerous, date-sensitive computer applications. If
these facilities are not year 2000 compliant, or if the systems of other local
exchange companies, long-distance carriers and others upon which the Company
relies are not year 2000 compliant, it could have a material effect on the
Company's business, operating results and financial condition.
F-24
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
BIRCH TELECOM, INC.
BIRCH TELECOM, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: The name of the Corporation is Birch Telecom, Inc.
SECOND: The date on which the Certificate of Incorporation of the
Corporation was originally filed with the Secretary of State of the State of
Delaware was December 23, 1996. The date on which the Amended and Restated
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware was February 10, 1998.
THIRD: The Board of Directors of the Corporation, acting in accordance
with the provisions of Sections 141 and 242 of the General Corporation Law of
the State of Delaware, adopted resolutions amending its Amended and Restated
Certificate of Incorporation as follows:
The second paragraph of Section B. of Article Fourth of the Amended and
Restated Certificate of Incorporation of the Corporation shall be deleted in its
entirety and the following shall be substituted in its place, to read in its
entirety as follows:
Of the authorized shares of Preferred Stock, 2,968,750 shares are
hereby designated "Series A Preferred Stock"; 8,750,000 shares are
hereby designated "Series B Preferred Stock"; and 8,500,000 shares are
hereby designated "Series C Preferred Stock."
The first sentence of Section C.(1)(b) of Article Fourth of the Amended
and Restated Certificate of Incorporation of the Corporation shall be deleted in
its entirety, and the following shall be substituted in its place, to read in
its entirety as follows:
The holders of Series B Preferred Stock shall be entitled to receive
dividends in cash at the rate of fifteen percent (15%) per annum on an
amount equal to $1.60 plus all unpaid dividends accrued on such shares
of Series B Preferred Stock, on each outstanding share of Series B
Preferred Stock (as adjusted for any stock dividends, combinations,
splits and the like with respect to such shares), when and as declared
by the Board of Directors out of the funds legally available for that
purpose; provided, however, that, prior to June 30, 1998, the Board of
Directors may declare and pay such dividends in additional shares of
Series B Preferred Stock, such shares of Series B Preferred Stock to be
valued at $1.60 per share.
1.
<PAGE> 2
The first sentence of Section C.(4)(g) of Article Fourth of the Amended
and Restated Certificate of Incorporation of the Corporation shall be deleted in
its entirety and the following shall be substituted in its place, to read in its
entirety as follows:
If the Corporation at any time or from time to time after June 30, 1998
makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, in each such event the
Preferred Stock Price of each applicable series of Preferred Stock that
is then in effect shall be decreased as of the time of such issuance
or, in the event such record date is fixed, as of the close of business
on such record date, by multiplying the Preferred Stock Price for each
applicable series of Preferred Stock then in effect by a fraction (i)
the numerator of which is the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance
or the close of business on such record date, and (ii) the denominator
of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close
of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not
fully paid or if such distribution is not fully made on the date fixed
therefor, the applicable Preferred Stock Price shall be recomputed
accordingly as of the close of business on such record date and
thereafter the applicable Preferred Stock Price shall be adjusted
pursuant to this Section (4)(g) to reflect the actual payment of such
dividend or distribution.
The first sentence of Section C.(4)(h) of Article Fourth of the Amended
and Restated Certificate of Incorporation of the Corporation shall be deleted in
its entirety and the following shall be substituted in its place, to read in its
entirety as follows:
If the Corporation at any time or from time to time after June 30, 1998
makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation other than shares of Common
Stock, in each such event provision shall be made so that the holders
of the Series B Preferred Stock and Series C Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of other securities of
the Corporation which they would have received had their Series B
Preferred Stock or Series C Preferred Stock been converted into Common
Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the conversion
date, retained such securities receivable by them as aforesaid during
such period, subject to all other adjustments called for during such
period under this Section (4) with respect to the rights of the holders
of the Preferred Stock or with respect to such other securities by
their terms.
2.
<PAGE> 3
The first sentence of Section C.(4)(k)(iv) of Article Fourth of the
Amended and Restated Certificate of Incorporation of the Corporation shall be
deleted in its entirety and the following shall be substituted in its place, to
read in its entirety as follows:
"Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Corporation or deemed to be issued pursuant to this
Section (4)(k), whether or not subsequently reacquired or retired by
the Corporation other than (A) shares of Common Stock issued upon
conversion of the Series B Preferred Stock or Series C Preferred Stock;
(B) Common Stock and/or options, warrants or other Common Stock
purchase rights, and the Common Stock issued pursuant to such options,
warrants or other rights to employees, officers or directors of, or
consultants or advisors to the Corporation or any subsidiary pursuant
to stock purchase or stock option plans or other arrangements that are
approved by the Board; (C) shares of Common Stock issued pursuant to
the exercise of options, warrants or convertible securities outstanding
as of the Original Issue Date; and (D) warrants to purchase Common
Stock, and the Common Stock issued pursuant to such warrants, that are
issued to holders of the Senior Notes due 2008 issued by the
Corporation pursuant to an indenture between the Corporation and
Norwest Bank, N.A. (the "Senior Notes").
The first two sentences of Section C.(5)(b)(i) of Article Fourth of the
Amended and Restated Certificate of Incorporation of the Corporation shall be
deleted in their entirety and the following shall be substituted in their place,
to read in their entirety as follows:
Following the date that is at least ninety-one (91) days after the date
on which the Corporation has fully repaid (whether at maturity or
otherwise) the Senior Notes, a holder of Series B Preferred Stock may
require the Corporation, to the extent it may lawfully do so, to redeem
all of such holder's Series B Preferred Stock, or the holders of a
least seventy-five percent (75%) of the then outstanding shares of
Series B Preferred Stock, voting as a separate class, may require the
Corporation, to the extent it may lawfully do so, to redeem all of the
outstanding shares of Series B Preferred Stock, by providing written
notice to the Corporation of such holder's request to redeem its shares
of Series B Preferred Stock (the "Holder Redemption Notice"). Such
Holder Redemption Notice shall be deemed an irrevocable request by such
holder to require the Corporation to redeem all of such holder's shares
of Series B Preferred Stock. If the Holder Redemption Notice is given
to the Corporation before January 1, 2003, the Corporation shall redeem
one-third of the aggregate number of shares of Series B Preferred Stock
requested to be redeemed in the Holder Redemption Notice on February
28, 2003, 2004 and 2005, respectively (each a "Series B Redemption
Date"). If the Holder Redemption Notice is given to the Corporation on
or after January 1, 2003 but before January 1, 2004, the Corporation
shall redeem one-half of the aggregate number of shares of Series B
Preferred Stock requested to be redeemed in the Holder Redemption
Notice on February 28, 2004 and 2005, respectively (each a "Series B
Redemption Date"). If the Holder Redemption Notice is given to the
Corporation on or after January 1, 2004 but before January 1, 2005, the
Corporation shall redeem all of the Series B Preferred Stock requested
to be redeemed in the Holder Redemption Notice on February 28, 2005
(such date being a "Series B Redemption Date"). If the Holder
Redemption Notice is given to the
3.
<PAGE> 4
Corporation on or after January 1, 2005, the Corporation shall redeem
all of the Series B Preferred Stock requested to be redeemed in the
Holder Redemption Notice within sixty (60) days of the delivery of such
Holder Redemption Notice (such date being a "Series B Redemption
Date").
Section C.(5)(c)(i) of Article Fourth of the Amended and Restated
Certificate of Incorporation of the Corporation shall be deleted in its entirety
and all section numbers and references to section numbers in the Amended and
Restated Certificate of Incorporation shall be renumbered accordingly.
FOURTH: Thereafter, pursuant to a resolution of the Board of Directors,
this Certificate of Amendment was submitted to the stockholders of the
Corporation for their approval, and was duly adopted in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, Birch Telecom, Inc. has caused this Certificate of
Amendment to be signed by its President and attested to by its Secretary this
19th day of June, 1998.
BIRCH TELECOM, INC.
By: /s/ David E. Scott
-------------------------
David E. Scott, President
ATTEST:
/s/ Gregory C. Lawhon
- ----------------------------
Gregory C. Lawhon, Secretary
4.
<PAGE> 1
EXHIBIT 10.14
BIRCH TELECOM, INC.
1998 STOCK OPTION PLAN
ADOPTED FEBRUARY 9, 1998
1. PURPOSES.
(A) The purpose of the Plan is to provide a means by which selected
Employees of the Company, and its Affiliates, may be given an opportunity to
purchase stock of the Company.
(B) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees of the Company or its Affiliates, to secure and
retain the services of new Employees, and to provide incentives for such persons
to exert maximum efforts for the success of the Company and its Affiliates.
(C) The Company intends that the Options issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options. All Options shall
be separately designated Incentive Stock Options or Nonstatutory Stock Options
at the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
2. DEFINITIONS.
(A) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(B) "BOARD" means the Board of Directors of the Company.
(C) "CODE" means the Internal Revenue Code of 1986, as amended.
(D) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(E) "COMPANY" means Birch Telecom, Inc., a Delaware corporation.
(F) "CONTINUOUS STATUS AS AN EMPLOYEE" means that the service of an
individual to the Company or an Affiliate as an Employee is not interrupted or
terminated. The Board or the chief executive officer of the Company may
determine, in that party's sole discretion, whether Continuous Status as an
Employee shall be considered interrupted in the case of: (i) any leave of
absence approved by the Board or the chief executive officer of the Company,
including sick leave, military leave, or any other personal leave; or (ii)
transfers between the Company, Affiliates or their successors.
1.
<PAGE> 2
(G) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(H) "DIRECTOR" means a member of the Board.
(I) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(J) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(K) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows:
(1) If the common stock is listed on any established stock exchange
or traded on the Nasdaq National Market or The Nasdaq SmallCap Market, the Fair
Market Value of a share of common stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Company's common stock) on the last market trading day prior to
the day of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable.
(2) In the absence of such markets for the common stock, the Fair
Market Value shall be determined in good faith by the Board.
(L) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(M) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system.
(N) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.
(O) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
2.
<PAGE> 3
(P) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(Q) "OPTION" means a stock option granted pursuant to the Plan.
(R) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(S) "OPTIONEE" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(T) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(U) "PLAN" means this Birch Telecom, Inc. 1998 Stock Option Plan.
(V) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3 as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(W) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(A) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(B) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how each Option shall be
granted; whether an Option will be an Incentive Stock Option or a Nonstatutory
Stock Option; the provisions of each Option granted (which need not be
identical), including the time or times such Option may be exercised in whole or
in part; and the number of shares for which an Option shall be granted to each
such person.
(2) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the
3.
<PAGE> 4
exercise of this power, may correct any defect, omission or inconsistency in the
Plan or in any Option Agreement, in a manner and to the extent it shall deem
necessary or expedient to make the Plan fully effective.
(3) To amend the Plan or an Option as provided in Section 11.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
(C) The Board may delegate administration of the Plan to a committee of
the Board composed of two (2) or more members (the "Committee"), all of the
members of which Committee may be, in the discretion of the Board, Non-Employee
Directors and/or Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Additionally, prior to the Listing Date, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to a committee of one or more members of the
Board and the term "Committee" shall apply to any person or persons to whom such
authority has been delegated. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Options to eligible persons who (1)
are not then subject to Section 16 of the Exchange Act and/or (2) are either (i)
not then Covered Employees and are not expected to be Covered Employees at the
time of recognition of income resulting from such Option, or (ii) not persons
with respect to whom the Company wishes to comply with Section 162(m) of the
Code.
4. SHARES SUBJECT TO THE PLAN.
(A) Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate Six Million One Hundred Ninety-Five Thousand Eight
Hundred Forty-Five (6,195,845) shares of the Company's common stock. If any
Option shall for any reason expire or otherwise terminate, in whole or in part,
without having been exercised in full, the stock not purchased under such Option
shall revert to and again become available for issuance under the Plan.
(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(A) Options may be granted only to Employees.
(B) No person shall be eligible for the grant of an Incentive Stock
Option if, at the
4.
<PAGE> 5
time of grant, such person owns (or is deemed to own pursuant to Section 424(d)
of the Code) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of any of its Affiliates
unless the exercise price of such Option is at least one hundred ten percent
(110%) of the Fair Market Value of such stock at the date of grant and the
Option is not exercisable after the expiration of five (5) years from the date
of grant.
(C) Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Options
covering more than 1,250,000 shares of the Company's common stock in any
calendar year. This subsection 5(c) shall not apply prior to the Listing Date
and, following the Listing Date, shall not apply until (i) the earliest of: (A)
the first material modification of the Plan (including any increase to the
number of shares reserved for issuance under the Plan in accordance with Section
4); (B) the issuance of all of the shares of common stock reserved for issuance
under the Plan; (C) the expiration of the Plan; or (D) the first meeting of
stockholders at which directors are to be elected that occurs after the close of
the third calendar year following the calendar year in which occurred the first
registration of an equity security under Section 12 of the Exchange Act; or (ii)
such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(A) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(B) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; the exercise price of
each Nonstatutory Stock Option shall be not less than fifty percent (50%) of the
Fair Market Value of the stock subject to the Option on the date the Option is
granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock
Option or a Nonstatutory Stock Option) may be granted with an exercise price
lower than that set forth in the preceding sentence if such Option is granted
pursuant to an assumption or substitution for another option in a manner
satisfying the provisions of Section 424(a) of the Code.
(C) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment arrangement, except that payment of the common
stock's "par value" (as defined in the Delaware General Corporation Law) shall
not be made by deferred payment, or other arrangement (which may include,
without limiting the generality of the foregoing, the use of other common stock
of the Company) with the person to whom the Option is granted or to whom the
Option is transferred pursuant to subsection 6(d), or (C) in any other
5.
<PAGE> 6
form of legal consideration that may be acceptable to the Board. In the case of
any deferred payment arrangement, interest shall be compounded at least annually
and shall be charged at the minimum rate of interest necessary to avoid the
treatment as interest, under any applicable provisions of the Code, of any
amounts other than amounts stated to be interest under the deferred payment
arrangement.
(D) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option shall
only be transferable by the Optionee upon such terms and conditions as are set
forth in the Option Agreement for such Nonstatutory Stock Option, as the Board
or the Committee shall determine in its discretion, except that each
Nonstatutory Stock Option may be transferred to the spouse, children, lineal
ancestors and lineal descendants of the Optionee (or to a trust created solely
for the benefit of the Optionee and the foregoing persons) or to an organization
exempt from taxation pursuant to Section 501(c)(3) of the Code or to which tax
deductible charitable contributions may be made under Section 170 of the Code
(excluding such organizations classified as private foundations under applicable
regulations and rulings). The person to whom the Option is granted may, by
delivering written notice to the Company, in a form satisfactory to the Company,
designate a third party who, in the event of the death of the Optionee, shall
thereafter be entitled to exercise the Option.
(E) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(F) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. The foregoing requirements, and any assurances
given pursuant to such requirements, shall be inoperative if (i) the issuance of
the shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act, or (ii) as
to any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
then applicable
6.
<PAGE> 7
securities laws. The Company may require the Optionee to provide such other
representations, written assurances or information which the Company shall
determine is necessary, desirable or appropriate to comply with applicable
securities and other laws as a condition of granting an Option to such Optionee
or permitting the Optionee to exercise such Option. The Company may, upon advice
of counsel to the Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to, legends restricting
the transfer of the stock.
(G) TERMINATION OF EMPLOYMENT. In the event an Optionee's Continuous
Status as an Employee terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination) but only
within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionee's Continuous Status as an
Employee, or such longer or shorter period specified in the Option Agreement, or
(ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(H) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee terminates as a result of the Optionee's disability, the
Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement), or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(I) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option Agreement after the termination of,
the Optionee's Continuous Status as an Employee, the Option may be exercised (to
the extent the Optionee was entitled to exercise the Option as of the date of
death) by the Optionee's estate, by a person who acquired the right to exercise
the Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionee's death pursuant to subsection 6(d), but only within
the period ending on the earlier of (i) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement), or (ii) the expiration of the term of such Option as set forth in
the Option Agreement. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
7.
<PAGE> 8
(J) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee to exercise the
Option as to any part or all of the shares subject to the Option prior to the
full vesting of the Option. Any unvested shares so purchased may be subject to a
repurchase right in favor of the Company or to any other restriction the Board
determines to be appropriate.
(K) RIGHT OF REPURCHASE. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to
repurchase all or any part of the vested shares exercised pursuant to the Option
(L) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionee of the
intent to transfer all or any part of the shares exercised pursuant to the
Option.
(M) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2) authorizing
the Company to withhold shares from the shares of the common stock otherwise
issuable to the Optionee as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of the common stock of
the Company.
7. COVENANTS OF THE COMPANY.
(A) During the terms of the Options, the Company shall keep available
at all times the number of shares of stock required to satisfy such Options.
(B) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is unable
to obtain from any such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless and until
such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
8.
<PAGE> 9
9. MISCELLANEOUS.
(A) The Board shall have the power to accelerate the time at which an
Option may first be exercised or the time during which an Option or any part
thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in
the Option stating the time at which it may first be exercised or the time
during which it will vest.
(B) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(C) Throughout the term of any Option, the Company shall deliver to the
holder of such Option, not later than one hundred twenty (120) days after the
close of each of the Company's fiscal years during the Option term, a balance
sheet and an income statement. This section shall not apply (i) after the
Listing Date, or (ii) when issuance is limited to key employees whose duties in
connection with the Company assure them access to equivalent information.
(D) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee any right to continue in the
employ of the Company or any Affiliate or shall affect the right of the Company
or any Affiliate to terminate the employment of any Employee, with or without
cause, or to remove any Officer or Director as provided in the Company's Bylaws
and the provisions of the Delaware General Corporation Law.
(E) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
the Plan and all other plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall be
treated as Nonstatutory Stock Options.
(F) (1) The Board or the Committee shall have the authority to effect,
at any time and from time to time (i) the repricing of any outstanding Options
under the Plan and/or (ii) with the consent of the affected holders of Options,
the cancellation of any outstanding Options and the grant in substitution
therefor of new Options under the Plan covering the same or different numbers of
shares of common stock, but having an exercise price per share not less than
fifty percent (50%) of the Fair Market Value (one hundred percent (100%) of the
Fair Market Value in the case of an Incentive Stock Option or, in the case of a
ten percent (10%) stockholder (as defined in subsection 5(b)), not less than one
hundred and ten percent (110%) of the Fair Market Value) per share of common
stock on the new grant date.
(2) Shares subject to an Option canceled under this subsection 9(f)
shall continue to be counted, for the applicable period in which it was granted,
against the maximum award of Options permitted to be granted pursuant to
subsection 5(c) of the Plan. The repricing of an Option under this subsection
9(f), resulting in a reduction of the exercise price, shall be deemed to be a
cancellation of the original Option and the grant of a substitute Option; in the
event of such repricing, both the original and the substituted Options shall be
counted for the
9.
<PAGE> 10
applicable period against the maximum awards of Options permitted to be granted
pursuant to subsection 5(c) of the Plan. The provisions of this subsection
9(f)(2) shall be applicable only to the extent required by Section 162(m) of the
Code.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) If any change is made in the stock subject to the Plan, or subject
to any Option (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the type(s) and maximum
number of securities subject to the Plan pursuant to subsection 4(a) and the
maximum number of securities subject to award to any person pursuant to
subsection 5(c), and the outstanding Options will be appropriately adjusted in
the type(s) and number of securities and price per share of stock subject to
such outstanding Options. Such adjustments shall be made by the Board or
Committee, the determination of which shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a "transaction not involving the receipt of consideration by the
Company.")
(B) In the event of: (1) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then: (i) any surviving or acquiring corporation shall assume
Options outstanding under the Plan or shall substitute similar options
(including an option to acquire the same consideration paid to stockholders in
the transaction described in this Subsection 10(b)) for those outstanding under
the Plan, or (ii) in the event any surviving or acquiring corporation refuses to
assume such Options or to substitute similar options for those outstanding under
the Plan, the vesting of such Options and the time during which such Options may
be exercised shall be accelerated prior to such event and the Options terminated
if not exercised after such acceleration and at or prior to such event.
11. AMENDMENT OF THE PLAN AND OPTIONS.
(A) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment if such amendment requires stockholder approval in order for the Plan
to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or to comply
with applicable Nasdaq or stock exchange listing requirements.
(B) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
10.
<PAGE> 11
(C) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it into
compliance therewith.
(D) Rights and obligations under any Option granted before amendment of
the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Option was granted and
(ii) such person consents in writing.
(E) The Board at any time, and from time to time, may amend the terms
of any one or more Options; provided, however, that the rights and obligations
under any Option shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Option was granted and
(ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(A) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on January 29, 2008, which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Options may be
granted under the Plan while the Plan is suspended or after it is terminated.
(B) Rights and obligations under any Option granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the written consent of the person to whom the Option was granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Options granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
11.
<PAGE> 1
EXHIBIT 10.15
INCENTIVE STOCK OPTION AGREEMENT
This INCENTIVE STOCK OPTION AGREEMENT is made as of _____________,
199__, between BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
[NAME], an individual ("Optionee").
The Company has adopted the 1998 Stock Option Plan (the "Plan") in
order to attract and retain the best available personnel for positions of
substantial responsibility and to provide incentives for them to exert maximum
efforts for the success of the Company and its Affiliates. Pursuant to the Plan,
certain employees of the Company and its Affiliates may be designated by the
Board of Directors of the Company to receive options to purchase shares of
common stock of the Company ("Common Stock").
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS. Capitalized terms not explicitly defined in this
Agreement, but defined in the Plan, shall have the same definitions as in the
Plan.
2. GRANT OF OPTION. The Company grants to Optionee an Incentive Stock
Option to purchase up to the aggregate number of shares of Common Stock set
forth on EXHIBIT A attached to this Agreement, in accordance with the vesting
schedule set forth on EXHIBIT A. The Company may make additional grants to
Optionee of Incentive Stock Options to purchase shares of Common Stock (together
with the initial grant of options, individually an "Option" and collectively,
the "Options") by delivering Optionee an amended EXHIBIT A describing those
additional grants.
3. EXERCISE PRICE AND METHOD OF PAYMENT.
(A) EXERCISE PRICE. The exercise price of each Option is set
forth on EXHIBIT A, being the fair market value of the Common Stock on
the date of grant of the Option.
(B) METHOD OF PAYMENT. Payment of the exercise price is due in
full upon exercise of all or any part of each installment which has
accrued to Optionee. Optionee may elect, to the extent permitted by
applicable laws and regulations, to make payment of the exercise price
under one of the following alternatives:
(i) in cash (including check) at the time of
exercise;
(ii) pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board
which, prior to the issuance of Common Stock, results in
either the receipt of cash (or check) by the Company or the
receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;
<PAGE> 2
(iii) by delivery of already-owned shares of Common
Stock, held for the period required to avoid a charge to the
Company's reported earnings, and owned free and clear of any liens,
claims, encumbrances or security interests, which Common Stock shall
be valued at its Fair Market Value on the date of exercise; or
(iv) by a combination of the methods of payment
permitted by Sections 3(b)(i) through 3(b)(iii) of this Agreement.
4. WHOLE SHARES. An Option may not be exercised for any number of
shares which would require the issuance of anything other than whole shares.
5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained in this Agreement, an Option may not be exercised unless the shares
issuable upon exercise of the Option are then registered under the Securities
Act or, if those Shares are not then so registered, the Company has determined
that exercise and issuance would be exempt from the registration requirements of
the Securities Act.
6. TERM. The term of each Option commences on the date of grant and
expires ten years thereafter (the "Expiration Date"), unless the Option expires
sooner as set forth below or in the Plan. An Option shall terminate on the
earlier of the Expiration Date or three months after the termination of
Optionee's Continuous Status as an Employee with the Company or an Affiliate of
the Company for any reason or for no reason unless:
(A) termination of Continuous Status as an Employee is because
of Optionee's permanent and total disability (within the meaning of
Section 422(c)(6) of the Code), in which event the Options shall expire
on the earlier of the Expiration Date or twelve months following
termination of Continuous Status as an Employee; or
(B) termination of Continuous Status as an Employee is because
of Optionee's death, or Optionee's death occurs within three months
following Optionee's termination for any other reason, in which event
the Options shall expire on the earlier of the Expiration Date or
twelve months after Optionee's death; or
(C) during any part of the three month period an Option is not
exercisable solely because of the condition set forth in Section 5 of
this Agreement, in which event the Option shall not expire until the
earlier of the Expiration Date or until it shall have been exercisable
for an aggregate period of three months after the termination of
Continuous Status as an Employee; or
(D) exercise of an Option within three months after
termination of Optionee's Continuous Status as an Employee would result
in liability under Section 16(b) of the Exchange Act, in which case the
Option will expire on the earliest of (i) the Expiration Date,
2
<PAGE> 3
(ii) the tenth day after the last date upon which exercise would
result in that liability, or (iii) six months and ten days after the
termination of Optionee's Continuous Status as an Employee.
However, an Option may be exercised following termination of Optionee's
Continuous Status as an Employee only as to that number of shares as to which it
was exercisable on the date of termination of Optionee's Continuous Status as an
Employee as set forth on EXHIBIT A.
In order to obtain the federal income tax advantages associated with an
Incentive Stock Option, the Code requires that at all times beginning on the
date of grant of an option and ending on the day three months before the date of
the option's exercise, the optionee must be an employee of the Company or an
Affiliate of the Company, except in the event of the optionee's death or
permanent and total disability. This Section 7 provides for extended
exercisability of Options under certain circumstances for the benefit of
Optionee, but cannot guarantee that an Option will necessarily be treated as an
Incentive Stock Option if Optionee exercises the Option more than three months
after the date of termination of Optionee's Continuous Status as an Employee.
8. REPRESENTATIONS. By executing this Agreement, Optionee warrants and
represents that he or she has either (a) preexisting personal or business
relationships with the Company or any of its officers, directors or controlling
persons, or (b) the capacity to protect his or her own interests in connection
with the grant and exercise of the Options by virtue of the business or
financial expertise of any of Optionee's professional advisors who are
unaffiliated with and who are not compensated by the Company or any of its
Affiliates, directly or indirectly.
9. EXERCISE.
(A) An Option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the
Company) together with the exercise price to the Secretary of the
Company, or to another person as the Company may designate, during
regular business hours, together with any additional documents that the
Company may require pursuant to Section 9(b) of this Agreement and
Section 6(f) of the Plan.
(B) By exercising an Option, Optionee agrees that:
(i) as a precondition to the completion of any
exercise of the Option, the Company may require Optionee to
enter into an arrangement providing for the cash payment by
Optionee to the Company of any tax withholding obligation of
the Company arising by reason of: (1) the exercise of the
Option, (2) the lapse of any substantial risk of forfeiture to
which the shares are subject at the time of exercise, or (3)
the disposition of shares acquired upon exercise; and Optionee
also agrees that any exercise of an Option has not been
completed and that the Company is under no obligation to issue
any Common Stock until such an arrangement is established or
3
<PAGE> 4
the Company's tax withholding obligations are satisfied, as
determined by the Company;
(ii) the Company (or a representative of the
underwriters) may, in connection with the first underwritten
registration of the offering of any securities of the Company
under the Securities Act, require that Optionee not sell or
otherwise transfer or dispose of any shares of Common Stock or
other securities of the Company during that period (not to
exceed 180 days) following the effective date of the
registration statement of the Company filed under the
Securities Act as may be requested by the Company or the
representative of the underwriters. Optionee further agrees
that the Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restrictions
until the end of that period; and
(iii) unless the Common Stock of the Company is then
registered under Section 12(d) or 12(g) of the Exchange Act,
Optionee shall execute and deliver a Stock Restriction
Agreement in the form attached as EXHIBIT B.
10. TRANSFERABILITY. An Option is not transferable; provided, however,
by delivering written notice to the Company, in a form satisfactory to the
Company, Optionee may designate a third party who, in the event of Optionee's
death, shall be entitled to exercise the Options.
11. OPTION NOT A SERVICE CONTRACT. This Agreement is not an employment
contract and nothing in this Agreement shall be deemed to create any obligation
on Optionee's part to continue in the employ of the Company, or of the Company
to continue Optionee's employment with the Company.
12. NOTICES. Any notices provided for in this Agreement or the Plan
shall be given in writing and shall be deemed effectively given upon receipt or,
in the case of notices delivered by the Company to Optionee, five days after
deposit in the United States mail, postage prepaid, addressed to Optionee at the
address specified below or at another address designated by Optionee by written
notice to the Company.
13. GOVERNING PLAN DOCUMENT. This Agreement is subject to all the
provisions of the Plan (a copy of which has been provided to Optionee), the
provisions of which are hereby made a part of this Agreement. In the event of
any conflict between the provisions of this Agreement and those of the Plan, the
provisions of the Plan shall control. This Agreement also is further subject to
all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. If, however, the Plan is
amended or terminated after the date of this Agreement, that amendment or
termination shall not adversely affect the Options granted pursuant to this
Agreement, unless mutually agreed otherwise by Optionee and the Company, which
agreement shall be in writing and signed by Optionee and the Company.
4
<PAGE> 5
IN WITNESS WHEREOF, the Optionee and the Company have executed this
Agreement as of the date first written above.
OPTIONEE
-------------------------------------
[NAME]
Address:
-----------------------------
-------------------------------------
-------------------------------------
BIRCH TELECOM, INC.
By:
----------------------------------
Senior Vice President
5
<PAGE> 6
EXHIBIT A
to Incentive Stock Option Agreement dated as of_____________, 199__, between
Birch Telecom, Inc.
and
[NAME]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF EXERCISE
DATE OF GRANT SHARES SUBJECT TO VESTING SCHEDULE PRICE PER
OPTION SHARE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
_______ ______ 25% of shares subject to the $______
Option will vest on each
anniversary of the date of grant.
================================================================================
________ ______ 25% of shares subject to the $______
Option will vest on each
anniversary of the date of grant.
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.16
NONSTATUTORY STOCK OPTION AGREEMENT
This NONSTATUTORY STOCK OPTION AGREEMENT is made February ___, 1998,
between BIRCH TELECOM, INC., a Delaware corporation (the "Company"), and
[___________________], an individual ("Optionee").
The Company has adopted the 1998 Stock Option Plan (the "Plan") in
order to attract and retain the best available personnel for positions of
substantial responsibility and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its Affiliates. Pursuant to
the Plan, certain employees of the Company and its Affiliates may be designated
by the Board of Directors of the Company to receive an option to purchase shares
of common stock of the Company ("Common Stock").
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS. Capitalized terms not explicitly defined in this
Agreement, but defined in the Plan, shall have the same definitions as in the
Plan. As used in this Agreement, the following terms shall have the following
meanings:
(A) "CAUSE" means any of the following: (i) Optionee's breach
of a material obligation under any written employment, noncompetition
or proprietary information agreement with the Company or any of its
Affiliates; (ii) Optionee's failure to adhere in any material respect
to any written Company policy if such policy is material to the
effective performance by Optionee of his or her duties, and if Optionee
has been given a reasonable opportunity to cure his or her failure to
comply within the thirty-day period preceding the termination of
Optionee's employment, provided that if Optionee cures his or her
failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall
be required; (iii) the appropriation (or attempted appropriation) of a
material business opportunity of the Company or any of its Affiliates,
including attempting to secure or securing any personal profit in
connection with any transaction entered into on behalf of the Company
or any of its Affiliates (other than through stock options, bonuses and
other incentives provided by the Company or any of its Affiliates to
Optionee); (iv) the misappropriation (or attempted misappropriation) of
any of the funds or properties of the Company or any of its Affiliates;
or (v) the conviction of, or the entering of a guilty plea or plea of
no contest with respect to, a felony, or a crime involving moral
turpitude, dishonesty, or fraud.
(B) "CHANGE IN CONTROL" means any of the following: (i) the
sale of all or substantially all of the Company's (or its Affiliates')
assets that results in the liquidation of the Company and the payment
of liquidating distributions to the stockholders of the Company; (ii)
the acquisition of the Company by another entity by means of a merger
or
<PAGE> 2
consolidation resulting in the exchange of the outstanding shares of
the Company's capital stock for securities or consideration issued or
paid or caused to be issued or paid by the acquiring entity or its
subsidiary; or (iii) the acquisition from one or more of the
stockholders of the Company of more than 50% of the voting stock of
the Company by a single person or group of persons acting together.
(C) "GOOD REASON" means any of the following: (i) the material
breach by the Company or any of its Affiliates of a material obligation
under any written employment agreement with Optionee; (ii) the
assignment of Optionee, without his or her consent, to a position,
responsibilities, or duties of a materially lesser status or degree of
responsibility than his or her position, responsibilities, or duties at
the commencement of his or her employment.
2. GRANT OF OPTION. The Company hereby grants to Optionee a
Nonstatutory Stock Option to purchase up to an aggregate of ___________ (______)
shares of Common Stock (the "Option"), in accordance with the vesting schedule
set forth in Section 3 of this Agreement.
3. VESTING. Subject to the limitations contained in this Agreement,
6.25% of the shares subject to the Option will vest (become exercisable) on
____________, 1998 [THREE MONTHS FROM DATE OF GRANT], and an additional 6.25% of
the shares will then vest each [DATES UPON WHICH QUARTERS END] thereafter until
either (a) Optionee ceases to provide services to the Company or any of its
Affiliates for any reason, or (b) the Option becomes fully vested; provided,
however, that the unvested portion of the Option shall vest earlier and be
exercisable upon the earliest to occur of the following (subject to the
provisions of Section 8 of this Agreement): (i) a Change in Control, or (ii) the
termination of Optionee's Continuous Status as an Employee by the Company
without Cause or by Optionee for Good Reason.
4. EXERCISE PRICE AND METHOD OF PAYMENT.
(A) EXERCISE PRICE. The exercise price of the Option is
___________________________ ($___________) per share, being the fair
market value of the Common Stock on the date of grant of the Option.
(B) METHOD OF PAYMENT. Payment of the exercise price per share
is due in full upon exercise of all or any part of each installment
which has accrued to Optionee. Optionee may elect, to the extent
permitted by applicable statutes and regulations, to make payment of
the exercise price under one of the following alternatives:
(i) Payment of the exercise price per share in cash
(including check) at the time of exercise;
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<PAGE> 3
(ii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board
which, prior to the issuance of Common Stock, results in
either the receipt of cash (or check) by the Company or the
receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;
(iii) Payment by delivery of already-owned shares of
Common Stock, held for the period required to avoid a charge
to the Company's reported earnings, and owned free and clear
of any liens, claims, encumbrances or security interests,
which Common Stock shall be valued at its Fair Market Value on
the date of exercise;
(iv) Payment pursuant to the deferred payment
alternative as described in Section 4(c) of this Agreement; or
(v) Payment by a combination of the methods of
payment permitted by Sections 4(b)(i) through 4(b)(iv) of this
Agreement.
(C) CONDITIONS OF DEFERRED PAYMENT. In the event that Optionee
elects to make payment of the exercise price pursuant to the deferred
payment alternative:
(i) Not less than the aggregate par value of the
shares of Common Stock to be acquired pursuant to the exercise
of the Option shall be due at the time of exercise, not less
than 25% of the balance of said exercise price, plus accrued
interest, shall be due each year after the date of exercise,
and final payment of the remainder of the exercise price, plus
accrued interest, shall be due four (4) years from date of
exercise or, at the Company's election, upon termination of
Optionee's Continuous Status as an Employee with the Company
or an Affiliate of the Company;
(ii) Interest shall be payable at least annually and
shall be charged at the minimum rate of interest necessary to
avoid the treatment as interest, under any applicable
provisions of the Code, of any portion of any amounts other
than amounts stated to be interest under the deferred payment
arrangement; and
(iii) In order to elect the deferred payment
alternative, Optionee must, as a part of his or her written
notice of exercise, give notice of the election of this
payment alternative and, in order to secure the payment of the
deferred exercise price to the Company thereunder, if the
Company so requests, Optionee must tender to the Company a
promissory note and a security agreement covering the
purchased shares, both in form and substance satisfactory to
the Company, or such other or additional documentation as the
Company may request.
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<PAGE> 4
5. EXERCISE PRIOR TO VESTING.
(A) CONDITIONS OF EARLY EXERCISE. Subject to the provisions of
this Agreement, Optionee may elect at any time during his or her
Continuous Status as an Employee to exercise the Option as to any part
of all of the shares subject to the Option at any time during the term
hereof, including a time prior to the date of earliest exercise
("vesting") stated in Section 3 of this Agreement; provided, however,
that:
(i) a partial exercise of the Option shall be deemed
to cover vested shares first and then the earliest vesting
installment of unvested shares;
(ii) any shares so purchased from installments which
have not vested as of the date of exercise shall be subject to
the purchase option in favor of the Company as described in
the Early Exercise Stock Purchase Agreement attached hereto;
and
(iii) Optionee shall enter into any Early Exercise
Stock Purchase Agreement in the form attached to this
Agreement with a vesting schedule that will result in the same
vesting as if no early exercise had occurred.
(B) EXPIRATION OF EARLY EXERCISE ELECTION. The election
provided in this Section 5 to purchase shares upon the exercise of the
Option prior to the vesting dates shall cease upon the termination of
Optionee's Continuous Status as an Employee and may not be exercised
after the date thereof.
6. WHOLE SHARES. The Option may not be exercised for any number of
shares which would require the issuance of anything other than whole shares.
7. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, the Option may not be exercised unless the shares issuable
upon exercise of the Option are then registered under the Securities Act or, if
such Shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act.
8. TERM. The term of the Option commences on the date of this Agreement
and expires ten years thereafter (the "Expiration Date"), unless the Option
expires sooner as set forth below or in the Plan. In no event may the Option be
exercised on or after the Expiration Date. The Option shall terminate prior to
the Expiration Date as follows: three months after the termination of Optionee's
Continuous Status as an Employee with the Company or an Affiliate of the Company
for any reason or for no reason unless:
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(A) such termination of Continuous Status as an Employee is
due to Optionee's permanent and total disability (within the meaning of
Section 422(c)(6) of the Code), in which event the Option shall expire
on the earlier of the Expiration Date set forth above or twelve months
following such termination of Continuous Status as an Employee; or
(B) such termination of Continuous Status as an Employee is
due to Optionee's death, or Optionee's death occurs within three months
following Optionee's termination for any other reason, in which event
the Option shall expire on the earlier of the Expiration Date set forth
above or twelve months after Optionee's death; or
(C) during any part of such three month period the Option is
not exercisable solely because of the condition set forth in Section 7
of this Agreement, in which event the Option shall not expire until the
earlier of the Expiration Date set forth above or until it shall have
been exercisable for an aggregate period of three months after the
termination of Continuous Status as an Employee; or
(D) exercise of the Option within three months after
termination of Optionee's Continuous Status as an Employee would result
in liability under Section 16(b) of the Exchange Act, in which case the
Option will expire on the earlier of (i) the Expiration Date set forth
above, (ii) the tenth day after the last date upon which exercise would
result in such liability, or (iii) six months and ten days after the
termination of your Continuous Status as an Employee.
However, the Option may be exercised following termination of Continuous Status
as an Employee only as to that number of shares as to which it was exercisable
on the date of termination of Continuous Status as an Employee under the
provisions of Section 3 of this Agreement.
9. REPRESENTATIONS. By executing this Agreement, Optionee warrants and
represents that he or she (a) is acquiring the Option for his or her own account
and has no intention of distributing, transferring or selling all or any part of
the Option except in accordance with the terms of this Agreement, and (b) has
either (i) preexisting personal or business relationships with the Company or
any of its officers, directors or controlling persons, or (ii) the capacity to
protect his or her own interests in connection with the grant of the Option by
virtue of the business or financial expertise of any of Optionee's professional
advisors who are unaffiliated with and who are not compensated by the Company or
any of its affiliates, directly or indirectly.
10. EXERCISE.
(A) The Option may be exercised, to the extent specified
above, by delivering a notice of exercise (in a form designated by the
Company) together with the exercise price to the Secretary of the
Company, or to such other person as the Company may designate, during
5
<PAGE> 6
regular business hours, together with such additional documents as the
Company may then require pursuant to Section 6(f) of the Plan.
(B) By exercising the Option, Optionee agrees that:
(i) as a precondition to the completion of any
exercise of the Option, the Company may require Optionee to
enter an arrangement providing for the cash payment by
Optionee to the Company of any tax withholding obligation of
the Company arising by reason of: (1) the exercise of the
Option; (2) the lapse of any substantial risk of forfeiture to
which the shares are subject at the time of exercise; or (3)
the disposition of shares acquired upon such exercise.
Optionee also agrees that any exercise of the Option has not
been completed and that the Company is under no obligation to
issue any Common Stock until such an arrangement is
established or the Company's tax withholding obligations are
satisfied, as determined by the Company; and
(ii) the Company (or a representative of the
underwriters) may, in connection with the first underwritten
registration of the offering of any securities of the Company
under the Securities Act, require that Optionee not sell or
otherwise transfer or dispose of any shares of Common Stock or
other securities of the Company during such period (not to
exceed 180 days) following the effective date of the
registration statement of the Company filed under the
Securities Act as may be requested by the Company or the
representative of the underwriters. Optionee further agrees
that the Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restrictions
until the end of such period.
11. TRANSFERABILITY. The Option is not transferable, except (i) by will
or by the laws of descent and distribution, or (ii) by written instruction, in a
form accepted by the Company, to Optionee's spouse, children, lineal ancestors
and lineal descendants (or to a trust created solely for the benefit of Optionee
or any of the foregoing persons) or to an organization exempt from taxation
pursuant to Section 501(c)(3) of the Code or to which tax deductible charitable
contributions may be made under Section 170 of the Code (excluding such
organizations classified as private foundations under applicable regulations and
rulings), and is exercisable during Optionee's life only by Optionee or a
transferee satisfying these conditions. Notwithstanding the foregoing, by
delivering written notice to the Company, in a form satisfactory to the Company,
Optionee may designate a third party who, in the event of Optionee's death,
shall thereafter be entitled to exercise the Option.
12. OPTION NOT A SERVICE CONTRACT. This Agreement is not an employment
contract and nothing in this Agreement shall be deemed to create any obligation
on Optionee's part to continue in the employ of the Company, or of the Company
to continue Optionee's employment with the Company.
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<PAGE> 7
13. NOTICES. Any notices provided for in this Agreement or the Plan
shall be given in writing and shall be deemed effectively given upon receipt or,
in the case of notices delivered by the Company to Optionee, five (5) days after
deposit in the United States mail, postage prepaid, addressed to Optionee at the
address specified below or at such other address as Optionee hereafter
designates by written notice to the Company.
14. GOVERNING PLAN DOCUMENT. This Agreement is subject to all the
provisions of the Plan, a copy of which is attached hereto and its provisions
are hereby made a part of this Agreement, including without limitation the
provisions of Section 6 of the Plan relating to option provisions, in the event
of any conflict between the provisions of this Agreement and those of the Plan,
the provisions of the Plan shall control, and this Agreement is further subject
to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. If however, the Plan is
amended or terminated after the date of this Agreement such amendment or
termination shall not affect the Option granted pursuant to this Agreement,
unless mutually agreed otherwise by Optionee and the Company, which agreement
shall be in writing and signed by Optionee and the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
date first written above.
OPTIONEE
------------------------------------------
[name]
Address:
----------------------------------
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BIRCH TELECOM, INC.
By:
---------------------------------------
David E. Scott, President
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<PAGE> 1
EXHIBIT 10.17
LEASE AGREEMENT
THIS LEASE AGREEMENT ("LEASE") is made and entered into between Francor, L.L.C.
("LANDLORD"), and Birch Telecom, Inc. ("TENANT"), as of the 20th day of
July, 1998.
WITNESSETH:
In consideration of the obligation of Tenant to pay rent and in consideration of
the other terms, covenants and conditions of this Lease, all of which are hereby
agreed to by Landlord and Tenant, Landlord hereby demises and leases to Tenant
the Premises and the parking areas described below, and the use of the roof of
the building described below, to have and to hold the same for the Term of this
Lease, all upon the covenants and conditions set forth below.
BASIC PROVISIONS
1. The following basic provisions shall be construed in conjunction with, and
limited by, reference thereto in other provisions of this Lease:
a. "LANDLORD": Francor, L.L.C., a Delaware limited liability company
Address of Landlord: 4971 Summit, Kansas City, MO 64112
b. "TENANT": Birch Telecom, Inc., a Delaware corporation
c. "PREMISES": All of the second, third and fourth floors of the building
located at 2020-2028 Baltimore, Kansas City, Missouri (the "BUILDING"),
which consists of approximately 37,126 rentable square feet.
d. "TENANT'S PERCENTAGE": Total rentable area in the building is 48,137
square feet, and Tenant's proportionate share ("TENANT'S PERCENTAGE") is
seventy-seven and thirteen hundredths percent (77.13%).
e. "TERM": A period of ninety-six and one-half (96.5) months, commencing on
December 15, 1998 (the "COMMENCEMENT DATE") and ending on December 31,
2006 (the "EXPIRATION DATE"), unless sooner terminated in accordance
with the provisions of this Lease. Provided, however, if the New
Improvements have not been substantially completed and Landlord has
not delivered to Tenant possession of the Premises by December 15,
1998, as provided in the section below titled Possession and
Surrender . . .," the Commencement Date and the Expiration Date shall be
extended by a number of days equal to the number of days past December
15, 1998 that the New Improvements are substantially completed and
Landlord delivers to Tenant possession of the Premises. If adjustments
of the Commencement Date and the Expiration Date are necessary,
Landlord and Tenant shall execute an amendment to this Lease setting
forth the revised Commencement Date and Expiration Date.
f. "BASE RENT": Payable in monthly installments in advance during the Term,
paid to Landlord, or to the agent of Landlord designated in writing by
Landlord, at the address indicated above, or at such other place as
Landlord shall designate, according to the following schedule:
Month 1 $ 37,125.50
Month 2 through 12 $ 46,407.50
Month 13 through 24 $ 49,501.33
Month 25 through 36 $ 51,048.25
Month 37 through 48 $ 52,595.17
Month 49 through 60 $ 54,142.08
Month 61 through 72 $ 55,689.00
Month 73 through 84 $ 57,235.92
Month 85 through 96 $ 58,782.83
g. "ADDITIONAL RENT" shall be parking charges as defined in the section
below titled "Parking," Tenant's Percentage of the increase in operating
costs defined in the sections below titled Additional Rent" and
"Operating and Maintenance Costs" and all other amounts Tenant owes
Landlord under this Lease.
h. "SECURITY DEPOSIT": $50,000.00.
PAYMENT OF RENT; LATE CHARGE
2. Tenant shall pay Base Rent in monthly installments in advance, beginning on
the Commencement Date and on the first day of each and every month thereafter
during the Term, with proration for any partial month's occupancy, without
demand. Provided, however, no Base Rent shall be due for the period of December
15, 1998 through and including December 31, 1998. If Landlord does
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not receive the full amount of any rent payment due under this Lease within ten
(10) days after it is due, a late charge of One Thousand and No/100s Dollars
($1,000.00) will be added to the unpaid amount to cover the extra expense
involved in handling the delinquency. Late charges shall be due on demand by
Landlord or the due date of the next monthly installment of Base Rent, which
ever is earlier.
POSSESSION AND SURRENDER AND CONDITION OF PREMISES AT END OF TERM
3. Landlord shall promptly begin and diligently pursue to completion all
of the work and improvements specified in attached Exhibit A (collectively, the
"BUILDING IMPROVEMENTS") and all of the work and improvements specified in
attached Exhibit B (collectively, the "TENANT IMPROVEMENTS"). Landlord shall
substantially complete the Building Improvements and the Tenant Improvements
(collectively, the "NEW IMPROVEMENTS"), and shall deliver to Tenant possession
of the Premises, by the Commencement Date. If Landlord fails to substantially
complete the New Improvements, and to deliver possession of the Premises by the
Commencement Date, Landlord shall not be liable to Tenant for any loss or damage
resulting from such failure, except as provided below in this section, the
Commencement Date shall be extended to the date on which the New Improvements
are substantially complete and Landlord delivers possession to Tenant of the
Premises, and, except as provided in the section below titled "Substantial
Completion," Tenant shall not be liable to Landlord for any Base Rent or
Additional Rent that would have been due prior to the respective extended
Commencement Date.
Landlord's progress toward substantial completion of the New
Improvements shall be sufficient to, and Landlord shall, give Tenant access to
the Premises (a) during the twenty-one (21) days prior to the Commencement Date
to wire and install Tenant's telephone, computer and other communications
equipment, systems furniture and trade fixtures and (b) during the two (2) days
prior to the Commencement Date to move the rest of its furniture, files and
other property into the Premises so that Tenant will be able to commence full
operation of its business on the Commencement Date. Tenant's wiring,
installation and move in activities provided for in this paragraph shall not
unreasonably interfere with Landlord's substantial completion of the New
Improvements. If such unreasonable interference causes a delay in Landlord (i)
substantially completing the New Improvements, (ii) giving Tenant access to the
Premises during the twenty-one (21) days or the two (2) days prior to the
Commencement Date as provided in this paragraph above or (iii) giving Tenant
Possession of the Premises, then Tenant shall pay Landlord, within thirty (30)
days after Landlord's demand, all increased costs incurred by Landlord as the
result of such unreasonable interference, Tenant shall not be given the rent
credit provided in the next paragraph and Landlord shall not be subject to
Tenant's termination rights provided in the next two paragraphs during the
period of delay caused by such unreasonable interference. Further, Tenant shall
not be given the rent credit provided in the next paragraph and Landlord shall
not be subject to Tenant's termination rights provided in the next two
paragraphs during the period of delay caused by Tenant's failure to deliver to
Landlord the plans, specification and drawing needed for Exhibit B on or before
September 1, 1998.
If Landlord fails to substantially complete the New Improvements and to
deliver to Tenant possession of the Premises by the Commencement Date, or if
Landlord does not give Tenant access to the Premises during the twenty-one (21)
days or the two (2) day before the Commencement Date as required in the
immediately preceding paragraph, Tenant shall be given credit toward the third
and subsequent monthly installments of Base Rent in amounts equal to one day of
Base Rent for each day of delay past the Commencement Date. The amount of Base
Rent for each day of delay shall be the product of multiplying the monthly
installment of Base Rent by one thirtieth (1/30th) of such monthly installment.
If Landlord fails to substantially complete the New Improvements and to
deliver to Tenant possession of the Premises within ninety (90) days after the
Commencement Date, Tenant may terminate this Lease by written notice to Landlord
given within ten (10) days after the end of such 90 day period. Termination
shall be effective on the date the notice is given. Within ten (10) days after
such termination, Landlord shall pay to Tenant an amount equal to the amount of
the credit Tenant would have been entitled to receive toward payment of monthly
installments of Base Rent, if Tenant had not terminated this Lease pursuant to
the provisions of the immediately preceding paragraph.
Tenant's acceptance of possession of the Premises after substantial
completion of the New Improvements will be deemed to be an indication that
Tenant is satisfied with the physical condition of the Premises, subject to
Landlord's obligations stated in the section below titled "Substantial
Completion" and Landlord's obligations stated in the section below titled
"Maintenance, Repair and Replacements." Tenant acknowledges that there have been
no representations, agreements or promises to decorate, alter, repair or improve
the Premises, except as provided in this Lease. Upon termination or expiration
of this Lease, except for damage caused by fire or other perils, Tenant, at
Tenant's expense, will: (a) surrender the Premises in as good a condition as
general office use will have reasonably permitted, subject to normal wear and
tear, Tenant's obligations under this Lease and Insurable Losses; (b) have
removed the Generator and all of Tenant's property from the Premises; (c) have
promptly repaired any damage to the Premises caused by the removal of the
Generator and Tenant's property; and (d) leave the Premises free of trash and
debris and in "broom-clean" condition.
BUILDING AND TENANT IMPROVEMENTS
4. Landlord, by August 15, 1998, shall deliver to Tenant and Wiedeman
Architects, Inc., Tenant's architect, all of the plans, specifications and
drawings needed to replace the preliminary content of Exhibit A that is attached
to this Lease. Tenant, by September 1, 1998, shall deliver to Landlord and to
J.E. Dunn Construction Co., Landlord's general contractor, all of the plans,
specifications and drawings needed for Exhibit B that will be attached to this
Lease. After the time this Lease is executed, both parties shall cooperate with
each other and their respective architects and contractor to reach agreement on
the content of Exhibit A and Exhibit B and the cost and prices for the Tenant
Improvements as soon as reasonably possible, but not later than September 15,
1998. Upon such agreement,
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Landlord and Tenant shall execute any amendment of this Lease necessary to
substitute a new agreed upon Exhibit A and an agreed upon Exhibit B.
Landlord shall contract for, and shall cause to be performed, prior to
the Commencement Date, (a) all of the Building Improvements, at Landlord's sole
cost and in accordance with the attached Exhibit A plans and specifications, as
subsequently revised in accordance with the provisions of the first paragraph of
this section, and (b) all of the Tenant Improvements, in accordance with the
Exhibit B plans and specifications to be attached to this Lease. Landlord shall
obtain prices and costs for the Tenant Improvements that are reasonable and
customary. Such prices and costs may include an amount, not to exceed Fifty
Thousand and No/100s Dollars ($50,000.00) (the "PREMIUM"), for overtime and
other costs so that Landlord's contractor may use best efforts to substantially
complete the Tenant Improvements and deliver to Tenant possession of the
Premises by December 15, 1998. Landlord shall cause its contractor to agree to
(i) substantially complete the New Improvements and to deliver to Tenant
possession of the Premises by December 15, 1998, (ii) keep accurate time and
expense records for expenditure of the Premium and (iii) allow Tenant to audit
records for expenditure of the Premium at reasonable times after reasonable
notice. Landlord shall pay the first Seven Hundred Sixty-Two Thousand Five
Hundred Twenty and No/100s Dollars ($762,520.00) of the cost of the Tenant
Improvements (the "TI ALLOWANCE"), which amount shall include reimbursement to
Tenant for all fees and charges payable to Tenant's architect, other than fees
and charges for specification of furniture and furnishings, as and when Tenant
becomes obligated to pay such amounts. Tenant shall reimburse Landlord for the
cost of the Tenant Improvements in excess of the TI Allowance, less a ten
percent (10%) holdback (the "HOLDBACK"), by the time Landlord owes such excess
to it's contractors and suppliers, but not earlier than ten (10) days after
receipt of a notice from Landlord that includes an accounting for the amount
requested from Tenant, supporting documentation for the same and the date
Landlord must pay the requested excess to its contractors and suppliers. Tenant
shall pay the Holdback to Landlord within three (3) days after completion of all
punch list items in accordance with the provisions of the next section. Without
the prior written consent of Tenant, Landlord shall not incur costs and expenses
for the Tenant Improvements described in Exhibit B that will be attached to this
Lease in excess of those agreed upon by Landlord and Tenant pursuant to the
provisions of the first paragraph of this section. Any changes to Exhibit A or
Exhibit B shall be approved in advance, in writing, by both Landlord and Tenant.
All of the Tenant Improvements shall be the property of Landlord and shall be
surrendered to Landlord upon expiration or termination of this Lease.
In the event that Landlord's total cost for Tenant Improvements is less
than the TI Allowance, the difference shall be credited back to Tenant in the
form of rent reduction. The amount of the difference shall be divided by
thirty-six (36), and the quotient shall be subtracted from the scheduled Base
Rent for each of months three (3) through thirty-eight (38), inclusive.
SUBSTANTIAL COMPLETION
5. "SUBSTANTIAL COMPLETION" of the New Improvements shall mean (a) written
certification given to Landlord and Tenant by Tenant's and Landlord's architects
that all of the New Improvements have been completed (i) in accordance with the
plans and specifications contained in attached Exhibit A and Exhibit B, (ii) in
accordance with Laws (defined below), (iii) in a workmanlike manner, according
to and using applicable industry standards, methods and procedures and (iv) with
good quality materials and (b) issuance of a temporary or final certificate of
occupancy for the Premises by the City of Kansas City, Missouri (the "CITY").
Substantial completion shall not include completion of minor punch list type
items which are minor items of work or adjustments of equipment and fixtures
that can be completed after occupancy. Prior to taking possession of the
Premises, Tenant shall give written notice to Landlord of any items which, upon
visual inspection, are readily apparent or cosmetic and are not satisfactorily
completed (the "PUNCH LIST" items). Within thirty (30) days of receipt of the
punch list items, Landlord shall complete or correct all punch list items, or
shall address in writing any punch list item which Landlord, in Landlord's
reasonable opinion, deems to be inconsistent with the standards recited in
clause (a) of the first sentence of this section. If Tenant does not notify
Landlord of any punch list items before the date Tenant takes possession of the
Premises, it will be conclusively presumed the readily apparent or cosmetic
items included in the New Improvements have been satisfactorily completed and
accepted by Tenant. Landlord, at Landlord's cost and not as part of Operating
Costs (defined below), shall repair and correct (i) latent defects in the
structural aspects of the building, the parking areas and the Premises that
exist on the Commencement Date and, (ii) during the first year after the
Commencement Date or any longer period covered by an enforceable warranty or
guaranty, work and materials involved in the New Improvements that later prove
to be of poor quality or inconsistent with the standards recited in clause (a)
of the first sentence of this section.
All disagreements between Landlord and Tenant concerning whether (1)
prices and costs for the Tenant Improvements were reasonable and customary, (2)
the New Improvements have been substantially completed, (3) an item should be
included on Tenant's punch list, (4) items on the punch list have been completed
or properly completed, (5) latent defects exist (6) work or materials later
prove to be of poor quality or inconsistent with the standards recited in clause
(a) of the first sentence of the immediately preceding paragraph and (7) latent
defects or poor quality or substandard work have been repaired or corrected
properly, shall be resolved by Landlord's and Tenant's architects. If their
architects are not able to resolve a particular disagreement, a third architect
chosen by those two architects shall be hired by Landlord and Tenant, and the
majority decision of the three architects shall be binding upon Landlord and
Tenant. The third architect shall not have any business, social or other
connections with, or bias in favor of, Landlord or Tenant or the two architects
who choose him/her. The fees of the third architect shall be shared equally by
Landlord and Tenant. Landlord and Tenant shall diligently and in good faith
cooperate with each other and the architects involved to resolve the
disagreements as expeditiously as possible and shall secure commitments from
such architects to do the same.
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OPTION TO RENEW
6. Tenant shall have the option to renew and extend the Term once for a
period of three (3) years if, at the time of giving notice of its exercise and
at the time the renewed and extended Term begins, an Event of Default by Tenant
has not occurred, or, if it occurs after the notice is given, it is cured by the
date the renewed and extended Term begins. To exercise such option, Tenant must
notify Landlord, in writing, of its intent to renew and extend the Term at least
six (6) months prior to the expiration of the current Term. During the renewed
and extended Term, all of the covenants and conditions of this Lease shall
remain the same, except that Base Rent for each month of the renewed and
extended Term shall be Sixty-One Thousand Eight Hundred Seventy-Six and 67/100s
Dollars ($61,876.67).
PARKING
7. Landlord shall create at least six (6) parking spaces in the basement
of the building, in accordance with applicable City Codes and the plans and
specifications contained in attached Exhibit A, by the Commencement Date. Tenant
shall have the exclusive use of: ( a) the greater of seventy-five percent (75%)
of the total, or six (6), parking spaces in the basement of the building, at a
rate of $75.00 per space per month; (b) six (6) parking spaces in the surface
lot directly east of and across Baltimore Street from the building, at a rate of
$35.00 per space per month; and (c) up to the greater of seventy-five percent
(75%) of the total, or seventy-five (75), of the parking spaces available to
Landlord in what is known as the Freight House surface lot, at the rate
negotiated and paid by Landlord, as may be adjusted from time to time. Tenant's
use of, and obligation to pay for, parking spaces in the Freight House surface
lot shall be on an as needed basis each month, determined by written notice to
Landlord one full calendar month in advance of the use. The amounts due from
Tenant to Landlord for parking shall be paid monthly, in advance, as Additional
Rent. All of the parking areas mentioned in this section shall be referred to
collectively in this Lease as the "PARKING AREAS" and shall be adequately
lighted, at all times for those in the garage of the building, and after sunset
and until sunrise each day for the those outdoors. None of the parking spaces
referred to above in this section shall be used to satisfy any handicapped
parking space requirements imposed upon Landlord by Laws (defined below). If
Landlord loses it rights to use the Freight House surface parking lot or the
parking lot east across Baltimore Street from the building for providing Tenant
with the parking spaces referred to in this Section, or its rights to use any
other parking lot(s) to which Tenant and Landlord agree after the Commencement
Date, Landlord shall provide Tenant, prior to or by the time of the loss, with
the same number of alternate parking spaces in a lot(s) located in close
proximity to the building that are reasonably acceptable to Tenant. Landlord
shall give Tenant copies of all notices Landlord receives in connection with any
threatened or actual termination of its rights to use any parking areas promptly
after Landlord receives the same.
PUBLIC REQUIREMENTS
8. Landlord, at Landlord's cost and as part of the work Landlord will do
in connection with the New Improvements, shall cause the building, the parking
areas and the Premises to comply with the federal Americans With Disabilities
Act and any similar State or local laws (collectively, the "ADA") for the
Permitted Use defined below. The plans and specifications Tenant submits for the
Tenant Improvements shall adhere to, and Tenant's use of the Premises shall
comply with, the ADA. After the Commencement Date, if Tenant's use of the
Premises or the parking areas, or Tenant's employment activities, necessitate
further improvements or alterations to the building, the Premises or the parking
areas to comply with the ADA as currently in effect or hereafter amended or
superseded, Tenant shall make such improvements or alterations in accordance
with the section of this Lease titled "Alterations." If the requirements of the
ADA with respect to the building, the parking areas or the Premises otherwise
change after the Commencement Date, Landlord shall make any improvements or
alterations to the same necessitated by such change and the cost of doing so
shall be included within Operating Costs (defined below). Tenant and Landlord,
in performing their respective obligations and in exercising their respective
rights under this Lease, shall comply with all present and future codes,
ordinances, laws, regulations, orders, judgements and other public requirements
(collectively, "LAWS") affecting the building, the parking areas and the
Premises and Tenant's and Landlord's respective personal property, and the use
thereof, and shall Indemnify each other in connection with any failure to do so.
QUIET ENJOYMENT
9. Landlord hereby covenants that Tenant, upon paying rent as provided,
and performing all covenants and agreements contained in this Lease to be
performed by Tenant, shall and may peacefully and quietly have, hold and enjoy
the Premises. Nothing in this section shall prevent Landlord from performing
alterations or repairs on other portions of the building, nor shall performance
of such alterations or repairs be construed as a breach of this covenant by
Landlord, if such performance does not unreasonably interfere with the conduct
of Tenant's business at the Premises.
ASSIGNMENT-SUBLETTING
10. a. Tenant shall not sublet, assign, transfer, mortgage, pledge,
hypothecate or encumber this Lease or any interest herein or any portion hereof,
or permit or suffer any other person (the employees, agents, servants and
invitees of Tenant excepted) to occupy or use the Premises, or any portion
thereof, without the prior written consent of Landlord. Permission is, however,
granted Tenant to assign this Lease and/or to sublet the Premises, or any part
thereof, to any subsidiary, parent or affiliate of Tenant, or any entity to
which
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Tenant sells its stock or assets or with which Tenant merges or joins, or any
entity to which Tenant converts, upon giving Landlord written notice. In the
event of any assignment or subletting, Tenant shall remain the principal obligor
under all covenants of this Lease, and by accepting any assignment or
subletting, an assignee or subtenant shall become bound by and shall perform and
shall become entitled to the benefit of all of the conditions and covenants by
which Tenant is bound. A consent to any such assignment, subletting, occupation
or use by any other entity shall not be deemed to be a consent to any subsequent
assignment, subletting, occupation or use by another entity. Any assignment or
subletting of the Premises in violation of the provisions of this section shall
be void. Any subletting or assignment consented to by Landlord shall be
evidenced only in writing and in form reasonably acceptable to Landlord and
Tenant. Landlord acknowledges and consents to Tenant subletting a portion of the
Premises to DNS Publishing, Inc., a Missouri corporation.
b. Landlord shall not sell or otherwise transfer the building or the
parking areas, or any part thereof or interest therein, nor assign this Lease,
unless, simultaneous with the closing of the sale, transfer or assignment, (i)
the buyer, transferee, assignee or other recipient of Landlord's interest
(collectively, an "ASSIGNEE") agrees in writing with Landlord and Tenant at the
time of the transaction (1) to assume this Lease, (2) to perform all of
Landlord's obligations under this Lease and (3) acknowledges receipt of the
Security Deposit and that the Assignee and Tenant are contractually bound to
each other under this Lease and (ii), promptly after closing the transaction,
Landlord gives Tenant a copy of the Assignee assumption agreement that contains
all parties' original signatures and the Assignee's name and its contact person,
address and phone number (collectively, the "ASSIGNEE ASSUMPTION AGREEMENT").
Tenant will not have any obligation to pay Base Rent, Additional Rent or other
payments to an Assignee until the monthly installment of Base Rent that first
becomes due after Tenant is given the Assignee Assumption Agreement.
USE
11. Tenant shall only use and occupy the premises (a) for general office
purposes, (b) to house, operate and maintain telecommunications equipment and
(c) for activities ancillary to the uses specified in the immediately preceding
two clauses (collectively, the "PERMITTED USE"), and for no other purpose
without Landlord's prior written consent. Tenant will not (i) use the Premises
for any unlawful, disreputable, or extra-hazardous purpose, (ii) maintain or
allow any public or private nuisance in the Premises, (iii) disturb the quiet
enjoyment of any other tenant, (iv) permit any operation on the Premises which
might emit offensive odors into other portions of the building, (v) use any
apparatus which might make undue noise or set off undue vibrations in the
building or (vi) permit any activity or anything to be kept or used which would
increase the fire insurance rate or other insurance rates on the building or
contents. Tenant will not permit the Premises to be used for any purpose which,
in Landlord's reasonable opinion, impairs the reputation or character of the
building. Tenant shall not install nor permit the installation of any signs in
or upon the Premises which are visible from the exterior hereof without the
written consent of Landlord. Tenant shall not obstruct or use the sidewalks,
entries, passages, vestibules, halls, elevators or stairways of the building for
any purpose other than ingress or egress to and from the Premises, or throw, or
sweep, or put anything out of the windows or doors, or in the passages or
corridors of the building. Landlord shall include in each lease of, and in each
other occupancy or use agreement for, every portion of the building, other than
the Premises, a section that is substantially the same as this section, modified
only by the description of the Permitted Use. Landlord shall enforce such
section in all such Leases and agreements.
MAINTENANCE, REPAIRS AND REPLACEMENTS
12. a. Except for the obligations imposed upon Tenant in the immediately
following subsection, and subject to the sections of this Lease titled "Damage
and Destruction" and "Building and Tenant Improvements," Landlord shall operate,
maintain, repair and replace, when necessary, the building and its common areas,
the parking areas and the real estate upon which the building and its common
areas and the parking areas are located, including all structural components of
the same and of the Premises. Such structural components include, without
limitation, heating, air conditioning, ventilation, water, sprinkler, plumbing,
lighting (excluding any lighting fixtures within the Premises installed by
Tenant) electrical, elevator, fire escape and alarm (excluding any alarm
installed in the Premises by Tenant) equipment, systems, fixtures (excluding
Tenant's trade and telecommunications fixtures and equipment), supplies,
services, service panels and structures for, and windows and panels of, the
building and its common areas, the parking areas and the Premises and the
exterior walls and the areas above the surface of the ceilings, below the
surface of the floors and behind the surface of the interior walls of the
Premises. Landlord's duties under this subsection shall include, without
limitation, (i) keeping the building and its common areas and parking areas free
of rodents, insects and other pests; (ii) policing and keeping the building's
common areas and the parking areas clean, sanitary, orderly, sightly,
unobstructed and free from trash, debris, ice and snow; (iii) preventing water
pipes in or that serve the building, and those that serve the Premises, from
freezing; (iv) maintaining the lawn, shrubs, plants, trees and other landscaping
of the building's common areas and the parking areas, if any and (v) doing all
work necessary to continuously provide the services Landlord is required to
provide under the section below titled "Services." Landlord shall reimburse
Tenant for any repair or replacement work for which Tenant is responsible under
the following subsection that is necessitated by the negligent act or omission
or fault of Landlord or its employees, agents, vendors, licensees or invitees.
Landlord promptly shall begin and shall diligently pursue to completion any
needed repairs and replacements of which it receives written notice from Tenant,
or of which it otherwise has actual notice, in accordance with Laws, in a
workmanlike manner, according to and using applicable industry standards,
methods and procedures, with good quality materials and, when required, after
obtaining a permit for such work from the City (collectively, the "WORK
STANDARDS").
b. Except for the obligations imposed upon Landlord in the immediately
preceding subsection and subject to the sections of this Lease titled "Damage
and Destruction" and "Building and Tenant Improvements," Tenant, at Tenant's
sole cost, promptly shall (i) maintain and keep clean, sanitary and sightly and
in good order, repair and condition the Premises, including the non-structural
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components of the Premises, (ii) repair all damage to the Premises caused by the
negligent act or omission or fault of Tenant or its employees, agents, vendors,
licensees or invitees and (iii) reimburse Landlord for any repair or replacement
work for which Landlord is responsible under the preceding subsection that is
necessitated by the negligent act or omission or fault of Tenant or its
employees, agents, vendors, licensees or invitees. All of Tenant's work required
in this subsection shall be performed in accordance with the Work Standards.
ALTERATIONS
13. a. Tenant shall not alter or change the Premises without prior written
consent of Landlord, and, unless otherwise provided in writing, all work shall
be done by or under the direction of Landlord, at Tenant's sole cost, in
accordance with the Work Standards and by a contractor employed by Tenant that
is reasonably acceptable to Landlord and Tenant. Any alteration shall be of a
quality equal to or exceeding the quality of Tenant Improvements specified in
attached Exhibit B. Landlord reserves the right to require any contractor to
provide lien waivers and liability insurance. Any alterations, physical
additions or improvements, except movable office furniture and equipment and
telecommunication equipment, shall at once become property of Landlord and shall
be surrendered to Landlord upon termination or expiration of this Lease.
Notwithstanding anything herein to the contrary, any increase in ad valorem
taxes or insurance premiums resulting from such improvements shall be the sole
responsibility of Tenant.
b. Without Landlord's prior written consent, but subject to the other
provisions of the immediately preceding subsection, Tenant may, at its cost,
install and operate sending and receiving antennas and satellite dishes mounted
on a single structure anchored to the roof of the building, and communication
equipment related to such antennas and dishes, in a location reasonably
acceptable to Landlord and Tenant. Upon the expiration or sooner termination of
this Lease, Tenant shall remove such antennas, satellite dishes and
communication equipment at its cost. Tenant, at its cost, shall repair any
damage to the roof or building structure caused by installation or removal of
antennas and satellite dishes and related communication equipment. Landlord
diligently shall make good faith efforts to correct or to cause the owners,
operators or users of communication equipment located on or in the building or
any other property in the vicinity of the building that Landlord owns or leases
to correct any reception or transmission interference problems its or their
equipment cause with Tenant's communication equipment. Landlord shall not
install, erect or use any antennas, satellite dishes or other communication
equipment in, on or from the building, the parking areas or any other property
in the vicinity of the building that Landlord owns or leases, nor allow any
other entity that leases, subleases or licenses such property from Landlord to
do the same, if such other equipment interferes with the receipt by, the sending
of signals from or the operation of Tenant's antennas, satellite dishes or other
communication equipment.
c. Within one (1) year after the Commencement Date, Landlord shall
construct on the roof of the building, in accordance with the Work Standards and
at Landlord's sole cost, a deck not less than five hundred (500) square feet in
area, for the use and enjoyment in common by the employees and invitees of all
of the tenants of the building. Such deck shall be connected to the stairwell
and elevator shaft of the building where they open onto the roof. Landlord may
close such deck with reasonable frequency for reasonable periods of time for the
temporary exclusive use of the deck for private functions upon notice to Tenant.
SERVICES
14. Landlord, at its sole cost, shall furnish to the building and the
Premises (a) heated and refrigerated air conditioning, in season at reasonable
temperatures and in reasonable amounts, and reasonable air ventilation, for
executive business offices (collectively, "HVAC") from 7:00 a.m. until 7:00
p.m., Monday through Friday, and from 8:00 a.m. through 1:00 p.m on Saturday
(collectively, "OPERATING HOURS"), except on New Year's Day, the 4th of July,
Thanksgiving Day and Christmas Day of each year ("HOLIDAYS"), (b) elevator
service to all floors and the basement of the building, ingress to and egress
from the building and the parking areas and the security services listed below,
all of which services shall be furnished twenty-four (24) hours a day, every day
of the year, and (c) janitor and trash removal services Monday through Friday of
each week, exclusive of holidays, including, at a minimum, the services stated
in attached Exhibit C. Security services, at a minimum, shall consists of (i) a
security guard driving by and looking for and reporting problems at the building
on a regular basis, but not less than twice a night, during night time hours,
every day of the year, (ii) elevators that are programed to restrict access,
after normal business hours and on weekends and holidays, to each floor of the
building and the basement parking area to only those who enter access code
numbers revealed to only those who work on or otherwise have a right to be on
each floor, (iii) restricted access to the building's common areas and the
basement parking area after normal business hours and weekends and holidays to
only the employees, customers, invitees, vendors and contractors of the Landlord
and Tenant and other tenants of the building, (iv) restrict access to other
parking areas at all times to only those with permits to park there and (v)
adequate lighting in the common areas and the basement parking area at all times
and in the outdoor parking areas during all night hours.
HVAC shall be available in all parts of the Premises upon Tenant's
request during all non-operating hours, including on holidays. The cost of
providing Tenant with HVAC during non-operating hours (including holidays) shall
be charged to Tenant at an hourly rate determined by Landlord based upon the
actual utility costs plus all other reasonable costs incurred by Landlord in
providing the same, including depreciation of Landlord's HVAC equipment during
such non-operating hours operation, and shall be paid by Tenant as Additional
Rent on the date the next monthly installment of Base Rent is due following
receipt by Tenant of a statement therefor.
Notwithstanding anything in this section to the contrary, separate HVAC
equipment for Tenant's network operations center in the Premises (the "NOC")
shall be included in the Tenant Improvements and detailed in Exhibit B that will
be attached to this Lease, and the utilities used to operate such HVAC for the
NOC shall be separately metered by Tenant at its cost and in its name and paid
for directly by Tenant. Landlord shall provide Tenant with space, other than in
the Premises, for placement and installation of (i) an air-conditioner
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condenser unit for the NOC's HVAC, (ii) an air-conditioner condenser unit for
the HVAC for Tenant's computer room, (iii) an uninterruptable power generator
for the NOC and the Tenant's computer room (the "GENERATOR") and a structure to
house the Generator, and (iv) in the basement or elsewhere in the interior of
the building, a wall mounted transfer switch for the Generator, all of which
equipment and structure shall be included in Exhibit B as part of the Tenant
Improvements. Tenant shall not be obligated to pay additional rent or other
consideration to Landlord for any of the space provided by Landlord outside of
the Premises as required in this paragraph. After completion of the Tenant
Improvements, Landlord shall have no obligation for, nor liability with respect
to, the inspection, operation, maintenance or repair of any of the equipment
mentioned in this paragraph, except to the extent Landlord is required to repair
and correct work and materials related to any of the equipment mentioned in this
paragraph, as required in the section of this Lease titled "Substantial
Completion."
Tenant shall not, without Landlord's prior written consent, install or
operate any electrical equipment, machinery or mechanical device or computer on
the Premises, other than those normally used in connection with the Permitted
Use and other than as permitted in the immediately preceding paragraph. If
Tenant needs or demands electric service above the needs of the Permitted Use,
Tenant shall pay for same, at the same rates paid by Landlord, as Additional
Rent, if Landlord is reasonably able to provide same, except as otherwise
provided in the immediately preceding paragraph of this section. Tenant also
shall pay for any additional special facilities or equipment, and all costs for
installing same, that are not included in the Tenant Improvements specified in
Exhibit B that will be attached to this Lease. Landlord shall diligently restore
any services it is obligated to provide under this section when failures,
stoppages or interruptions occur. Tenant shall promptly notify Landlord of the
need for any such restoration. Landlord shall not be liable for damages to
Tenant for failure to perform any of the covenants in this section, nor shall
temporary stoppages, temporary failures or interruptions of any of the services
to be supplied by Landlord under this section be construed as an eviction of
Tenant, work an abatement of rent or relieve Tenant from any covenant or
agreement, unless such failure, stoppage or interruption (i) is caused by the
negligent act or omission or fault of Landlord or its employees, agents,
vendors, licensees or invitees and occurs for an aggregate of three (3) hours or
more per day during any fourteen (14) days during a period of thirty days, or
(ii) is the result of an Event of Default by Landlord.
Notwithstanding anything to the contrary in this section, and without
compensation to Landlord, Tenant may obtain utilities and any of the services
described in this section directly from the provider of the same, after giving
Landlord notice of its intent to do so and after Tenant and Landlord agree on
the manner and place such utilities and services will be brought into the
building and the Premises, which agreement on either party's part shall not be
withheld or delayed unreasonably. Any and all costs, whether direct or indirect,
resulting from the installation, operation, non-operation, maintenance or
removal of such utilities and services shall be borne solely by Tenant or the
provider of the utility or service.
ENTRY
15. Landlord, its officers, agents and representatives shall have the right
to enter into and upon the Premises at reasonable times agreed to in advance by
Tenant, and with reasonable frequency, (a) to inspect the same, make repairs or
replacements and perform maintenance and other tasks required of Landlord, or
which Landlord has the right to do, under this Lease, (b) to show the Premises
to prospective purchasers and lenders and, during the last six months of the
term, if the Term has not been renewed and extended, to prospective tenants or
(c), at any time without advance notice or agreement, to deal with any emergency
related to the serious immediate safety, protection or preservation of the
building, the Premises or the lives or health of occupants of the building.
Landlord may and shall at all times have master keys or pass keys to the
Premises. Tenant shall not change any locks or install locks in the doors of the
Premises, or install other devices or systems which would restrict access to the
Premises, except for burglar and other security systems, without Landlord's
prior written consent. If Tenant installs alarms or other security systems in
the Premises, it shall provide Landlord with access codes for the same that
Landlord may use only in connection with entering the Premises in an emergency
as provided in clause (c) of this section. Landlord shall keep such access codes
confidential and shall Indemnify Tenant for any consequences of failing to do
so. Landlord shall not enter the NOC or other rooms or areas where Tenant's
communications equipment is housed or operated, except to deal with an emergency
of the type described above in clause (c) of this section. Each time an entry
into the Premises is made pursuant to clause (c) of this section, Landlord shall
use reasonable efforts to take care of Tenant's property and, promptly after
having so entered, Landlord shall notify Tenant of its having done so, the
reasons for the entry and what was discovered and done while in the Premises. In
connection with performing Landlord's obligations and exercising its rights
under this Lease, and in connection with Landlord servicing other parts of the
building, Landlord may adjust and balance the controls of the HVAC systems, if
they do not exclusively serve the Premises and if doing so does not adversely
affect the temperature and comfort of workers and the operation of equipment in
any part of the Premises, conduct environmental audits or abatement and erect,
use, maintain, repair, replace or relocate pipes, ducts, wiring conduits and
similar devices in and through the Premises, so long as such activity does not
unreasonably disrupt the conduct of Tenant's business at the Premises or
interfere with the operation of Tenant's telecommunication equipment located in
the Premises or on the roof of the building.
ADDITIONAL RENT
16. Upon notice from Landlord, Tenant shall pay Landlord, as Additional
Rent, in advance in equal monthly installments, at the time and place that
installments of Base Rent are due and payable, beginning January 1, 2000,
Tenant's Percentage of any increase in Operating Costs (hereinafter defined) as
reasonably estimated by Landlord, over and above actual Operating Costs for
1999. On or before March 1, 2001, and on or before March 1 of each subsequent
year, Landlord shall prepare and deliver to Tenant an itemized detailed
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statement of the actual Operating Costs for the previous calendar year, together
with a statement of the actual Operating Costs for 1999. Within thirty (30) days
after receipt of such statement, Tenant shall pay Landlord the amount of any
deficiency between estimated and actual in Tenant's Percentage of any increase
in Operating Costs for the prior calendar year over those for 1999. In the event
of any overpayment by Tenant, such overpayment shall be credited towards
installments thereafter becoming due and payable. If occupancy of the building
during 1999 or any subsequent calendar year is less than one hundred percent
(100%), then Operating Costs for the year in question shall be increased or
"grossed up" to that amount of Operating Costs that, using reasonable
projections, would normally be expected to be incurred during the year in
question if the building was 100 percent occupied, as determined under generally
accepted accounting principles consistently applied. Landlord shall provide in
the statements required in this section, a reasonably detailed description of
how the Operating Costs were grossed up. Only those component expenses that are
affected by variations in occupancy levels shall be grossed up.
OPERATING AND MAINTENANCE COSTS
17. The phrase "OPERATING COSTS" shall be defined as the sum of any and all
reasonable costs, expenses and disbursements of every kind and character which
Landlord reasonably incurs, pays or becomes obligated to pay in any calendar
year in connection with the ownership, operation, maintenance, repair, and
replacement of the building and the land upon which the building is located (the
"LAND"), and all related improvements and appurtenances thereto, in a manner
similar to the way well managed office building properties in the
downtown/midtown area of Kansas City, Missouri, are operated, maintained,
repaired and replaced, all determined in accordance with generally accepted
accounting principles for such office buildings, consistently applied. Operating
Costs shall include, but not be limited to, the following: real estate taxes and
assessments; rent taxes, gross receipt taxes, water and sewer charges; insurance
premiums for the coverage Landlord is required to carry under this Lease and for
other coverage Landlord reasonably carries in connection with its ownership and
operation of the building; license, permit and inspection charges; utilities;
service contracts; labor; building management; air conditioning, heating and
elevator maintenance; supplies; security; janitor service; trash removal
service; maintenance and upkeep costs of and for the building and all parking
areas, drives, lawns, trees, shrubbery and common areas; depreciation of
equipment (but not fixtures) owned by Landlord and used solely for maintenance
and operation of the building and the cost of contesting by appropriate
proceedings increases in real estate taxes and assessments and the applicability
to, or the validity of, any Laws which might increase Operating Costs if such
contesting is agreed to in advance by Landlord and Tenant. The phrase "REAL
ESTATE TAXES" shall mean all taxes, general and special, levied or assessed on
the land and the building, and on any land and/or improvements now or hereafter
owned by Landlord that constitute the parking areas.
Operating Costs shall not include, without limitation, the following:
(i) cost of improving, preparing for lease, repairing, maintaining, cleaning or
altering space in the building available or to become available for lease or the
modification of such space to comply with Laws; (ii) labor costs, advertising,
brokerage fees, leasing commissions, legal and other professional fees related
to leasing or attempting to lease space in the building or enforcement or
dispute of lease provisions, the recovery of damages or pursuit of other
landlord remedies; (iii) cost of correcting construction defects; (iv) cost of
repairs caused by the negligent act or omission or fault of Landlord, its
employees, agents, vendors, invitees, licensees or other tenants of the Building
or their employees, agents, vendors, invitees, licensees or subtenants; (v)
salaries of Landlord's or Landlord's managing agent's executives; (vi)
maintenance, repair and replacement costs paid from the proceeds of any
insurance policy or by Tenant or third parties; (vii) utility and other charges
reimbursed or paid directly by Tenant or any other tenant of the building or the
parking areas; (viii) depreciation, except for depreciation allowed under the
previous paragraph of this section; (ix); labor costs of any manager or
management company if the basis for such manager's or company's compensation is
a fee calculated to include the cost of labor such manager or company hires to
perform its management obligations; (x) capital expenditures, except reasonable
capital expenditures for energy conservation if Tenant's Percentage of such
costs is equal to or less than Tenant's Percentage of the savings in utility
charges, during the remaining Term, achieved by such capital improvements; and
(xi) Operating Costs that are not charged to and collected from all other
tenants of the building. The amount of labor costs includable in Operating Costs
shall be limited to a portion of such costs determined by the percent of time a
particular employee works on matters related to the building. The amount of
costs for tools and equipment includable in Operating Costs shall be limited to
a portion of such costs determined by the percent of time particular tools and
equipment are used at the building.
Tenant, at its expense, shall have the right once per calendar year
following receipt of the statement of Operating Costs prepared by Landlord and
promptly after prior written notice to Landlord, to audit Landlord's books and
records relating to Operating Costs for the two preceding years. In the event
such an audit demonstrates the amount Tenant paid or will pay as Additional Rent
in connection with the years audited by Tenant was or will be higher or lower
than the amount of Additional Rent actually due pursuant to the preceding
section, then, within ten (10) days of such determination, Landlord shall refund
any over-payment and adjust the amount of Additional Rent Tenant is required to
pay, or Tenant shall pay any under-payment.
CONDEMNATION
18. If the building is taken by any competent authority under the power of
eminent domain, or is acquired for any public or quasi-public use or purpose,
the Term of this Lease shall terminate upon the date when possession of the
building is so taken or acquired. If less than all of the building, or if the
Freight House parking area, is taken or damaged by such condemning authority, or
if the grade of any street or alley adjacent to the land or the parking areas is
changed by any competent authority and such change of grade makes it necessary
or desirable to remodel the building or the parking areas to conform to the
changed grade, Tenant shall have the right to terminate this
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Lease by giving notice to Landlord ninety (90) days or more prior to the date of
termination stated in the notice. Tenant shall not be entitled to receive any
amount from the condemnation award for, or from any judgment for damages caused
by, the taking or the change of grade. Nothing in this section shall preclude an
award being made to Tenant, and Tenant recovering, for loss of business,
depreciation to and cost of removal of Tenant's Property, the value of fixtures
installed in the Premises by Tenant and the cost of relocating Tenant's
businesses, provided that such award does not reduce the amount due and payable
to Landlord. Upon termination of this Lease as provided in this section, rent
shall be apportioned as of the date of the termination.
PROPERTY DAMAGE INSURANCE
19. Landlord shall keep in force a policy or policies of property damage
insurance insuring the building and appurtenant structures, including the Tenant
Improvements, under a commercial property insurance policy with a special broad
causes of loss form (formerly known as "all-risk" insurance) issued on a
replacement cost basis in an amount not less than eighty percent (80%) of the
full replacement cost of the building and appurtenances, including the Tenant
Improvements, with endorsements covering the following: (a) mechanical
breakdown, (b) backup of sewers and drains, (c) differences in conditions for
the peril of earthquake and (d) building ordinance (collectively, an "ALL-RISK
POLICY"), with the aggregate of applicable deductibles not exceeding Twenty-Five
Thousand and No/100s Dollars ($25,000.00), exclusive of the deductible for
earthquake coverage which shall not be greater than ten percent (10%) of the
replacement cost of the building.
Landlord shall pay the premium for the All-Risk Policy (the "PROPERTY
INSURANCE PREMIUM") each year before it becomes delinquent and, promptly
thereafter, shall send Tenant a certificate of such insurance, or if Tenant
requests, a copy of the policy, as required in the last paragraph of this
section. If Tenant questions whether the amount of property damage insurance
Landlord carries on the building equals eighty percent (80%) of the replacement
cost of the building, and Landlord and Tenant can not reach agreement thereon,
they will use the procedure outlined in the last paragraph of the section of
this Lease titled "Substantial Completion" to resolve their disagreement.
Tenant, at Tenant's cost, shall keep in force a policy or policies of
property damage insurance, issued on a replacement cost basis, insuring all
personal property owned, leased or otherwise belonging to or in the possession
of Tenant that is used, stored, placed, incorporated, installed or erected in,
on or in connection with the Premises, including, without limitation, signs,
telecommunication equipment and trade fixtures (collectively, "TENANT'S
PROPERTY"), with an agreed amount endorsement and such coverage amounts,
deductibles and other endorsements as Tenant deems appropriate.
As used in this Lease, an "INSURABLE LOSS" means any whole or partial
loss of or damage to the building or the Premises or the personal property of
either party or of third parties which would be covered by an All-Risk Policy,
or an equivalent tenant's policy, regardless of (i) the amount of coverage
carried, (ii) whether such insurance is actually maintained and (iii) whether
the cost of repairing or replacing the loss or damage falls within an applicable
deductible, and any loss which is covered by any insurance policy of Landlord or
of Tenant in force at the time of such loss.
All insurance required to be maintained by a party to this Lease (in
this section or the next) shall be issued by companies reasonably acceptable to
Landlord and Tenant that are authorized to do business in the State in which the
Premises are located and that have a rating by A.M. Best of at least B++. Each
party to this Lease shall deliver to the other party current certificates of all
such insurance on a form known as ACORD 27, which certificates shall provide
that the insurer shall give the other party at least thirty (30) days notice
prior to any lapse, cancellation or material change in coverage and, if
requested by the other, copies of the actual policies, and, promptly following
request, shall deliver to the other party complete copies of the policies.
INDEMNITY AND LIABILITY INSURANCE
20. As used in this Lease, "INDEMNIFY" means the party to this Lease that
is identified shall indemnify, defend and save harmless the other party to this
Lease, and the other party's officers, directors, shareholders, members,
managers, trustees, general and limited partners and subtenants and the
employees, agents, invitees and licensees of the other party and of the other
party's subtenants, from and against any and all actions, claims, demands,
losses, damages, fines, penalties, interest charges, liabilities, judgements and
costs of every kind, including, without limitation, reasonable attorney fees and
litigation costs, asserted against or incurred by the other party, and/or the
other party's officers, directors, shareholders, members, managers, trustees,
general and limited partners and subtenants and the employees, agents, invitees
and licensees of the other party and of the other party's subtenants, in
connection with or with respect to situations, circumstances or events stated in
this Lease.
Subject to the section of this Lease titled "Waiver of Subrogation,"
Tenant shall Indemnify Landlord in connection with all third party claims for
loss of life, bodily injury or damage to property (a "CLAIM" or, collectively,
"CLAIMS") asserted against or incurred by Landlord that arise from or out of any
occurrence in, on or in connection with the Premises, except for Claims that are
the result of wilful or negligent acts or omissions of Landlord or of Landlord's
officers, directors, shareholders, members, managers, trustees, general and
limited partners, employees, agents, invitees or licensees or are the result of
a Default by Landlord under this Lease. If a Claim is asserted against or
incurred by Landlord, Tenant, upon notice thereof from Landlord and at Tenant's
cost, shall defend Landlord from the Claim by counsel reasonably acceptable to
Landlord.
Subject to the section of this Lease titled "Waiver of Subrogation,"
Landlord shall Indemnify Tenant from and against any and all Claims asserted
against or incurred by Tenant that arise from or out of any occurrence in, on or
in connection with the building, the parking areas or the Premises, but only to
the extent such Claims are the result of wilful or negligent acts or omissions
of Landlord or of
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Landlord's officers, directors, shareholders, members, managers, trustees,
general or limited partners, employees, agents, invitees or licensees or are the
result of a Default by Landlord. If such a Claim is asserted against or incurred
by Tenant, Landlord, upon notice thereof from Tenant and at Landlord's cost,
shall defend Tenant from the Claim by counsel reasonably acceptable to Tenant.
Throughout the term of this Lease, Tenant and Landlord each shall keep
in force a policy(ies) of commercial general liability insurance (on the
occurrence form) in which the limits of coverage for combined single limit
bodily injury and property damage shall be not less than Three Million and
No/100s Dollars ($3,000,000.00). Such policy(ies) shall contain a contractual
endorsement insuring Tenant's and Landlord's respective indemnity agreements set
forth in this section, to the extent such an endorsement is available. Tenant's
and Landlord's policies also will name the other as an additional insured.
DAMAGE AND DESTRUCTION
21. a. Subject to the options to terminate provided below in this section,
if the building or the Premises or the parking areas suffer an Insurable Loss or
a loss other than an Insurable Loss that is not substantial, or if any of the
parking areas suffer any loss, Landlord, at its cost, including, but not limited
to, use of all proceeds available under the All-Risk policy, shall (i) repair
and restore the building, the Premises and the parking areas to a condition
substantially equivalent to their condition immediately prior to the loss,
subject to zoning and building laws applicable at the time of the work, (ii)
commence the work with reasonable promptness and (iii) diligently pursue the
work to completion in accordance with all of the provisions of the section above
titled "Substantial Completion," except for clause a(i) of that subsection.
b. If the building or the Premises suffer a substantial loss that is
not an Insurable Loss, Landlord may terminate this Lease by notice to Tenant
given within thirty (30) days after the date of the loss. However, Tenant may
avoid such a termination if (i) Tenant gives Landlord notice, within thirty (30)
days after the date of Landlord's notice of election to terminate, that Tenant,
at Tenant's cost, will repair or restore the Premises and any other portion of
the building necessary to restore and use the Premises, with an assignment of
Landlord's interest in all proceeds available under the All-Risk Policy Landlord
is required to keep in force, (ii) the City will issue a building permit for
such work, if one is required, and (iii) Tenant commences the work with
reasonable promptness and diligently pursues the work to completion. If Tenant
does give such a termination avoidance notice, Landlord promptly shall assign to
Tenant all of its rights to make a claim, and all of the proceeds available,
under the All-Risk Policy for the loss. If Landlord does not exercise its option
to terminate, Landlord shall repair or restore the building and the Premises in
accordance with the provisions of the immediately preceding subsection. For the
purposes of this section, "SUBSTANTIAL" shall mean damage to such an extent that
the estimated cost of fully repairing the damage is greater than five percent
(5%) of the value of the building or the Premises immediately prior to the loss,
subject to zoning and building laws applicable at the time of the work.
c. If the building or the Premises suffer a loss, Landlord, after
consulting with its All-Risk Policy carrier, architect and contractors and
within thirty (30) days after the date of the loss, shall give Tenant notice of
the length of time Landlord reasonably believes it will take to complete repairs
to or restoration of the building and the Premises as provided in this section.
If such period of time is expected to be greater than one hundred eighty (180)
days after the date of the loss (the "REPAIR PERIOD"), or if Landlord fails to
give Tenant such notice, Tenant may terminate this Lease by giving notice to
Landlord within thirty (30) days after receipt of Landlord's notice of the time
it will take to repair or restore the Premises. If, during the last thirty-six
(36) months of the initial Term, and after consultation as provided in this
subsection, Landlord reasonably believes the time it will take to complete
repairs to or restoration of the building and the Premises as provided in this
section will be greater than the Repair Period, Landlord may terminate this
Lease by giving notice to Tenant of the termination at the same time it gives
Tenant notice of the expected time frame for completing repairs and restoration.
If, after commencement of repair or restoration of the building and the Premises
as provided in this section, such work cannot reasonably be expected to be
substantially complete by the end of thirty (30) days after the end of the
Repair Period, Tenant may terminate this Lease by giving notice to Landlord.
d. If this Lease is terminated under any option given in this section,
this Lease shall terminate on the date the loss or damage to the Premises
occurred. Rent shall be apportioned as of the date of termination, and any rent
paid in advance for any period beyond the date of termination shall be refunded
to Tenant.
e. Following any loss or damage that Landlord is obligated or has
elected to repair or restore, Tenant shall cooperate fully with Landlord to
facilitate Landlord's repair or restoration of the building and the Premises.
Landlord shall not be responsible to Tenant for any inconvenience arising from
such work, but rent shall be equitably prorated and abated during the period for
which, and to the extent which, the Premises are untenantable and Tenant is
unable to conduct its business from the Premises. Any rent paid in advance for
any period during which rent is to be abated shall be credited to the next
ensuing payments, if any, and if no further payments are to be made, such rent
shall be refunded promptly to Tenant.
WAIVER OF SUBROGATION
22. Notwithstanding anything to the contrary contained in this Lease, each
party to this Lease (the "RELEASING PARTY") hereby releases the other party (the
"RELEASED PARTY") from any liability which the Released Party would, but for
this section, have had to the Releasing Party during the term of this Lease for
any damage to or loss or destruction of the building or the Premises, the
property of the Releasing Party or the property of others which is under the
Releasing Party's control which results from an Insurable Loss to the building,
the Premises or to the property of, or to the property under the control of, the
Releasing Party, regardless of how such loss, damage or destruction occurs,
including, without limitation, as the result of negligent acts or omissions of
the Released Party or its officers, directors,
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shareholders, members, managers, general and limited partners, trustees,
employees, agents, subtenants, invitees or licensees. Each party to this Lease
promptly will give notice of the provisions of this section to its insurance
carriers and obtain from them any endorsements required to give effect to the
foregoing releases and, if requested, deliver reasonable evidence of such
endorsements to the other party. Provided, however, the release contained in
this section will become inoperative and null and void if the Releasing Party's
insurance carrier (a) takes the position that the existence of such a release
vitiates or would substantially adversely affect any policy so insuring the
Releasing Party, and notice thereof is given to the Released Party, or (b)
requires payment of a higher premium as the result of the existence of such a
release, unless, in the later case, the Released Party, within twenty (20) days
after notice thereof from the Releasing Party, pays such increase in premium.
HOLDING OVER
23. If Tenant retains possession of the Premises after the expiration or
termination of the Term by lapse of time or otherwise, without renewal and
extension and without Landlord's written consent, Tenant shall pay Landlord Base
Rent at a rate equal to 150% of the Base Rent payable for the month immediately
preceding the expiration or termination of the Term, and any Additional Rent,
computed on a per-month basis for each month or part thereof without reduction
for any partial month that Tenant remains in possession. If, however, such
retention of possession of the Premises is with Landlord's written consent,
Tenant shall pay Landlord Base Rent at the same rate payable for the month
immediately preceding the expiration or termination of the Term. Any retention
of possession mentioned in this section shall constitute a month-to-month lease.
The provisions of this section shall not exclude Landlord's right of re-entry or
any other right hereunder. The acceptance by Landlord of any payment of rent
subsequent to the commencement of such retention of possession by Tenant shall
not be deemed to constitute a waiver by Landlord of any of the provisions of
this section.
RULES AND REGULATIONS OF BUILDING
24. Tenant, its employees, agents, servants, invitees and guests shall
comply fully with all of the rules and regulations of the building reasonably
established by Landlord (the "RULES AND REGULATIONS"), of which Tenant receives
copies, as long as Landlord uniformly enforces the Rules and Regulations with
all of the other tenants of the building and they do not conflict with the
Provisions of this Lease. Landlord shall at all times have the right to amend
the Rules and Regulations in such reasonable manner as may be deemed advisable
for safety, care, order, control, cleanliness and exterior and interior
appearance of the Premises, building and the parking areas. The current Rules
and Regulations, marked "EXHIBIT E" are attached to and hereby incorporated into
this Lease.
RIGHTS RESERVED AND RETAINED BY LANDLORD
25. Landlord reserves the following rights, but only to the extent (a)
their exercise does not unreasonably interfere with any rights of Tenant
hereunder or any of Tenant's signs or the operation of Tenant's communication
equipment, (b) their exercise does not unreasonably interfere with the conduct
of Tenant's business at the Premises and (c) all reasonable costs incurred by
Tenant in connection with Landlord's exercise of the following rights, including
attorney and paralegal fees, are paid by Landlord to Tenant upon Tenant's
demand: (i) to name the building and to change the name or street address of the
building; (ii) to install and maintain all signs on the exterior and interior of
the building, so long as doing so does not interfere or conflict with signs
Landlord has agreed Tenant may install and maintain on the exterior and interior
of the building; (iii) to grant utility easements or other easements in, or
re-plat, subdivide or make other changes in the legal status of the land.
SUBORDINATION AND ATTORNMENT
26. a. This Lease shall be subordinate to any future Deed of Trust or
Mortgage (a "MORTGAGE") that encumbers the building, and all renewals,
modifications, amendments, extensions, assignments and participation thereof,
if the mortgagee, beneficiary or owner thereof ("MORTGAGEE") enters into a
Subordination and Non-Disturbance Agreement (an "SNDA") with Tenant that is
reasonably acceptable to Tenant and Mortgagee and that contains a provision
similar to the following:
"As long as no Event of Default by Tenant exists, Mortgagee shall not
disturb Tenant's right to possession of the Premises or any other
rights of Tenant under the Lease during the initial and subsequent
Terms of the Lease, and the Lease and all rights and obligations of the
parties to the Lease shall continue in full force and effect,
notwithstanding foreclosure of the Mortgage or transfer of the building
in lieu of foreclosure."
The word "Mortgagee(s)," as used in this Lease, shall include each Mortgagee
that exists on the Commencement Date. This Lease is contingent upon each
Mortgagee that exists on the Commencement Date entering into an SNDA with Tenant
that is reasonably acceptable to Tenant and the Mortgagee and that contains a
non-disturbance provision similar to the one quoted above in this subsection.
b. Tenant shall attorn and pay rent to an entity that acquires the
building by purchase at a foreclosure sale or by a deed in lieu of foreclosure,
and shall recognize such entity as the Landlord under this Lease, if such entity
agrees in writing with Tenant at the time of the transaction to assume this
Lease and perform all of Landlord's obligations under this Lease and
acknowledges it and Tenant are contractually bound to each other under this
Lease. Provided, however, such an agreement shall provide that such acquiring
entity shall not be (1) liable for any previous act or omission of any prior
landlord under this Lease, (2) subject to any offset, not expressly provided for
in this Lease, that accrues to Tenant against Landlord under this Lease prior to
the sale or transfer, (3) bound by any previous
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modification of this Lease not expressly provided for in this Lease or any
previous prepayment of more than one month's rent, unless such modification or
prepayment was approved in writing by Landlord and such acquiring entity or
their respective successors or assigns or (4) liable for new construction or
remodeling of leasehold improvements or reimbursement for the costs of the same
which may be required to be performed or paid for by Landlord under this Lease,
other than those required under the sections of this Lease titled "Tenant
Improvements," "Damage and Destruction," "Maintenance, Repairs and
Replacements,"and "Eminent Domain."
c. Landlord shall not allow to be foreclosed any lien against the land
granted, created or caused by Landlord that is prior to this Lease and, in
connection with which, Tenant is not a party to an SNDA.
ESTOPPEL CERTIFICATE
27. Tenant shall within ten (10) days after written request by Landlord,
deliver to Landlord in writing an executed statement certifying that: this Lease
is unmodified and in full force and effect, or in the case of Lease
modifications, that this Lease as modified is in full force and effect; the
dates to which rent or other charges have been paid; the amount, if any, of
prepaid rent and deposits paid by Tenant to Landlord; the nature and kind of
concessions, rental or otherwise, if any, which Tenant has received or is
entitled to receive; and that no Event of Default by Landlord exists, or if such
an Event of Default does exist, a detailed description thereof. Such statement
also shall include such other certifications as Landlord reasonably requests.
INTEREST
28. If an Event of Default occurs that is caused by Tenant's or Landlord's
failure to pay Base Rent, Additional Rent or any other amount due under this
Lease, interest shall accrue on all such unpaid amounts at the rate of fifteen
percent (15%) per annum from the due date until paid ("DEFAULT INTEREST").
Default Interest shall be due upon demand.
DEFAULT
29. A default ("DEFAULT") under this Lease will occur whenever any
obligation imposed by this Lease upon Tenant or Landlord is not performed or
observed on the due date stated, or in the manner provided, in this Lease, or
whenever any representation made in this Lease by either party is breached or
turns out to have been untrue or deficient when made, or whenever any warranty
made in this Lease by either party is breached or is untrue. The occurrence of
any of the following events shall constitute an event of default ("EVENT OF
DEFAULT") under this Lease:
a. Tenant fails to pay the full amount of any Base Rent, Additional
Rent or other payment due under this Lease within ten (10) days after Landlord
(i) gives Tenant notice that such payment is in Default or (ii) demands payment
of any amount Tenant is obligated to pay Landlord upon demand. Provided,
however, if Default notices concerning three (3) separate Base Rent, Additional
Rent or other payments have been given by Landlord to Tenant during any previous
eighteen (18) consecutive calendar months, a subsequent Default by Tenant in
payment of any Base Rent, Additional Rent or other payment due under this Lease
on the date it is due shall constitute an Event of Default without notice to
Tenant;
b. Tenant fails to (i) comply in a material manner with any condition,
covenant or other provision of this Lease applicable to Tenant, other than one
involving the payment of Base Rent, Additional Rent or other sums, (ii) remedy,
to Landlord's reasonable satisfaction, a material breach of any warranty made in
this Lease by Tenant, including as the result of a warranty later being
materially untrue or deficient, or (iii) correct, to Landlord's reasonable
satisfaction, the consequence to Landlord of a representation made by Tenant
that proves to have been materially false or deficient when made within thirty
(30) days after Landlord gives Tenant notice of such Default. However, if the
material Default of which Tenant is given notice cannot reasonably be remedied
within 30 days after Landlord's notice, an Event of Default will not occur
unless Tenant fails to promptly commence good faith efforts to remedy the
noticed Default within the 30 day period and, thereafter, fails to diligently
pursue such good faith efforts through remedy of the noticed Default;
c. Tenant or Landlord makes any conveyance or assignment for the
benefit of creditors, generally does not pay its debts as they become due or
admits in writing its inability to pay its debts as they become due, files a
petition commencing a voluntary case under any chapter of the Bankruptcy Code,
11 U.S.C. Sec. 101 et seq. (the "BANKRUPTCY CODE"), consents to the filing of
such a petition or acquiesces in the appointment of a trustee or receiver for
its or any substantial part of its assets or takes any action looking to its
dissolution or liquidation; or a proceeding is instituted against Tenant or
Landlord seeking the entry of an order to adjudicate it as a bankrupt or seeking
reorganization, arrangement, readjustment, liquidation, dissolution or similar
relief against it under the Bankruptcy Code, or any other present or future
federal or state statute, law, rule or regulation, which proceeding either
results in such entry or remains undismissed for sixty (60) days, or, within
sixty (60) days after the appointment without its consent of a trustee or
receiver for it or any substantial part of its assets, such appointment is not
vacated;
d. Landlord or Tenant files or has filed against it a petition under
any chapter of the Bankruptcy Code and this Lease is rejected in such Bankruptcy
proceeding;
e. The discovery of Hazardous Material in violation of Environmental
Laws at or affecting the land, the building or the Premises that was not
deposited, installed or permitted to be placed or disposed of by or on behalf of
Tenant, for which Landlord does not obtain a "no further action required" letter
pursuant to Environmental Laws or that is not removed or remediated in
accordance with Environmental Laws and within the time required by Environmental
Laws; or
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f. Landlord, or a Mortgagee mentioned below in this sentence, fails to
(i) comply in a material manner with any condition, covenant or other provision
of this Lease applicable to Landlord, (ii) remedy, to Tenant's reasonable
satisfaction, a material breach of any warranty made in this Lease by Landlord
or (iii) correct, to Tenant's reasonable satisfaction, the consequence to Tenant
of a representation made by Landlord that proves to have been materially false
or deficient when made within thirty (30) days after Tenant gives Landlord, and
all Mortgagees whose names and addresses previously have been given in a notice
to Tenant, notice of such Default. However, if the material Default of which
Landlord and such Mortgagees are given notice cannot reasonably be remedied
within 30 days after Tenant's notice, an Event of Default will not occur unless
Landlord or such Mortgagees fail to promptly commence good faith efforts to
remedy the noticed Default within the 30 day period and, thereafter, fail to
diligently pursue such good faith efforts through remedy of the noticed Default.
DEFAULT EXPENSES
30. The phrase "DEFAULT EXPENSES", as used in this Lease, means all costs
and expenses reasonably incurred by Landlord or by Tenant that are in any way
connected with a Default or an Event of Default by the other party and, unless
prohibited by law, includes, without limitation, reasonable attorney fees and
litigation costs. Upon demand, Default Expenses shall be paid by the party who
caused the other party to incur the Default Expenses.
LANDLORD'S REMEDIES
31. After occurrence of an Event of Default by Tenant, Landlord, at
Landlord's option and without further notice or demand, except as provided
below in this section, may do any of the following:
a. Reenter and resume possession of the Premises without termination of
this Lease; evict, remove and put out Tenant or any other persons who might be
in possession of, or present at, the Premises, together with all personal
property found at the Premises; and attempt to relet the Premises as Tenant's
agent in an effort to mitigate Landlord's damages. Landlord shall receive the
rental income from any reletting of the Premises as Tenant's agent and shall
apply it to the payment of, first, amounts, other than rent, owed by Tenant to
Landlord under this Lease; second, to the reasonable costs of any repair,
renovation, remodeling, redecorating and advertising of the Premises, brokerage
fees and other costs associated with Landlord's efforts to relet the Premises;
and third, rent due, and to become due, under this Lease;
b. Give Tenant notice that this Lease is terminated effective the date
stated in the notice; reenter and resume possession of the Premises for
Landlord's own benefit, free of this Lease; and evict, remove and put out Tenant
or any other persons who might be in possession of, or present at, the Premises,
together with all of Tenant's Property and all other personal property found at
the Premises. If Landlord terminates this Lease, all of Tenant's obligations to
Landlord for unpaid rent and for all other sums due under this Lease through the
date of termination shall be determined as of the date this Lease is terminated
and shall be paid by Tenant to Landlord upon demand. Additionally, upon demand,
Tenant shall be obligated to pay Landlord (1) the present value, determined as
of the date this Lease is terminated and discounted at a rate per annum equal to
the interest rate on a United States Treasury obligation with a maturity equal
or closest to the remaining term of this Lease, plus two hundred (200) basis
points, of the difference between the amount of rent reserved for the balance of
the term of this Lease and the reasonable rental value of the Premises for the
same period; and (2) all costs incurred by Landlord for repair of damage to the
Premises caused by or in connection with Tenant's or any other person's
occupying or vacating the Premises after termination of this Lease. All other
obligations of Tenant that would have come due if this Lease had not been
terminated, except for Default Expenses, shall terminate as of the date this
Lease is terminated;
c. Perform any obligation of Tenant under this Lease necessary to
remedy the Event of Default by Tenant; and
d. Pursue any and all other remedies available at law or in equity that
are not inconsistent with the provisions of this Lease.
TENANT'S REMEDIES
32. After occurrence of an Event of Default by Landlord, Tenant, at
Tenant's option, without further notice or demand, except as provided below in
this section, may do any of the following: (a) perform any obligation of
Landlord under this Lease necessary to remedy an Event of Default by Landlord
and offset all costs of doing so, and all related Default Expenses and Default
Interest, by deducting the same from Base Rent, Additional Rent and other
payments Tenant then and in the future owes and will owe Landlord under this
Lease, and Tenant shall give Landlord notice of the amount of all such offset
deductions at the time rent payments are due under this Lease; (b) terminate
this Lease by giving Landlord notice that the termination will be effective on a
date stated in the notice; and (c) pursue all other remedies available to Tenant
under this Lease, or available to Tenant at law or in equity, that are not
inconsistent with the provisions of this Lease. Provided, however, if Landlord
or a Mortgagee mentioned in subsection e of the section of this Lease titled
"Default" gives Tenant notice that Landlord or such Mortgagee disagrees with the
existence of the Event of Default for which Tenant intends to exercise its
offset rights, or disagrees with the amount Tenant intends to or might offset,
and if Tenant and Landlord are not able to resolve the disagreement within ten
(10) days after Tenant receives Landlord's notice, Tenant shall not exercise the
offset rights provided in this section unless the disagreement is resolved in
Tenant's favor, in whole or in part, and only to the extent resolved in Tenant's
favor, by the procedure outlined in the last paragraph of the section of this
Lease titled "substantial completion," if the issues involve disagreements that
are the same as or similar to those covered by that paragraph, or by two
commercial real estate agents, one designated by Landlord and
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one designated by Tenant, other than an agent who manages the building, who both
specialize in management of, and regularly manage, multiple office buildings in
the general downtown/midtown area of Kansas City, Missouri that are reasonably
similar to the building and who each have the designation of Certified Property
Manager ("CPM") given by the Building Owners and Managers Association
International ("BOMA"). If those two agents are not able to resolve a particular
disagreement, a third similarly qualified commercial office real estate agent
chosen by those two agents shall be hired by Landlord and Tenant, and the
majority decision of the three agents shall be binding upon Landlord and Tenant.
The third agent shall not have any business, social or other connections with,
or bias in favor of, Landlord or Tenant or the two agents who choose him/her.
The fees of the third agent shall be shared equally by Landlord and Tenant.
Landlord and Tenant shall diligently and in good faith cooperate with each other
and the commercial real estate agents involved to resolve the disagreements as
expeditiously as possible and shall secure commitments from such real estate
agents to do the same.
REMEDIES CUMULATIVE
33. All rights, powers, privileges and remedies of each party under this
Lease, and available to each party at law or in equity, are cumulative and are
not exclusive.
WAIVER
34. A waiver by either Landlord or Tenant of any obligation, Default or
Event of Default of, or due from, the other party under this Lease shall not be
deemed or construed to be a continuing waiver of such obligation, Default or
Event of Default nor as a waiver of, or permission for, any subsequent
obligation, Default or Event of Default. No delay or failure of either Landlord
or Tenant in exercising any right, power, privilege or remedy under this Lease,
or available at law or in equity, shall affect such right, power, privilege or
remedy, or be deemed to be a waiver thereof, nor shall any single or partial
exercise thereof, or any failure to exercise the same in any instance, preclude
any further or future exercise thereof or the exercise of any other right,
power, privilege or remedy by either Landlord or Tenant. No payment by Tenant or
receipt by Landlord of a lesser amount than the rent provided for in this Lease
shall be deemed to be other than on account of the earliest due rent. Nor shall
any endorsement or statement on any check or letter accompanying any check or
payment as rent be deemed in accord and satisfaction and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of the rent or pursue any other remedy provided for in this Lease. In
connection with the foregoing, Landlord shall have the absolute right in its
sole discretion to apply any payment received from Tenant to any amount or other
payment of Tenant then not current and due or delinquent. The receipt and
acceptance by Landlord of delinquent rent shall not constitute a waiver of any
other Default, but shall constitute only a wavier of timely payment for the
particular payment involved.
SECURITY DEPOSIT
35. Tenant at the time of execution of this Lease has deposited with
Landlord the security deposit stated in section 1 of this Lease to be held by
Landlord to guarantee the faithful performance by Tenant of all of the covenants
and conditions to be kept and performed by Tenant. Said deposit shall be
deposited in a separate interest bearing money market account at a depository
institution in the metropolitan Kansas City area that is insured by the Federal
Deposit Insurance Corporation ("FDIC") and shall not be co-mingled with other
funds. Unless and until an Event of Default by Tenant occurs, the Security
Deposit, and the interest that accrues thereon, shall be the property of Tenant.
If an Event of Default by Tenant occurs, Landlord may apply the whole or any
part of such Security Deposit toward the payment of any amount which Landlord
may be required to expend by reason of the Event of Default. If, after such
application of the Security Deposit, the Event of Default is cured, Tenant shall
pay to Landlord, on demand, the amount necessary in order to restore the
Security Deposit to its original amount. In the event that Tenant shall
faithfully and fully comply with all the covenants and conditions of this Lease,
the Security Deposit, and all accrued interest thereon, shall be returned to
Tenant within thirty (30) days of the end of the Term and upon the surrender of
the Premises. In the event of any transfer of the building, Landlord, subject to
the section of this Lease titled "Assignment and Subletting," shall pay over the
Security Deposit to the transferee to be held under the covenants and conditions
of this Lease.
TENANT'S ENVIRONMENTAL PROVISIONS
36. a. Except as provided in the next subsection, Tenant shall not deposit,
install or permit to be placed or disposed upon, over, in or under the Premises
any substance deemed hazardous ("HAZARDOUS MATERIAL") by applicable laws, rules,
governmental standards, orders or regulations promulgated by the United States
of America, or any city, county, state or other governmental entity that has
jurisdiction with respect to Hazardous Material (collectively, "ENVIRONMENTAL
LAWS"). Tenant, at Tenant's cost, shall immediately remove any Hazardous
Material deposited, installed or permitted to be placed or disposed upon, over,
in or under the Premises by or on behalf of Tenant, except for the Hazardous
Material referred to in the next subsection.
b. Landlord acknowledges the Permitted Use will result in the use and
storage of Hazardous Material at the Premises related to telecommunications
equipment and the Permitted Use, including, without limitation fuel for the
Generator. Landlord consents to use and storage of such Hazardous Material at
the Premises so long as such Hazardous Material is used and stored in compliance
with Environmental Laws.
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c. Tenant shall Indemnify Landlord in connection with any voluntary or
involuntary action by, against or involving Landlord that, in any way, results
from or relates to any breach of Tenant's covenants in this section or, except
as provided in the previous subsection but including with respect to the
Generator and the fuel for same, discovery or removal of any Hazardous Material
upon, over, under, in or emanating from the Premises that was or is deposited,
installed or permitted to be placed or disposed of by or on behalf of Tenant.
LANDLORD'S ENVIRONMENTAL PROVISIONS
37. a. Landlord represents and warrants to Tenant, to the best of
Landlord's knowledge, that, prior to Tenant taking possession of the Premises,
no Hazardous Material has emanated from nor has any Hazardous Material been
disposed of, placed or left upon, over, under or in, nor removed from, the land,
the building or the Premises, and neither the land, the building or the Premises
have been used for the generation, handling, transportation or storage of
Hazardous Material, other than Hazardous Material consented to by Landlord in
the immediately preceding section.
b. Landlord shall Indemnify Tenant in connection with any voluntary or
involuntary action by, against or involving Tenant that, in any way, results
from or relates to any breach of Landlord's covenants in this section or
discovery or removal of any Hazardous Material upon, over, under, in or
emanating from the land, the building or the Premises that was deposited,
installed or placed on, disposed of from, in existence at or removed from the
land, the building or the Premises prior to Tenant taking possession of the
Premises and that was not or is not deposited, installed or permitted to be
placed or disposed of upon, over, in or under the land, the building or the
Premises by or on behalf of Tenant, whether or not Landlord has knowledge of its
presence.
REPRESENTATIONS AND WARRANTIES
38. In addition to all other representations and warranties of Landlord and
Tenant contained in this Lease, (a) each party to this Lease represents to the
other party (i) it is properly formed and constituted as a Delaware limited
liability company, in the case of Landlord, and a Delaware corporation, in the
case of Tenant, and is in good standing with the State of Delaware and is
authorized to conduct its business in the States of Missouri, and (ii) it has
full right, title, power and authority to make, execute and deliver this Lease;
(b) Tenant represents to Landlord that any financial statements delivered to
Landlord prior to the execution of this Lease properly reflect the true and
correct value of all the assets and liabilities of Tenant; (c) Landlord
represents to Tenant (i) no Mortgages, security interests or other liens
encumber the Premises, other than 1998 and subsequent years' real estate taxes
that are not now due and payable, and the matters set forth on attached Exhibit
D; (ii) no delinquency, default or uncured event of default under any obligation
secured by a lien upon the Premises exists or is anticipated, nor has notice of
the same been given to Landlord; (iii) Landlord has not received, and does not
anticipate receiving, notice that the building, the parking areas or the
Premises, or use of the same, are in violation of any Laws; (iv) Landlord knows
of no planned or contemplated taking, taxing, assessment or other action by the
City or any other governmental authority, regulatory body or court that has
jurisdiction over the building or the parking areas or by any other party that
will or might adversely affect the Premises or Tenant's above stated intended
use of the Premises; (v) a valid agreement that will not expire during, and will
be enforceable throughout, the Term exists between Landlord and the owner of the
Freight House District surface parking lot for the number of parking spaces
stated in the section of this Lease titled "Parking" and (vi) the building and
the land have not been occupied or used by any entity since the effective date
of the July 25, 1995 Phase I Environmental Site Assessment of the land and the
building performed for Landlord by Underground Environmental Services, Inc.,
except for demolition and construction activities in the building, and (d)
Landlord warrants to Tenant that, after completion of the New Improvements, the
Premises and their use as offices will comply with Laws. Tenant and Landlord
each acknowledges the other is relying upon the accuracy and completeness of the
representations and warranties made in this section. Each party to this Lease
shall Indemnify the other party in connection with any breach or the falseness
of the party's representations and warranties made in this section.
CONDITIONS PRECEDENT
39. The effectiveness and enforceability of Tenant's obligations under this
Lease are contingent upon the following:
a. Receipt by Tenant, prior to the Commencement Date, of certificates
of insurance evidencing Landlord has secured and paid the premiums for all of
the insurance coverages it is required to carry under this Lease and, if
requested by Tenant, a copy of each insurance policy;
b. By the Commencement Date, each Mortgagee that exists on the
Commencement Date and Tenant executing an SNDA in a form reasonably acceptable
to Tenant and the Mortgagee;
c. Landlord's completion of the New Improvements, in accordance with
the time frames and the standards established in this Lease; and
d. By the Commencement Date, Landlord executing and delivering to
Tenant a Memorandum of Lease in a form reasonably acceptable to Tenant and
Landlord.
40. The effectiveness and enforceability of Landlord's obligations under
this Lease are contingent upon the following:
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a. Receipt by Landlord, prior to the Commencement Date, of certificates
of insurance evidencing Tenant has secured and paid the premiums for all of the
insurance coverages it is required to carry under this Lease and, if requested
by Landlord, a copy of each insurance policy;
b. By the Commencement Date, each Mortgagee that exists on the
Commencement Date and Tenant executing an SNDA in a form reasonably acceptable
to Tenant and the Mortgagee;
c. Landlord's completion of the New Improvements, in accordance with
the time frames and the standards established in this Lease
SURVIVAL
41. All of Landlord's and Tenant's respective (a) Indemnity and REALTOR
commission payment obligations contained in this Lease, (b) representations and
warranties made in this Lease, (c) other obligations under this Lease that have
accrued as of the date this Lease is terminated or expires and (d) remedies
provided for in this Lease shall survive termination or expiration of this
Lease.
HEADINGS
42. The titles and headings in the Lease are used only to facilitate
reference, and in no way to define or limit the scope or intent of any of the
provisions of this Lease.
ENTIRE AGREEMENT-AMENDMENTS
43. This Lease constitutes the entire agreement between the parties with
respect to the building, the parking areas and the Premises, and this Lease
covers, merges and includes all agreements, oral or written, between the parties
hereto, whether made prior to or contemporaneous with the execution of this
Lease, concerning the building, the parking areas and the Premises. This Lease
cannot be modified or changed by any verbal statement, promise or agreement, and
no modification, change nor amendment shall be binding on the parties unless it
shall have been agreed to in writing. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular or plural,
as the identity of the person or persons may require.
SEVERABILITY
44. In the event any provisions of this Lease be officially found to be
contrary to law, or void as against public policy or otherwise, such provisions
shall be either modified to conform to the law or considered severable with the
remaining provisions hereof continuing in full force and effect.
PROCUREMENT NEGOTIATED BY
45. It is understood by the parties hereto that this Lease has been
negotiated by Kerry T. Bush, ("REALTOR"). REALTOR has acted in the capacity of
Agent for Tenant. Landlord and Tenant acknowledge REALTOR and no other was the
procuring cause of this Lease. Landlord shall pay REALTOR, and no other, a
commission of three percent (3%) of the gross Base Rent for the initial Term,
half of which shall be paid to REALTOR at the time this Lease has been signed by
Landlord and Tenant, and the other half of which shall be paid to REALTOR on the
Commencement Date.
MEMORANDUM
46. Neither party to this Lease shall record this Lease. However, Landlord
shall execute and deliver to Tenant a Memorandum of Lease in form and with
content sufficient for recording to provide constructive notice of the existence
of this Lease, without disclosing the rent provisions, which Tenant may record
at its cost.
SUCCESSORS AND ASSIGNS
47. All the covenants, agreements and conditions herein contained shall
extend to, and be binding upon, the respective successors, assigns, receivers or
other representatives of the parties to this Lease.
NOTICES
48. All notices, designations, consents, approvals, requests, demands,
objections, waivers, agreements or other communications (collectively,
"NOTICES") that are required to be sent, delivered, given, made, maintained or
obtained pursuant to this Lease shall be in writing and shall be served by (a)
hand delivery by a party to this Lease if the other party or its representative
acknowledges receipt in writing, (b) prepaid certified United States mail,
return receipt requested, (c) a delivery service that provides documentation of
the delivery
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or (d) telecopier, with a copy sent the same day by either prepaid certified
United States mail, return receipt requested, or by a delivery service that
provides documentation of the delivery. All notices shall be addressed to the
Landlord at the address stated in section 1 of this Lease and to Tenant at the
Premises. Either party may, by notice in the manner provided above, change its
address for all subsequent notices. Notices shall be deemed served and received
upon the earlier of the third (3rd) day following the date of mailing, in the
case of notices mailed by United States certified mail, or upon delivery in all
other cases. Failure or refusal by a party to this Lease to accept service of a
notice shall constitute delivery of the notice.
TIME OF THE ESSENCE
49. Time is of the essence of this Lease.
EXHIBITS
50. All Exhibits that are referred to in and that are attached to this
Lease are hereby incorporated into this Lease.
CONSENTS AND APPROVALS
51. Neither party to this Lease shall unreasonably withhold, condition or
delay any consent or approval with respect to any matter for which the a party
is required or desires to obtain the other party's consent or approval under
this Lease. If the required consent or approval is withheld, the reasons for
doing so shall be stated promptly in writing. Landlord shall exercise its
discretion with respect to all matters provided for in this Lease in a manner
which reasonably recognizes the legitimate business interests and concerns of
Tenant, including but not limited to, Tenant's need to utilize the Premises in a
commercially feasible fashion.
SUPPLEMENTAL PROVISIONS
52. a. This Lease shall be construed and enforced in accordance with the
laws of the State of Missouri.
b. A directory shall be maintained in the lobby of the building by
Landlord, with the names and suite numbers of the tenants in the building
properly numbered and lettered, but if changed or added to at the request of
Tenant, Tenant shall pay the cost of same. Door signs approved by Landlord and
Tenant shall be ordered by Landlord and installed in locations agreed to by
Landlord and Tenant. Tenant will not attach to the doors or hallways any signs
or logos other than the standard building type, without Landlord's prior written
consent.
c. Upon Landlord's request, Tenant shall furnish Landlord with its most
recently audited financial statements, but not more frequently than once a year,
so long as release of such statements does not violate applicable securities
laws or court order.
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IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed by
their duly authorized undersigned representatives, in two originals, on date(s)
indicated below, to be effective as of the date stated at the beginning of this
Lease.
LANDLORD: TENANT:
FRANCOR, L.L.C., BIRCH TELECOM, INC.,
a Delaware limited liability company, a Delaware corporation,
By: /s/ J. Scott Francis By: /s/ David E. Scott
------------------------------ ---------------------------
Name: J. Scott Francis Name: David E. Scott
------------------------------ ---------------------------
Title: Member Title: President
------------------------------ ---------------------------
Date: 7/20/98 Date: July 17, 1998
------------------------------ ---------------------------
CERTIFICATE
I, Gregory C. Lawhon, the Secretary of Birch Telecom, Inc., Tenant, hereby
certify that the officer executing the foregoing Lease on behalf of Tenant was
duly authorized to act in his capacity as President of Tenant, and his actions
are the action of Tenant.
(Corporate Seal) Gregory C. Lawhon
---------------------------------------
Secretary
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EXHIBIT A
SPECIFICATIONS FOR IMPROVEMENTS TO BE MADE TO THE BUILDING
a) Building and Premises to meet all city code requirements for
entrance/egress and life/safety issues (modifications required due to
Tenant Improvements not included);
b) Building and Premises to meet all federal Americans with Disabilities
and similar State of Missouri and City of Kansas City requirements;
c) Two (2) finished fire-rated exit stairs;
d) New passenger elevator;
e) Freight elevator, connected to rear loading dock;
f) Mechanical rooms on the second and fourth floors to contain telephone
service panel and electrical and mechanical equipment for the Premises;
g) Electrical and HVAC brought to mechanical room, ready for distribution;
h) Water, drain and vent lines stubbed-out for restrooms;
i) Fully functioning sprinkler system, pipes sandblasted and sealed
(modifications required due to Tenant Improvements not included);
j) Exposed, sandblasted and sealed brick exterior walls;
k) Exposed wood ceilings, sandblasted and sealed;
l) Refinished hardwood floors;
m) Fully operational wooden sash windows (in existing penetrations),
complete with hardware.
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EXHIBIT B
SPECIFICATIONS FOR IMPROVEMENTS TO BE MADE TO THE PREMISES
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EXHIBIT C
MINIMUM JANITORIAL SERVICE SPECIFICATIONS FOR THE PREMISES
DAILY
a. Pull trash and remove it to area of the Property designated by
Landlord;
b. Replace plastic trash can liners if wet or torn;
c. Vacuum all high traffic carpeted areas;
d. Dust mop all wood and other hard surface floors;
e. Spot mop all wood and other hard surface floors with a wet mop that
has been wrung dry;
f. Clean and disinfect drinking fountains; and
g. Thoroughly clean the restrooms, including, without limitation:
i. Sanitize all fixtures;
ii. Polish bright work;
iii. Mop floors;
iv. replace all paper products and soap.
WEEKLY
a. Thoroughly vacuum all carpeted areas;
b. Dust all horizontal surfaces, excluding computer equipment, without
having to move items on such surfaces;
c. Edge vacuum along all baseboards, filing cabinets, desks and other
furniture and equipment and in all corners;
MONTHLY
a. Wash all restroom partition walls with disinfectant;
b. Dust all window blinds;
c. Dust all window sills;
d. Dust all vertical surfaces and the front and backs of all doors and
cabinets; and
e. Low dusting of all chairs, tables and other furniture.
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EXHIBIT D
LIENS AND ENCUMBRANCES ON THE LAND
Those matters noted in Scheduled B-1 and B-2 of the title insurance commitment,
dated February 16, 1998, issued for the land by Assured Quality Title Company
under commitment number MJ19860, Revision No.-1, and the Deed of Trust granted
to Missouri Bank and Trust by Landlord.
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EXHIBIT E
RULES AND REGULATIONS
1. The common areas of the building shall not be obstructed by Tenant or
used for any purpose other than for ingress and egress.
2. Landlord shall have the right to control and operate the common areas
of the building, as well as facilities or services furnished for the
common use of tenants, in such manner as it deems best for the benefit
of the tenants generally.
3. Tenant shall cooperate with Landlord in the creation of a "Plan of
Action For Evacuation Assistance" from the Premises and the building
acceptable to the Codes Administration Department of the City of Kansas
City, and shall faithfully adhere to and abide by the terms of the
Plan.
4. The Premises shall not be used for any illegal, improper, objectionable
or immoral purposes. Landlord reserves the right to exclude or expel
from the building any person who, in the judgment of Landlord, is
intoxicated or under the influence of liquor or drugs, or who shall in
any manner do any act in violation of any of the Rules and Regulations
of the building.
5. Tenant shall not disturb, solicit or canvass any occupant of the
building.
6. Tenant shall not keep any pets or other animals in the Premises without
the prior written consent of Landlord.
7. Tenant acknowledges and understands that the timber frame construction
of the building makes it likely that noise and vibration emanating both
from within and outside the building will be perceived in the Premises
from time to time. Tenant will at all times be considerate of
neighboring tenants, and use its best efforts to prevent excessive,
unwarranted or repetitive noise and vibration within the Premises and
the building.
8. There shall be no smoking in the Common Areas of the building. Landlord
reserves the right to prohibit smoking in the Premises at any time upon
written notice to Tenant.
9. Tenant shall not overload the floor of the Premises or in any way
deface the Premises or any part thereof.
10. Tenant shall not use the freight elevators for routine access to or
egress from the Premises, but only for delivery and removal of freight,
furniture and equipment.
11. All moving of furniture, freight or equipment into or out of the
building shall be done at such time and in such manner as Landlord
shall reasonably designate. Landlord shall have the right to prescribe
the weight, size and position of all heavy equipment brought into the
building.
12. Tenant shall not use or keep in the Premises or the building any
kerosene, gasoline or inflammable or combustible fluid or material
without the prior written consent of Landlord, other than for Tenant's
Generator.
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