<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
[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
------- --------
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
--------------
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. [ ]
<PAGE> 2
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.
-2-
<PAGE> 3
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.
-3-
<PAGE> 4
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.
-4-
<PAGE> 5
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 also 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
-5-
<PAGE> 6
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.
-6-
<PAGE> 7
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.
-7-
<PAGE> 8
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.
-8-
<PAGE> 9
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
-9-
<PAGE> 10
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,
-10-
<PAGE> 11
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
-11-
<PAGE> 12
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 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,
-12-
<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
-13-
<PAGE> 14
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.
-14-
<PAGE> 15
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 Internet Service Providers (ISPs).
See "Business -- Regulation -- Interconnection with ILEC Facilities." Increased
local exchange competition resulting from various legislative initiatives,
including the Telecommunications Act, may allow Bell Operating Companies (BOCs)
such as SWBT to provide long distance services under provisions of the
Telecommunications Act more quickly than had earlier been
-15-
<PAGE> 16
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
-16-
<PAGE> 17
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 state regulatory 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.
-17-
<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
-19-
<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.
-20-
<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.
-21-
<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>
-22-
<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.
-23-
<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.
-24-
<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.
-25-
<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.
-26-
<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
-27-
<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 to 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.
-28-
<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,
-29-
<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 were 9.3% to $186,000 for the year ended
December 31, 1997, compared to $205,000 for the year ended December 31, 1996.
-30-
<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
-31-
<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.
-32-
<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
-33-
<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 and Marketing
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
-34-
<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 and Marketing. 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 Capital Corporation, a management company, and general
partner of its predecessor partnership. In addition, 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.
-35-
<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
$.001 per share, and vest over a four-year period, at a rate of 6.25% per
quarter. The stock options have been adjusted to reflect the Stock Dividend
on June 23, 1998. Holders of exercised options have voting power with
respect to all shares of Common Stock underlying the options. Upon
termination of employment with the Company, Birch has the right to purchase
all options which have not vested as of that date, subject to certain
exceptions.
(b) Reflects compensation paid to Messrs. Scott and Lawhon commencing in
January 1997.
(c) Reflects compensation paid to Messrs. Chesser and Vranicar commencing in
March 1997.
(d) Mr. Sauder joined Birch after the Valu-Line acquisition and currently
serves as Vice President of the Company. Compensation listed was paid by
Valu-Line from January 1997 to February 1998.
(e) Reflects matching contributions made by the Company under its 401(k) plan.
-36-
<PAGE> 37
OPTIONS GRANTS
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1998
Stock Option Plan (the Plan). As of March 29, 1999, options to purchase a total
of 5,352,934 shares were outstanding under the Plan and options to purchase
842,911 shares remained available for grant thereunder.
The following table shows, for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at year
end by the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
-------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(C)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------
NAME GRANTED(#)(A) FISCAL YEAR(B) ($/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 $.001 with an assumed rate of appreciation
of 5% and 10%, respectively, compounded annually for 10 years.
-37-
<PAGE> 38
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES(A)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS(#) OPTIONS($)
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 options/SARs 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
-38-
<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
-40-
<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. 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>
-41-
<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 Management which provides
management of White Pines L.P. I and the Pacific Capital, L.P. investment
funds. 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 $4,750500,000 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
-42-
<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.
+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.
*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.
#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.
# To be filed by amendment
(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 MARCH 31, 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 March 31, 1999
- ---------------------------------------- (Principal Executive Officer)
DAVID E. SCOTT
/s/ BRADLEY A. MOLINE Chief Financial Officer (Principal March 31, 1999
- ---------------------------------------- Financial and Accounting Officer)
BRADLEY A. MOLINE
/s/ HENRY H. BRADLEY Director March 31, 1999
- ----------------------------------------
HENRY H. BRADLEY
/s/ STEPHEN L. SAUDER Director March 31, 1999
- ----------------------------------------
STEPHEN L. SAUDER
Director March __, 1999
- ----------------------------------------
IAN R. N. BUND
Director March 31, 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 SHEETS
December 31, 1997
(In thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 258
Accounts receivable, net of allowance of $80 and $70,
respectively............................................ 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
Income taxes payable.................................... --
------
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>
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>
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 (decrease) 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
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment financed under capital lease................................... $ -- $ --
=========== ===========
</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 435
at 10.0%...................................................
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>
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>
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
AMENDMENT NO. 1 TO INTERCONNECTION AGREEMENT
BY AND BETWEEN
SOUTHWESTERN BELL TELEPHONE COMPANY
AND
BIRCH TELECOM OF MISSOURI, INC.
The Interconnection Agreement ("the Agreement") by and between
Southwestern Bell Telephone Company ("SWBT") and Birch Telecom of Missouri, Inc.
("CLEC") dated May 27, 1998 is hereby amended as follows:
(1) Addition of the following Appendices to existing agreement:
- Operator Services (OS)
- Directory Assistance (DA)
- Resale
- Collocation
(2) The parties agree that the terms of the above-referenced Resale
Appendix shall supersede and replace the Resale Agreement Between Southwestern
Bell Telephone Company and Birch Telecom of Missouri, Inc. dated August 21, 1997
which shall terminate upon the effective date of this Resale Appendix.
(3) This Amendment shall not modify or extend the Effective Date or
Term of the underlying Agreement, but rather, shall be coterminous with such
Agreement.
(4) EXCEPT AS MODIFIED HEREIN, ALL OTHER TERMS AND CONDITIONS OF THE
UNDERLYING AGREEMENT SHALL REMAIN UNCHANGED AND IN FULL FORCE AND EFFECT, and
such terms are hereby incorporated by reference and the Parties hereby reaffirm
the terms and provisions thereof.
(5) This Amendment shall be filed with and is subject to approval by
the Public Service Commission of the State of Missouri and shall become
effective ten (10) days following approval by such Commission.
IN WITNESS WHEREOF, this Amendment to the Agreement was exchanged in
duplicate on this 18th day of November, 1998, by SWBT, signing by and through
its duly authorized representative, and CLEC, signing by and through its duly
authorized representative.
<PAGE> 2
BIRCH TELECOM OF MISSOURI, INC. SOUTHWESTERN BELL TELEPHONE COMPANY
By: /s/ Gregory C. Lawhon By: /s/ Larry B. Cooper
---------------------------- ------------------------------------
Title Senior Vice President Title: President - Industry Markets
Name: Gregory C. Lawhon Name: Larry B. Cooper
-------------------------- -------------------------------
(Print or Type) (Print or Type)
<PAGE> 1
GENERAL TERMS AND CONDITIONS - KS
PAGE 1 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
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.
<PAGE> 2
GENERAL TERMS AND CONDITIONS - KS
PAGE 2 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1.0 DEFINITIONS.............................................................5
2.0 INTERPRETATION AND CONSTRUCTION.........................................9
3.0 IMPLEMENTATION SCHEDULE AND INTERCONNECTION ACTIVATION DATES............9
4.0 INTERCONNECTION PURSUANT TO SECTION 251(c)(2)..........................10
4.1 Scope............................................................10
4.2 Interconnection Coverage.........................................10
4.3 Methods for Interconnection......................................11
4.4 Physical Architecture............................................12
4.5 Technical Specifications.........................................13
4.6 Interconnection in Additional Metropolitan Exchange Areas........13
5.0 TRANSMISSION AND ROUTING OF TELEPHONE EXCHANGE SERVICE
TRAFFIC PURSUANT TO SECTION 251(c)(2)..................................14
5.1 Scope of Traffic.................................................14
5.2 Responsibilities of the Parties..................................15
5.3 Reciprocal Compensation for Termination of Local Traffic.........15
5.4 Reciprocal Compensation for Transit Traffic......................17
5.5 Reciprocal Compensation for Termination of IntraLATA
Interexchange Traffic............................................18
5.6 Compensation for Origination and Termination of Switched
Access Service Traffic to or From an IXC (Meet-Point
Billing (MPB) Arrangements)......................................18
5.7 Billing Arrangements for Compensation for Termination
of IntraLATA, Local, Transit, and Optional Calling
Area Traffic.....................................................20
5.8 Compensation for "Porting" Optional Calling Area Numbers.........21
6.0 TRANSMISSION AND ROUTING OF EXCHANGE ACCESS TRAFFIC PURSUANT
TO 251(c)(2)...........................................................21
6.1 Scope of Traffic.................................................21
6.2 Trunk Group Architecture Traffic Routing.........................21
7.0 TRANSPORT AND TERMINATION OF OTHER TYPES OF TRAFFIC....................22
7.1 Information Services Traffic.....................................22
7.2 Line Status Verification (LSV)/Busy Line
Interrupt (BLI) Traffic..........................................22
7.3 Wireless Traffic.................................................22
8.0 SIGNALING..............................................................23
9.0 NUMBERING..............................................................23
</TABLE>
<PAGE> 3
GENERAL TERMS AND CONDITIONS - KS
PAGE 3 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
<TABLE>
<S> <C> <C>
10.0 RESALE -- SECTIONS 251(b)(1); 251(c)(4); 252(d)(3);
and 271(c)(2)(B)(xiv)..................................................25
11.0 UNBUNDLED NETWORK ELEMENTS - SECTIONS 251(c)(3), 271(c)(2)(B)
(ii),(iv),(v),(vi),(x).................................................25
12.0 NOTICE OF CHANGES -- SECTION 251(c)(5).................................25
13.0 COLLOCATION -- SECTION 251(c)(6).......................................26
14.0 NUMBER PORTABILITY -- SECTIONS 251(b)(2)and 271(c)(2)(B)(xi)...........26
15.0 DIALING PARITY -- SECTION 251(b)(3); 271(c)(2)(B)(xii);
and 271(e)(2)..........................................................26
16.0 ACCESS TO RIGHTS-OF-WAY -- SECTION 251(b)(4) and 271(c)(2)(B)(iii).....26
17.0 DATABASE ACCESS -- SECTION 271(c)(2)(B)(x)............................27
18.0 INTERCEPT REFERRAL ANNOUNCEMENTS.......................................27
19.0 COORDINATED REPAIR CALLS...............................................27
20.0 OTHER SERVICES 271(c)(B)(2)(vii) and 271(c)(2)(B)(viii)................28
20.1 White Pages......................................................28
20.2 Calling Name Information.........................................28
20.3 Billing/Collecting/Remitting ...................................28
20.4 911/E911 Service ...............................................28
20.5 Directory Assistance (DA)........................................28
20.6 Direct Access (DIRECT)...........................................28
20.7 Operator Services................................................28
20.8 Clearinghouse Services ..........................................28
20.9 Hosting..........................................................29
20.10 Signaling System 7 Interconnection...............................29
21.0 GENERAL RESPONSIBILITIES OF THE PARTIES................................29
22.0 EFFECTIVE DATE, TERM, AND TERMINATION..................................31
23.0 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES...........................32
24.0 CHANGES IN END USER LOCAL EXCHANGE SERVICE PROVIDER SELECTION..........32
25.0 SEVERABILITY...........................................................33
26.0 INTELLECTUAL PROPERTY..................................................33
</TABLE>
<PAGE> 4
GENERAL TERMS AND CONDITIONS - KS
PAGE 4 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
<TABLE>
<S> <C> <C>
27.0 INDEMNIFICATION........................................................33
28.0 LIMITATION OF LIABILITY................................................36
29.0 REGULATORY APPROVAL....................................................36
30.0 MISCELLANEOUS..........................................................36
30.1 Authorization...................................................36
30.2 Compliance and Certification....................................37
30.3 Law Enforcement.................................................37
30.4 Independent Contractor..........................................38
30.5 Force Majeure...................................................38
30.6 Confidentiality.................................................39
30.7 Governing Law...................................................40
30.8 Taxes...........................................................40
30.9 Non-Assignment..................................................41
30.10 Non-Waiver......................................................42
30.11 Audits..........................................................42
30.12 Disputed Amounts................................................42
30.13 Disputed Resolutions............................................43
30.14 Notices.........................................................47
30.15 Publicity and Use of Trademarks or Service Marks................47
30.16 Section 252(i) Obligations......................................48
30.17 Joint Work Product..............................................48
30.18 Intervening Law.................................................48
30.19 No Third Party Beneficiaries; Disclaimer of Agency..............48
30.20 No License......................................................48
30.21 Survival........................................................48
30.22 Scope of Agreement..............................................49
30.23 Entire Agreement................................................49
30.24 Performance Measurements........................................49
30.25 Remedies........................................................49
</TABLE>
<PAGE> 5
GENERAL TERMS AND CONDITIONS - KS
PAGE 5 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
INTERCONNECTION AGREEMENT UNDER SECTIONS 251 AND 252 OF THE
TELECOMMUNICATIONS ACT OF 1996
This Interconnection Agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 ("Agreement"), is by and between Southwestern
Bell Telephone Company, a Missouri Corporation ("SWBT"), and Birch Telecom of
Kansas, Inc., formerly known as Valu-Line of Kansas, Inc. ("CLEC").
WHEREAS, the Parties want to interconnect their networks at mutually
agreed upon points of interconnection to provide, directly or indirectly,
Telephone Exchange Services and Exchange Access to residential and business end
users predominantly over their respective telephone exchange service facilities
in Kansas; and
WHEREAS, the Parties are entering into this Agreement to set forth the
respective obligations of the Parties and the terms and conditions under which
the Parties will interconnect their networks and provide other services as
required by the Telecommunications Act of 1996 ("the Act") and additional
services as set forth herein; and
WHEREAS, for purposes of this Agreement, the Parties intend to operate
where SWBT is the incumbent local exchange carrier and CLEC, a competitive local
exchange carrier, is certified by the State Corporation Commission of the State
of Kansas as required.
NOW, THEREFORE, CLEC and SWBT hereby agree as follows:
The terms of this Agreement shall supersede and replace the Resale
Agreement Between Southwestern Bell Telephone Company and Valu-Line of Kansas,
Inc., approved on July 14, 1997 (including the amendment which was approved on
August 7, 1998), which shall terminate upon the effective date of this
Agreement.
1.0 DEFINITIONS
1.1 "Act" means the Communications Act of 1934, 47 U.S.C. 151 et. seq.,
as amended by the Telecommunications Act of 1996.
1.2 "Affiliate" is as defined in the Act.
1.3 "Automatic Number Identification" or "ANI" is a switching system
feature that forwards the telephone number of the calling party and is used for
screening, routing and billing purposes.
1.4 "Busy Line Interrupt" or "BLI" is performed when one Party's
operator bureau interrupts a telephone number in progress after Line Status
Verification has occurred. The operator bureau will interrupt the busy line and
inform the called party that there is a call waiting.
<PAGE> 6
GENERAL TERMS AND CONDITIONS - KS
PAGE 6 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
1.5 "Calling Party Number" or "CPN" is a feature of signaling system
7 (SS7) protocol whereby the ten (10) digit number of the calling party is
forwarded from the end office.
1.6 "Central Office Switch" means a single switching system within the
public switched telecommunications network, including the following:
(i) "End Office Switches" which are Class 5 switches where
end user Exchange Services are directly connected and
offered; and
(ii) "Tandem Office Switches" or "Tandems" which are Class 4
switches used to connect and switch trunk circuits between
Central Office Switches.
Central Office Switches may be employed as combination End Office/Tandem Office
switches (combination Class 5/Class 4).
1.7 "CLASS Features" mean certain CCS-based features available to end
users including, but not limited to: Automatic Call Back; Call Trace; Caller
Identification and related blocking features; Distinctive Ringing/Call Waiting;
Selective Call Forward; and Selective Call Rejection.
1.8 "Collocation" means an arrangement whereby one Party's (the
"Collocating Party") facilities are terminated in its equipment necessary for
Interconnection or for access to Network Elements on an unbundled basis which
has been installed and maintained at the premises of a second Party (the
"Housing Party"). Collocation may be "physical" or "virtual." In "Physical
Collocation," the Collocating Party installs and maintains its own equipment in
the Housing Party's premises. In "Virtual Collocation," the Housing Party
installs and maintains the collocated equipment in the Housing Party's premises.
Collocation includes, but is not limited to, collocation of 38 GHz basic
transmission equipment, provided it complies with the guidelines in SWBT's
current Physical Collocation Technical Publication provided to CLEC.
1.9 "Commission" or "SCC" means the State Corporation Commission of the
State of Kansas.
1.10 "Common Channel Signaling" or "CCS" is a special network, fully
separate from the transmission path of the public switched network, that
digitally transmits call set-up and network control data. Unless otherwise
agreed by the Parties, the CCS used by the Parties shall be SS7.
1.11 "Cross Connect" means the unbundled network element cross connect
rate element which is used to designate connection between: i) the SWBT
distribution frame and an unbundled network element component, or ii) two
unbundled network element components, or iii) the SWBT distribution frame and
the tie cable termination point for CLEC collocation.
<PAGE> 7
GENERAL TERMS AND CONDITIONS - KS
PAGE 7 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
1.12 "Dialing Parity" is as defined in the Act. As used in this
Agreement, Dialing Parity refers to both Local Dialing Parity and Toll Dialing
Parity.
1.13 "Digital Signal Level" means one of several transmission rates in
the time-division multiplex hierarchy.
1.14 "Digital Signal Level 0" or "DS0" means the 64 Kbps zero-level
signal in the time-division multiplex hierarchy.
1.15 "Digital Signal Level 1" or "DS1" means the 1.544 Mbps first-level
signal in the time-division multiplex hierarchy. In the time-division
multiplexing hierarchy of the telephone network, DS1 is the initial level of
multiplexing.
1.16 "Digital Signal Level 3" or "DS3" means the 44.736 Mbps
third-level in the time-division multiplex hierarchy. In the time-division
multiplexing hierarchy of the telephone network, DS3 is defined as the third
level of multiplexing.
1.17 "End User" means a third-party residence or business, that
subscribes to Telecommunications Services provided by either of the Parties, or
by another telecommunications service provider.
1.18 "Exchange Access" is as defined in the Act.
1.19 "Exchange Message Record" or "EMR" means the standard used for
exchange of Telecommunications message information among Telecommunications
Carriers for billable, non-billable, sample, settlement and study data. EMR
format is contained in Bellcore Practice BR-010-200-010 CRIS Exchange Message
Record.
1.20 "Fiber-Meet" means an Interconnection architecture method whereby
the Parties physically interconnect their networks via an optical fiber
interface (as opposed to an electrical interface) at a mutually agreed upon
location.
1.21 "Interconnection" is as Described in the Act and refers to the
connection of separate pieces of equipment, facilities, or platforms between or
within networks for the purpose of transmission and routing of Telephone
Exchange Service traffic and Exchange Access traffic.
1.22 "Interconnection Activation Date" is the date that the
construction of the joint facility Interconnection arrangement has been
completed, trunk groups have been established, and joint trunk testing is
completed.
1.23 "Interexchange Carrier" or "IXC" means a carrier that provides,
directly or indirectly, interLATA or intraLATA Telephone Toll Services. For
purposes of Section 6.0 of this Agreement, the term "IXC" includes any entity
which purchases FGB or FGD Switched Exchange Access Service in order to
originate or terminate traffic to/from CLEC's end users.
<PAGE> 8
GENERAL TERMS AND CONDITIONS - KS
PAGE 8 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
1.24 "IntraLATA Toll Traffic" means those intraLATA station calls that
are not defined as Local Traffic in this Agreement.
1.25 "Line Status Verification" or "LSV" or "Busy Line Verify" or "BLV"
is performed when one Party's end user requests assistance from the operator
bureau to determine if the called line of the other Party is in use.
1.26 "Local Traffic," for purposes of intercompany compensation, is if
(i) the call originates and terminates in the same SWBT exchange area; or (ii)
originates and terminates within different SWBT Exchanges that share a common
mandatory local calling area, e.g., mandatory Extended Area Service (EAS),
mandatory Extended Local Calling Service (ELCS), or other like types of
mandatory expanded local calling scopes.
1.27 "Losses" means any and all losses, costs (including court costs),
claims, damages (including fines, penalties, and criminal or civil judgments and
settlements), injuries, liabilities and expenses (including attorneys' fees).
1.28 "MECAB" refers to the Multiple Exchange Carrier Access Billing
(MECAB) document prepared by the Billing Committee of the Ordering and Billing
Forum (OBF), which functions under the auspices of the Carrier Liaison Committee
(CLC) of the Alliance for Telecommunications Industry Solutions (ATIS). The
MECAB document, published by Bellcore as Special Report SR-BDS-000983, contains
the recommended guidelines for the billing of access services provided to an IXC
by two or more LECs, or by one LEC in two or more states within a single LATA.
The latest release is issue No. 5, dated June 1994.
1.29 "MECOD" refers to the Multiple Exchange Carriers Ordering and
Design (MECOD) Guidelines for Access Services - Industry Support Interface, a
document developed by the Ordering/Provisioning Committee of the Ordering and
Billing Forum (OBF), which functions under the auspices of the Carrier Liaison
Committee (CLC) of the Alliance for Telecommunications Industry" Solutions
(ATIS). The MECOD document, published by Bellcore as Special Report SR
STS-002643, establishes methods for processing orders for access service which
is to be provided to an IXC by two or more telecommunications providers. The
latest release is issue No. 3, dated February 1996.
1.30 "Meet-Point Billing" or "MPB" refers to a billing arrangement
whereby two or more Telecommunications Carriers jointly provide for switched
access service to an IXC, with each LEC receiving an appropriate share of its
switched access revenues as defined by its effective access tariffs.
1.31 "Metropolitan Exchange Area" means a geographical area defined in
SWBT current tariffs effective as a metropolitan exchange local calling area.
For example, Dallas, Ft. Worth, Houston, Little Rock, Oklahoma City, St. Louis,
Austin and would be examples of Metropolitan Exchange Areas.
<PAGE> 9
GENERAL TERMS AND CONDITIONS - KS
PAGE 9 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
1.32 "Network Element Bona Fide Request" means the process described in
Appendix UNE that is attached hereto and incorporated herein that prescribes the
terms and conditions relating to a Party's request that the other Party provide
a Network Element.
1.33 "Switched Exchange Access Service" means the offering of
transmission or switching services to Telecommunications Carriers for the
purpose of the origination or termination of Telephone Toll Service. Switched
Exchange Access Services include, but are not necessarily limited to: Feature
Group A, Feature Group B, Feature Group D, 800/888 access, and 900 access and
their successors or similar Switched Exchange Access services.
1.34 "Synchronous Optical Network" or "SONET" means an optical
interface standard that allows inter-networking of transmission products from
multiple vendors. The base rate is 51.84 Mbps (OC-1/STS-1) and higher rates are
direct multiples of the base rate, up to 13.22 Gpbs.
1.35 "Telephone Exchange Service" is as defined in the Act.
1.36 "Wire Center" means an occupied structure or portion thereof in
which a Party has the exclusive right of occupancy and which serves as a Routing
Point for Switched Exchange Access Service.
2.0 INTERPRETATION AND CONSTRUCTION
In the event of any amendment of the Act or any legislative,
regulatory, judicial order, rule or regulations, or other legal action that
revises or reverses the Act, the FCC's Orders in FCC Docket Nos. 96-98 and
95-185 or any applicable order or arbitration award purporting to apply the
provisions of the federal Act, the Parties reserve all of their rights and
remedies, including those to amend, alter, or revise this Agreement.
3.0 IMPLEMENTATION SCHEDULE AND INTERCONNECTION ACTIVATION DATES
Subject to the terms and conditions of this Agreement, Interconnection
of the Parties' facilities and equipment pursuant to Sections 4.0, 5.0 and 6.0
for the transmission and routing of Telephone Exchange Service traffic and
Exchange Access traffic shall be established on or before the corresponding
"Interconnection Activation Date" shown for each such Metropolitan Exchange Area
on Appendix DCO attached hereto and incorporated by reference. Appendix DCO may
be revised and supplemented from time to time upon the mutual agreement of the
Parties to reflect the Interconnection of additional Metropolitan Exchange Areas
pursuant to Section 4.6 by modifying or updating Appendix DCO.
<PAGE> 10
GENERAL TERMS AND CONDITIONS - KS
PAGE 10 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
4.0 INTERCONNECTION PURSUANT TO SECTION 251(C)(2)(A),(B),(C); 47 CFR
SS. 51.305(a)(1)
4.1 SCOPE
This Section 4.0 describes the physical architecture for
Interconnection of the Parties' facilities and equipment for the transmission
and routing of Telephone Exchange Service traffic and Exchange Access traffic
pursuant to Section 251(c)(2) of the Act. Such Interconnections shall be equal
in quality to that provided by the Parties to themselves or to any subsidiary,
affiliate or Third Party. Appendix ITR attached hereto and incorporated by
reference prescribes the specific trunk groups (and traffic routing parameters)
which will be configured over the physical connections described in this Section
4.0 to provide the facilities for the transmission and routing of Telephone
Exchange Service traffic (as described in Section 5.0), Exchange Access traffic
(as described in Section 6.0), LSV/BLI traffic (as described in sub-section
7.2).
4.2 INTERCONNECTION COVERAGE SS. 251(c)(2)(B) AND (C), 47 CFR SS.
51.305(a)(2)
The Parties shall provide for interoperation of their networks that is
at least equal in quality to that provided by SWBT to itself or to any
subsidiary, affiliate, or any other party to which SWBT provides interconnection
and shall interconnect at any technically feasible point in their network as
stated below:
4.2.1. CLEC shall interconnect with SWBT's facilities as follows:
a. In each SWBT exchange area in which CLEC chooses to offer
local exchange service, CLEC, at a minimum, will
interconnect its network facilities to: (a) the SWBT access
tandem(s) for which the CLEC's NXX subtend in the Local
Exchange Routing Guide (LERG), and (b) to either each SWBT
local tandem(s) or each SWBT end office(s) ("EO") subtending
that local tandem(s) or (c) all end offices serving such
exchange where SWBT has no local tandem. SWBT EOs and tandems
through which CLEC will terminate its traffic will be called
SWBT Interconnection Wire Centers and are identified in
Appendix DCO. As CLEC initiates Exchange Service operations
in additional SWBT exchange areas, SWBT and CLEC shall agree
upon additional SWBT Interconnection Wire Centers in each
new exchange area. CLEC agrees that if SWBT establishes
additional tandems in an exchange area within which CLEC
offers local exchange service, CLEC will interconnect to the
additional tandems.
b. Interconnection to a SWBT local tandem(s) will provide CLEC
local access to the SWBT end offices and NXXs which subtend
that tandem(s), and to other Local Exchange Carriers ("LECs")
(subject to sub-section 5.4) which are connected to that
tandem(s). Interconnection to SWBT EO(s) will
<PAGE> 11
GENERAL TERMS AND CONDITIONS - KS
PAGE 11 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
provide CLEC access only to the NXXs served by that
individual EO(s) to which CLEC interconnects.
c. Interconnection to a SWBT access tandem will provide CLEC
interexchange access to SWBT, IXCs, LECs and CRMS providers
(subject to sub-section 7.3) which are connected to that
tandem. Where an access tandem also provides local tandem
functions, interconnection to a SWBT access tandem serving
that exchange will also provide CLEC access to SWBT's EOs
with the same functionality described in (b) above.
d. Where CLEC requires ancillary services (e.g., Directory
Assistance, Operator Assistance, E911/911) additional
interconnection to SWBT's Interconnection Wire Center(s) or
special trunking will be required for interconnection to
such ancillary services.
4.2.2. SWBT shall interconnect with CLEC's facilities under terms
and conditions no less favorable than those identified in sub-section 4.2.1,
above.
4.3 METHODS FOR INTERCONNECTION
Where the Parties interconnect, for the purpose of exchanging traffic
between networks, the Parties may use the following interconnection methods for
each Tandem and End Office identified in Appendix DCO making use of facilities
they own or lease from a third party or SWBT.
4.3.1 Physical Collocation Interconnection ("PCI") - Where CLEC
provides fiber cable and connects to its equipment located in the SWBT Wire
Center. CLEC owns and maintains CLEC's equipment.
4.3.2 Virtual Collocation Interconnection ("VCI") - Where CLEC
provides fiber cable to SWBT for connection to CLEC-designated basic
transmission equipment dedicated solely for CLEC's use, located in the SWBT
Interconnection Wire Center. SWBT owns and maintains the basic transmission
equipment at the SWBT Interconnection Wire Center. This option shall be
consistent with the terms of SWBT's virtual collocation tariff.
4.3.3 SONET-Based Interconnection ("SBI") - Where CLEC provides
fiber cable to SWBT for connection to SWBT-designated basic transmission
equipment located at the SWBT Interconnection Wire Center and dedicated solely
for CLEC's use. SWBT owns and maintains the basic transmission equipment. This
option shall be consistent with SWBT's SBI tariff.
4.3.4 Leased Facility Interconnection ("LFI") - Where facilities
exist, either Party may lease facilities from the other Party as defined in
Section 7 of Appendix NIM.
<PAGE> 12
GENERAL TERMS AND CONDITIONS - KS
PAGE 12 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
4.3.5 Mid-span Fiber Interconnection ("NIM") - Where the Parties
agree to interconnect through SONET technology, using a Fujitsu originating line
terminating multiplexer fiber optic terminal ("FOT") details of this
architecture are addressed in Appendix NIM attached hereto and incorporated by
reference. This interconnection arrangement is limited to interconnecting
trunks.
4.3.6 Other interconnection methods, as negotiated by the parties,
which interconnect CLEC's and SWBT's networks (1) for the transmission and
routing of telephone exchange traffic, exchange access traffic, or both; (2) at
any technically feasible point within SWBT's network including: (1) the
line-side of a local switch; (ii) the trunk-side of a local switch, (iii) the
trunk interconnection points for a tandem switch; (iv) central office
cross-connect points; (v) out-of-band signaling transfer points necessary to
exchange traffic at these points and access call related databases, and (vi) the
points of access to unbundled network elements; (3) that is a level of quality
that is equal to that which SWBT provides itself, a subsidiary, an affiliate, or
any other party. If CLEC requests, and to the extent technically feasible, SWBT
shall negotiate interconnection that is superior or lesser in quality to that
provided by SWBT to itself or any subsidiary, affiliate, or any other party to
which the incumbent LEC provides interconnection.
4.4 PHYSICAL ARCHITECTURE. Using one or more of the Interconnection
Methods described in Section 4.3 above, the Parties will agree on a physical
architecture plan. This plan will be documented within Appendix DCO. The Parties
agree to deploy one physical architecture plan per Metropolitan Serving Area.
The two architecture arrangements, End Point Meet and Mid-Point Meet, are
discussed below. Additional physical architectures, as yet undefined, may evolve
during the term of this Agreement. These future as yet undefined architectures
can be deployed if mutually agreed upon.
4.4.1 End Point Meet. Using the "End Point Meet" architecture,
the Parties will establish transport facilities from their own Central Office(s)
to the other party's Central Office(s) utilizing any method of interconnection
described in Section 4.3 above. Unless otherwise mutually agreed upon, each
Party will use its own transport facilities to provide its trunking as set forth
in Appendix ITR. Each Party will be responsible for the appropriate sizing,
operation, and maintenance of its own transport facilities. If initially
deployed as an End Point Architecture, the deployment architecture may be
migrated or groomed, upon mutual agreement, to a Mid-Point Meet architecture.
4.4.2 Mid-Point Meet. Using the Mid-Point Meet architecture, the
Parties will agree upon a Point of Interconnection (POI). The POI functions as a
demarcation point for each Party. Each Party is responsible to transport all
trunking to its side of the POI utilizing any method of interconnection
described in Section 4.3 above. Each Party is responsible for the appropriate
sizing, operation, and maintenance of the transport facility and trunking to the
POI.
4.4.2.1 A second POI can be established to eliminate a
"single point of failure" when mutually agreed upon. The establishment of the
second POI should not
<PAGE> 13
GENERAL TERMS AND CONDITIONS - KS
PAGE 13 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
require additional or increased trunking or facilities of either Party. Trunking
from the initial POI will be groomed or augmented to the second POI upon mutual
agreement.
4.4.2.2 When required, based on guidelines established
pursuant to Appendix ITR, either Party may trunk directly to the other Party's
EO. If the Party is virtually or physically collocated to the EO, then that
collocation will be designated a POI. This collocation will be used for the
transport of direct EO trunking, in addition to other uses. The collocated Party
is responsible for the appropriate sizing, operation, and maintenance of the
transport facility. In the instance where the Party is not collocated, the EO
trunk group will be handed off at the original POI and both Parties will be
responsible for the transport facility on their side of that POI.
4.4.2.3 Unless otherwise mutually agreed upon, when
Mid-Point Meet architecture has been deployed, it will remain as the
architecture of choice during the term of this Agreement.
4.5 TECHNICAL SPECIFICATIONS
4.5.1 CLEC and SWBT shall work cooperatively to install and
maintain a reliable network. CLEC and SWBT shall exchange appropriate
information (e.g., maintenance contact numbers, network information, information
required to comply with law enforcement and other security agencies of the
Government and such other information as the Parties shall mutually agree) to
achieve this desired reliability.
4.5.2 CLEC and SWBT shall work cooperatively to apply sound
network management principles by invoking network management controls to
alleviate or to prevent congestion.
4.5.3 Technical Publications describe the practices,
procedures, specifications and interfaces generally utilized by SWBT, are listed
in Appendix TP attached hereto and incorporated by reference. Appendix TP will
herein assist the Parties in meeting their respective Interconnection
responsibilities. Copies of the publications listed in Appendix TP have been or
shall be provided to CLEC by SWBT.
4.6 INTERCONNECTION IN ADDITIONAL METROPOLITAN EXCHANGE AREAS
4.6.1 If CLEC decides to offer Telephone Exchange Services in
any other Metropolitan Exchange and Areas in which SWBT also offers Telephone
Exchange Services, CLEC shall provide written notice to SWBT of the need to
establish Interconnection in such Metropolitan Exchange Areas pursuant to this
Agreement.
4.6.2 The notice provided in Section 4.6.1 shall include: (i)
the initial Routing Point CLEC has designated in the Metropolitan Exchange Area;
(ii) CLEC's requested
<PAGE> 14
GENERAL TERMS AND CONDITIONS - KS
PAGE 14 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
Interconnection Activation Date; and (iii) a non-binding forecast of CLEC's
trunking requirements.
4.6.3 Unless otherwise agreed by the Parties, the Parties
shall designate the Wire Center that CLEC has identified as its initial Routing
Point in the Metropolitan Exchange Area as CLEC Interconnection Wire Center
("IWC") in that Metropolitan Exchange Area and shall designate the SWBT Tandem
Office Wire Center within the Metropolitan Exchange Area nearest to the IWC (as
measured in airline miles utilizing the V&H coordinates method) as the SWBT
Interconnection Wire Center (SIWC) in that Metropolitan Exchange Area.
4.6.4 Unless otherwise agreed by the Parties, the
Interconnection Activation Date in each new Metropolitan Exchange Area shall be
the one-hundred and fiftieth (150th) day following the date on which CLEC
delivered notice to SWBT of the need to establish Interconnection pursuant to
Section 4.6.1 above. Within ten (10) business days of SWBT's receipt of CLEC's
notice, SWBT and CLEC shall confirm their respective Wire Centers to be
Interconnected and the Interconnection Activation Date for the new Metropolitan
Exchange Area by attaching a supplementary schedule to Appendix DCO.
5.0 TRANSMISSION AND ROUTING OF TELEPHONE EXCHANGE SERVICE TRAFFIC PURSUANT
TO SECTION 251(c)(2)(D); 252(d)(1) AND (2); 47 CFR SS. 51.305(a)(5)
5.1 SCOPE OF TRAFFIC
This Section 5.0 prescribes parameters for Traffic Exchange trunk
groups the Parties shall establish over the Interconnections specified in
Section 4.0. The Parties shall allow for the Traffic Exchange trunk groups
specified in this Section 5.0 and in Appendix ITR for the transmission and
routing of all Local and IntraLATA Toll Traffic between the Parties' respective
Telephone Exchange Service end users.
5.1.1 For purposes of compensation under this Agreement, the
telecommunications traffic traded between CLEC and SWBT will be classified as
either Local Traffic, Transit Traffic, Optional Calling Area Traffic, IntraLATA
Interexchange Traffic, InterLATA Interexchange Traffic, or FGA Traffic. The
compensation arrangement for the joint provision of Feature Group A (FGA)
Services is covered in Appendix FGA, attached hereto and incorporated herein by
reference. The Parties agree that, notwithstanding the classification of traffic
under this Agreement, either Party is free to define its own "local" calling
area(s) for purposes of its provision of Telecommunications Services to its end
users.
5.1.2 For purposes of reciprocal compensation this Agreement
recognizes the unique status of traffic originated by and passed to Internet
Service Providers (ISP). These providers have historically been subject to an
access charge exemption by the FCC which permits the use of Basic Exchange
Telecommunications Service as a substitute for switched access service. The
Parties recognize the interstate, or at the very least, interexchange, nature of
the
<PAGE> 15
GENERAL TERMS AND CONDITIONS - KS
PAGE 15 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
great majority of internet calls. Therefore the Parties agree that such calls
are not properly the subject of reciprocal compensation under the Act. The
Parties will exempt traffic originated to an ISP from the reciprocal
compensation arrangements of this Agreement.
5.1.3 Calls originated by one Party's end user and terminated
to the other Party's end user will be classified as "Local Traffic" under this
Agreement if the call: (i) originates and terminates in the same SWBT exchange
area; or (ii) originates and terminates within different SWBT Exchanges that
share a common mandatory local calling area, e.g., mandatory Extended Area
Service (EAS), mandatory Extended Local Calling Service (ELCS), or other like
types of mandatory expanded local calling scopes.
5.2 RESPONSIBILITIES OF THE PARTIES
5.2.1 Each Party to this Agreement will be responsible for the
accuracy and quality of its data as submitted to the respective Parties
involved.
5.2.2 Each Party will include in the information transmitted
to the other for each call being terminated on the other's network (where
available), the originating Calling Party Number (CPN).
5.2.3 If the percentage of calls passed with CPN is greater
than ninety percent (90%), all calls exchanged without CPN information will be
billed as either Local Traffic or IntraLATA Toll Traffic in direct proportion to
the minutes of use (MOU) of calls exchanged with CPN information. If the
percentage of calls passed with CPN is less than ninety percent (90%), the
parties agree to investigate the reason and work together to correct any
solvable problems uncovered. In the interim, where CPN is not passed, the
parties will bill switched access.
5.2.4 The type of originating calling number transmitted
depends on the protocol of the trunk signaling used for interconnection.
Traditional toll protocol will be used with Multi-Frequency (MF) signaling, and
ANI will be sent from the originating Party's end office switch to the
terminating Party's tandem or end office switch.
5.2.5 Where one Party is passing CPN but the other party is
not properly receiving information, the Parties will cooperate to rate the
traffic correctly.
5.3 RECIPROCAL COMPENSATION FOR TERMINATION OF LOCAL TRAFFIC
5.3.1 The Compensation set forth below will apply to all Local
Traffic as defined in sub-section 5.1.2 of this Agreement.
5.3.2 Applicability of Rates
i) The rates, terms, conditions in this Section 5.3
apply only to the termination of Local Traffic,
except as explicitly noted.
<PAGE> 16
GENERAL TERMS AND CONDITIONS - KS
PAGE 16 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
ii) The Parties agree to compensate each other for
the termination of Local Traffic on a minute of
use (MOU) basis.
5.3.3 Rate Elements
5.3.3.1 A Tandem Served rate element is applicable to
Tandem Routed Local Traffic on a terminating local MOU basis and includes
compensation for the following sub-elements:
i) Tandem Switching - compensation for the use
of tandem switching functions.
ii) Tandem Transport - compensation for the
transmission facilities between the local
tandem and the end offices subtending that
tandem.
iii) End Office Switching - compensation for
the local EO office switching and line
termination functions necessary to complete the
transmission.
5.3.3.2 An End Office Served rate element applies to
direct-routed Local Traffic on a terminating local MOU basis and includes
compensation for End Office Switching. This includes direct-routed Local Traffic
that terminates to offices that have combined tandem and End Office functions.
5.3.4 Local Traffic Interconnection Rates
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Serving Method Prices Per Prices Per Prices Per
MOU MOU MOU
Zone A Zone B Zone C
----------------------------------------------------------------------
<S> <C> <C> <C>
Tandem Served
- Tandem Switching $0.002335 $0.002335 $0.002335
- Tandem Transport $0.000609 $0.000609 $0.000609
- End Office Switching $0.006708 $0.006405 $0.006891
-----------------------------------------------------------------------
End Office Served
- End Office Switching $0.006708 $0.006405 $0.006891
-----------------------------------------------------------------------
</TABLE>
5.3.5 If the difference between the local traffic volumes
flowing between the two networks is within a 10%
differential, the Parties will assess each other the
full symmetrical transport and termination rates as
outlined in Section 5.3.4. The ten percent threshold
should be calculated on a per-minute basis. When
local traffic exceeds the 10% differential, the Parties
<PAGE> 17
GENERAL TERMS AND CONDITIONS - KS
PAGE 17 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
will discount all amounts over the 10% differential by
75% of the rates outlined in Section 5.3.4.
5.4 RECIPROCAL COMPENSATION FOR TRANSIT TRAFFIC
5.4.1 Transit Traffic allows one Party to send traffic to a
third party network through the other Party's tandem. A Transit Traffic rate
element applies to all MOUs between a Party and third party networks that
transit the other Party's tandem switch. The originating Party is responsible
for the appropriate rates unless otherwise specified. The Transit Traffic rate
element is only applicable when calls do not originate with (or terminate to)
the transit Party's end user. The two categories of Transit Traffic are: i)
Local, and ii) Optional Area. The following details when each element applies:
i) The Local Transit Traffic rate element applies when
both the originating and terminating end users are
within SWBT local and mandatory exchanges.
ii) The Optional Area Transit Traffic rate element
applies when one end user is in a SWBT optional
exchange which is listed in Appendix Map and the
other end user is within the SWBT local or mandatory
exchanges. The Parties agree also to apply the
Optional Area Transit rate to traffic terminating
to third party incumbent LECs that share a common
mandatory local calling area with all SWBT exchanges
included in a specific metropolitan exchange area.
ILEC mandatory exchanges are listed in Appendix Map.
5.4.1.1 The Parties acknowledge that traffic
originated in third party incumbent LEC mandatory exchange areas as
listed in Appendix Map, which is attached hereto and incorporated by
reference, may traverse the SWBT tandem and terminate in other third
party LEC exchange areas. Although direct connections could be used for
this traffic, SWBT agrees to transit this traffic for the rate of
$0.006 per MOU if the other LEC exchanges share a common mandatory
local calling area with all SWBT exchanges included in a specific
exchange area.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Type of Transit Traffic Prices Per Prices Per Prices Per
MOU MOU MOU
Zone A Zone B Zone C
--------------------------------------------------------------------
<S> <C> <C> <C>
Local Transit
- Tandem Switching $0.002335 $0.002335 $0.002335
- Tandem Transport $0.000609 $0.000609 $0.000609
--------------------------------------------------------------------
Optional Area Transit $0.004
--------------------------------------------------------------------
</TABLE>
<PAGE> 18
GENERAL TERMS AND CONDITIONS - KS
PAGE 18 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
5.4.2 All other traffic which transits a tandem shall be
treated as Meet-Point Billing Traffic as described in Section 5.6 below or as
intraLATA interexchange traffic as described in Section 5.5.3 below, unless
otherwise agreed.
5.4.3 The Parties agree to enter into their own agreement with
third party telecommunications carrier. In the event one party originates
traffic that transits the second Party's network to reach a third party
telecommunications carrier with whom the originating Party does not have a
traffic interchange agreement, then originating Party will indemnify the second
Party against any and all charges levied by such third party telecommunications
carrier, including any termination charges related to such traffic and any
attorneys fees and expenses.
5.5 RECIPROCAL COMPENSATION FOR TERMINATION OF INTRALATA
INTEREXCHANGE TRAFFIC
5.5.1 Intentionally Left Blank
5.5.2 The Parties also agree to apply the OCA compensation
rate of $0.0210 per MOU for traffic terminating to CLEC end users in other
incumbent LEC exchange that share a common mandatory local calling area with all
SWBT exchanges that are included in the metropolitan exchange area. Appendix Map
lists the shared mandatory local calling areas. This rate is independent of any
retail service arrangement established by either Party to their respective end
users.
5.5.3 For intrastate intraLATA interexchange service traffic,
compensation for termination of intercompany traffic will be at terminating
access rates for Message Telephone Service (MTS) and originating access rates
for 800 Service, including the Carrier Common Line (CCL) charge, as set forth in
each Party's Intrastate Access Service Tariff, not to exceed SWBT's Intrastate
Access Services Tariff. For interstate intraLATA intercompany service traffic,
compensation for termination of intercompany traffic will be at terminating
access rates for MTS and originating access rates for 800 Service including the
CCL charge, as set forth in each Party's interstate Access Service Tariff, not
to exceed SWBT's Interstate Access Services Tariff.
5.6 COMPENSATION FOR ORIGINATION AND TERMINATION OF SWITCHED
ACCESS SERVICE TRAFFIC TO OR FROM AN IXC (MEET-POINT BILLING
(MPB) ARRANGEMENTS)
5.6.1 For interstate, interLATA traffic, terminating
compensation will be at access rates as set forth in each Party's own applicable
access tariffs.
5.6.2 The Parties will establish MPB arrangements in order to
provide Switched Access Services to IXCs via SWBT's access tandem switch in
accordance with the MPB guidelines adopted by and contained in the Ordering and
Billing Forum's MECOD and MECAB documents. CLEC's Meet Points with SWBT shall be
those identified in Appendix DCO and any supplements thereto.
<PAGE> 19
GENERAL TERMS AND CONDITIONS - KS
PAGE 19 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
5.6.3 Billing to IXCs for the Switched Exchange Access
Services jointly provided by the Parties via Meet-Point Billing arrangement
shall be according to the multiple bill/single tariff method. As described in
the MECAB document, each Party will render a bill in accordance with its own
tariff for that portion of the service it provides. For the purpose of this
Agreement, CLEC is the Initial Billing Company (IBC) and SWBT is the Subsequent
Billing Company (SBC). The assignment of revenues, by rate element, and the
Meet-Point Billing percentages applicable to this Agreement are set forth in
Appendix DCO. The actual rate values for each element shall be the rates
contained in that Party's own applicable access tariffs.
5.6.4 The Parties will maintain provisions in their respective
federal and state access tariffs, or provisions within the National Exchange
Carrier Association (NECA) Tariff No. 4, or any successor tariff, sufficient to
reflect this MPB arrangement, including MPB percentages.
5.6.5 As detailed in the MECAB document, the Parties will, in
accordance with accepted time intervals, exchange all information necessary to
accurately, reliably and promptly bill third Parties for Switched Access
Services traffic jointly handled by the Parties via the Meet Point Arrangement.
Each Party reserves the right to charge the other Party for the
recording/processing functions it performs pursuant to the terms and conditions
of Appendix Recording attached hereto and incorporated by reference. Information
shall be exchanged in Exchange Message Record (EMR) format, on magnetic tape or
via a mutually acceptable electronic file transfer protocol.
5.6.6 Initially, billing to IXCs for the Switched Access
Services jointly provided by the parties via the MPB arrangement will be
according to the multiple bill single tariff method, as described in the MECAB
document. Each Party will render a bill to the IXC in accordance with its own
tariff for that portion of the service it provides. Each Party will bill its own
network access service rates to the IXC. The residual interconnection charge
(RIC), if any, will be billed by the Party providing the End Office function.
5.6.7 Meet-Point Billing shall also apply to all jointly
provided MOU traffic bearing the 900, 800, and 888 NPAs or any other
non-geographic NPAs which may likewise be designated for such traffic in the
future where the responsible party is an IXC. When SWBT performs 800 database
queries, SWBT will charge the provider of the Signaling Service Point for the
database query in accordance with standard industry practices.
5.6.8 Each Party shall coordinate and exchange the billing
account reference ("BAR") and billing account cross reference ("BACR") numbers
for the Meet Point Billing service. Each Party shall notify the other if the
level of billing or other BAR/BACR elements change, resulting in a new BAR/BACR
number.
5.6.9 Each Party will provide the other with the Exchange
Access detailed usage data within thirty (30) days of the end of the billing
period. SWBT will perform assembly and editing, messages processing and
provision of Access Usage Records in accordance with
<PAGE> 20
GENERAL TERMS AND CONDITIONS - KS
PAGE 20 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
Appendix Recording, attached hereto and incorporated by reference. Each Party
will provide to the other the Exchange Access summary usage data within ten (10)
working days after the date that a bill is rendered to the IXC by the initial
Party. To the extent CLEC provides SWBT with Access Usage Records, SWBT will
compensate CLEC on the same terms as CLEC compensates SWBT per Appendix
Recording. SWBT acknowledges that currently there is no charge for Summary Usage
Data Records but that such a charge may be appropriate. At CLEC's request, SWBT
will negotiate a mutual and reciprocal charge for provision of Summary Usage
Data Records.
5.6.10 Errors may be discovered by CLEC, the IXC or SWBT. Both
SWBT and CLEC agree to provide the other Party with notification of any
discovered errors within two (2) business days of the discovery.
5.6.11 In the event of a loss of data, both Parties shall
cooperate to reconstruct the lost data within sixty (60) days of notification
and if such reconstruction is not possible, shall accept a reasonable estimate
of the lost data, based upon no more than three (3) to twelve (12) months of
prior usage data, if available.
5.7 BILLING ARRANGEMENTS FOR COMPENSATION FOR TERMINATION OF
INTRALATA, LOCAL, TRANSIT, AND OPTIONAL CALLING AREA TRAFFIC
5.7.1 Other than for traffic described in sub-section 5.6
above, each Party shall deliver monthly settlement statements for terminating
the other Party's traffic based on the following:
5.7.1.1 Each Party shall, unless otherwise agreed,
adhere to the detailed technical descriptions and requirements for the
recording, record exchange, and billing of traffic using the guidelines as set
forth in the Technical Exhibit Settlement Procedures (TESP), previously provided
by SWBT to CLEC. Reference to this technical publication is included in Appendix
TP.
(a) Where CLEC has direct/high usage trunks to a SWBT
end office with overflow trunking through a SWBT
tandem, billing for the Tandem Traffic will be
calculated as follows:
Total Originating MOUs Recorded By CLEC
Less Direct End Office Terminating MOUs Recorded
By SWBT
Equals Total MOUs To Be Compensated As Tandem
Traffic
(b) Where CLEC has direct/high usage trunks to a third
party with overflow trunking through a SWBT
tandem, CLEC must differentiate the originating
MOU records for the Parties to ascertain how many
MOUs should be compensated as Transit Traffic.
If CLEC is unable to so differentiate the
originating
<PAGE> 21
GENERAL TERMS AND CONDITIONS - KS
PAGE 21 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
MOU records, the Parties shall mutually agree upon
a surrogate method for calculating Transit Traffic
charges owed to SWBT.
5.7.1.2 On a monthly basis, each Party will record its
originating MOU including identification of the originating and terminating NXX
for all intercompany calls.
5.7.1.3 Each Party will transmit the summarized
originating MOU from Section 5.7.1.1 above to the transiting and/or terminating
Party for subsequent monthly intercompany settlement billing.
5.7.1.4 Bills rendered by either Party will be paid
within thirty (30) days of receipt subject to subsequent audit verification.
5.7.1.5 MOUs for the rates contained herein will be
measured in seconds by call type, and accumulated each billing period into one
(1) minute increments for billing purposes in accordance with industry rounding
standards.
5.7.1.6 Each Party will multiply the tandem routed and
end office routed terminating MOUs by the appropriate rate contained in this
Section to determine the total monthly billing to each Party.
5.8 COMPENSATION FOR "PORTING" OPTIONAL CALLING AREA NUMBERS
In those instances where an Optional Calling Area telephone number is
ported, CLEC will compensate SWBT $12.20 monthly, per ported number.
6.0 TRANSMISSION AND ROUTING OF EXCHANGE ACCESS TRAFFIC PURSUANT TO
251(c)(2)
6.1 SCOPE OF TRAFFIC
Section 6.0 prescribes parameters for certain trunk groups ("Access
Toll Connecting Trunks") to be established over the Interconnections specified
in Section 4.0 above, for the transmission and routing of Exchange Access
traffic between CLEC Telephone Exchange Service end users and IXCs via a SWBT
access tandem.
6.2 TRUNK GROUP ARCHITECTURE AND TRAFFIC ROUTING
6.2.1 The Parties shall jointly establish Access Toll
Connecting Trunks as described in Appendix ITR, by which will jointly provide
tandem-transported Switched Exchange Access Services to IXCs to enable CLEC's
end users to originate and terminate traffic to/from such IXCs.
<PAGE> 22
GENERAL TERMS AND CONDITIONS - KS
PAGE 22 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
6.2.2 Access Toll Connecting Trunks shall be used solely for
the transmission and routing of Switched Exchange Access to allow CLEC end users
to originate and terminate traffic to/from any IXCs which is connected to a SWBT
Access Tandem. In addition, the trunks shall be used to allow CLEC's end users
to connect to, or be connected to, the 800 Services of any Telecommunications
Carrier connected to the SWBT Access Tandem.
7.0 TRANSPORT AND TERMINATION OF OTHER TYPES OF TRAFFIC
7.1 INFORMATION SERVICES TRAFFIC
7.1.1 At such time as the Parties agree to route intraLATA
Information Services Traffic to one another, they shall agree to exchange rating
and billing information to effectively allow the Parties to bill their end users
and to charge reciprocal rates.
7.2 LINE STATUS VERIFICATION (LSV)/BUSY LINE INTERRUPT (BLI)
TRAFFIC
7.2.1 Each Party's operator bureau shall accept LSV and BLI
inquiries from the operator bureau of the other Party in order to allow
transparent provision of LSV/BLI Traffic between the Parties' networks. Only one
LSV attempt will be made per end user operator bureau call, and the applicable
charge shall apply whether or not the line is busy at the time of verification
or if the called party agrees to release the line. Only one BLI attempt will be
made per end user operator telephone call, and the applicable charge shall apply
whether or not the line is in use at the to time of interrupt or the called
party releases the line.
7.2.2 Each Party shall route LSV/BLI Traffic inquiries between
the Parties' respective operator bureaus over trunks described in Appendix ITR.
7.3 WIRELESS TRAFFIC
7.3.1 Appendix Wireless, attached hereto and incorporated by
reference sets forth the terms and conditions under which the Parties will
distribute revenue from their joint provision of Wireless Interconnection
Service for mobile to landline traffic terminating through the Parties'
respective wireline switching networks within a LATA. If one Party enters into
an interconnection agreement with a CMRS provider, Appendix Wireless shall no
longer be applicable between the Parties with respect to such CMRS providers,
and the other Party shall be obligated to enter into an agreement with such CMRS
provider for the termination of wireless to landline traffic.
7.3.2 CLEC shall pay the Local Transit Traffic rate to SWBT
for calls that originate on CLEC's network and are sent to SWBT for termination
to a CMRS Provider as long as such Traffic can be identified as wireless
traffic. SWBT shall pay the Local Transit Traffic rate to CLEC for such calls
that originate on SWBT's network are sent through CLEC for termination on a CMRS
Provider's network. Each Party shall be responsible for interconnection
agreements with CMRS providers for terminating compensation regarding traffic
originating on
<PAGE> 23
GENERAL TERMS AND CONDITIONS - KS
PAGE 23 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
the Party's network and terminating on the CMRS provider's network. The
originating Party agrees to indemnify the transiting Party for any claims of
compensation that may be made by the CMRS provider against the transiting Party
regarding compensation for such traffic.
7.3.3 When traffic is originated by either Party to a CMRS
Provider, and the traffic cannot be specifically identified as wireless traffic
for purposes of compensation between SWBT and CLEC, the traffic will be rated
either as Local, Optional or Access and the appropriate compensation rate shall
be paid by the originating Party to the transiting Party.
8.0 SIGNALING
8.1 The SWBT signaling publications that describe the practices,
procedures and specifications generally utilized by SWBT for signaling purposes
and are listed in Appendix TP which is attached hereto and incorporated herein.
A copy of these publications have been provided to CLEC.
8.2 The Parties will cooperate on the exchange of Transactional
Capabilities Application Part (TCAP) messages to facilitate interoperability of
CCS-based features between their respective networks, including all CLASS
features and functions, to the extent each Party offers such features and
functions to its end users. All CCS signaling parameters will be provided
including, without limitation, calling party number (CPN), originating line
information (OLI), calling party category and charge number.
9.0 NUMBERING
9.1 Nothing in this Agreement shall be construed to limit or otherwise
adversely impact in any manner either Party's right to employ or to request and
be assigned any North American Numbering Plan (NANP) number resources including,
but not limited to, central office (NXX) codes pursuant to the Central Office
Code Assignment Guidelines(1), or to establish, by tariff or otherwise,
Exchanges and Rating Points corresponding to such NXX codes. Each Party is
responsible for administering the NXX codes it is assigned.
9.2 At a minimum, in those Metropolitan Exchange Areas where CLEC
intends to provide local exchange service, CLEC shall obtain a separate NXX code
for each SWBT rate center which is required to ensure compliance with the
industry-approved Central Office Code (NXX) Assignment Guidelines (April 1997)
and the FCC's Second Report & Order in CC Docket 95-116, released August 18,
1997 (Local Number Portability). This will enable CLEC and SWBT to identify the
jurisdictional nature of traffic for intercompany compensation until such time
as both Parties have implemented billing and routing capabilities to determine
traffic jurisdiction on a basis other than NXX codes.
- -----------------
(1) Last published by the Industry Numbering Committee ("INC") as INC
95-0407-008, Revision 4/7/95 former ICCF 93-0729-010.
<PAGE> 24
GENERAL TERMS AND CONDITIONS - KS
PAGE 24 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
9.3 Each Party agrees to make available to the other, up-to-date
listings of its own assigned NPA-NXX codes, along with associated Rating Points
and Exchanges.
9.4 To the extent SWBT serves as Central Office Code Administrator for
a given region, SWBT commits to treat CLEC requests for assignment of central
office code(s) in a neutral and nondiscriminatory manner, consistent with
regulatory requirements, and (NXX) Central Office Code Assignment Guidelines.
9.5 Each Party is responsible to program and update its own switches
and network systems to recognize and route traffic to the other Party's assigned
NXX codes at all times. Neither Party shall impose fees or charges on the other
Party for such required programming and updating activities.
9.6 Each Party is responsible to input required data into the Routing
Data Base Systems (RDBS) and into the Bellcore Rating Administrative Data
Systems (BRADS) or other appropriate system(s) necessary to update the Local
Exchange Routing Guide (LERG), unless negotiated otherwise.
9.7 Upon the request of CLEC, SWBT shall perform LERG input for CLEC.
CLEC agrees to pay SWBT the sum of $110 per NXX in exchange for SWBT's input of
required data necessary to update the Local Exchange Routing Guide (LERG) on
CLEC's behalf. SWBT shall not be liable for any losses or damages arising out of
errors, defects, or failures associated with the input of CLEC's data into the
LERG, except for gross negligence or willful misconduct.
9.8 Neither Party is responsible for notifying the other Parties' end
users of any changes in dialing arrangements, including those due to NPA
exhaust, unless otherwise ordered by the Commission, the FCC, or a court.
9.9 NXX MIGRATION. Where either Party has activated an entire NXX for a
single end user, or activated more than half of an NXX for a single end user
with the remaining numbers in that NXX either reserved for future use or
otherwise unused, if such end user chooses to receive service from the other
Party, the first Party shall cooperate with the second Party to have the entire
NXX reassigned in the LERG (and associated industry databases, routing tables,
etc.) to an End Office operated by the second Party. Such transfer will require
development of a transition process to minimize impact on the Network and on the
end user(s)' service and will be subject to appropriate industry lead times
(currently forty-five (45) days) for movements of NXXs from one switch to
another. The Party to whom the NXX is migrated will pay NXX migration charges of
$10,000 per NXX to the Party formerly assigned the NXX.
<PAGE> 25
GENERAL TERMS AND CONDITIONS - KS
PAGE 25 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
10.0 RESALE -- SECTIONS 251(b)(1); 251(c)(4); 252(d)(3); AND
271(c)(2)(B)(xiv);
10.1 AVAILABILITY OF SWBT RETAIL TELECOMMUNICATIONS SERVICES FOR
RESALE
SWBT shall offer to CLEC for resale at wholesale rates its
Telecommunications Services, as described in Section 251(c)(4) of the Act,
pursuant to the terms and conditions of Appendix Resale attached hereto and
incorporated herein by this reference.
10.2 AVAILABILITY OF CLEC RETAIL TELECOMMUNICATION SERVICES FOR RESALE
CLEC shall make available its Telecommunications Services for resale at
wholesale rates to SWBT in accordance with Section 251(b)(1) of the Act.
11.0 UNBUNDLED NETWORK ELEMENTS -- SECTIONS 251(c)(3), 271(c)(2)(B)
(ii),(iv),(v),(vi),(x)
Pursuant to Appendix UNE, which is attached hereto and made a part
hereof, SWBT will provide the CLEC access to unbundled network elements for the
provision of a telecommunication service as required by Sections 251 and 252 of
the Act and in compliance with those portions of the FCC's First Report and
Order in CC Docket No. 96-98 that are in effect, subject to any modifications on
reconsideration, stay or appeal, under the terms and conditions described herein
and in the attachments hereto. The CLEC agrees to provide access to network
elements to SWBT under the same terms, conditions and prices contained herein.
12.0 NOTICE OF CHANGES -- SECTION 251(c)(5)
Nothing in this Agreement shall limit either Party's ability to upgrade
its network through the incorporation of new equipment, new software or
otherwise. If a Party makes a change in its network which it believes will
materially affect the interoperability of its network with the other Party, the
Party making the change shall provide at least ninety (90) days advance written
notice of such change to the other Party. The Party upgrading its network shall
be solely responsible for the cost and effort of accommodating such changes in
its own network. Notwithstanding the foregoing, if either Party establishes
additional tandems in an exchange area in which the other Party offers local
exchange service, that Party will provide the other Party with not less than
one-hundred eighty (180) days' advance notification of same, and with greater
notification when practicable. In addition, SWBT may elect to conduct central
office switch conversions for the improvement of its network. During such
conversions, CLEC orders for interconnection trunks and unbundled network
elements from that switch shall be suspended for a period of three days prior
and one day after the conversion date consistent with the suspension SWBT places
on itself for orders from its customers. SWBT shall notify the CLEC of the
planned conversion in advance via an assessible letter.
Both Parties agree to coordinate interconnection matters consistent
with the requirements of the Americans with Disabilities Act (42 U.S.C. 12101)
and with Sections 255 and 256 of the
<PAGE> 26
GENERAL TERMS AND CONDITIONS - KS
PAGE 26 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
Act. In addition, the Parties will comply with the Network Disclosure rules
adopted by the FCC in CC Docket No. 96-98, Second Report and Order, as may be
amended from time to time.
13.0 COLLOCATION -- SECTION 251(c)(6)
13.1 SWBT shall provide to CLEC Physical Collocation space necessary
for Interconnection (pursuant to Section 4.0 of this Agreement) or access to
Network Elements on an unbundled basis except that SWBT may provide for Virtual
Collocation if SWBT demonstrates that Physical Collocation is not practical for
technical reasons or because of space limitations, as provided in Section
251(c)(6) of the Act. SWBT shall provide such Collocation for the purpose of
Interconnection or access to Network Elements on an unbundled basis, except as
otherwise mutually agreed to in writing by the Parties or as required by the FCC
or the appropriate Commission, subject to applicable federal and state tariffs.
13.2 Except as otherwise ordered by the Commission or the FCC, or as
mutually agreed to by CLEC and SWBT, Physical Collocation shall be available at
a Central Office Switch location classified as an end office location, a serving
wire center, a tandem office location, or a remote node that serves as a rating
point for special access or switched access transport.
14.0 NUMBER PORTABILITY -- SECTIONS 251(b)(2) and 271(c)(2)(B)(xi)
The Parties shall provide to each other Interim Number Portability
(INP) and Permanent Number Portability (PNP) on a reciprocal basis. Pursuant to
the provisions in the Act and FCC First Report and Order, and in accordance with
the terms and conditions outlined in Appendix PORT, which is attached hereto and
incorporated herein, SWBT will provide CLEC Interim Number Portability through
Remote Call Forwarding and Direct Inward Dialing technology.
15.0 DIALING PARITY -- SECTION 251(b)(3); 271(c)(2)(B)(xii); AND 27l(e)(2)
15.1 The Parties shall provide Local Dialing Parity to each other as
required under Section 251(b)(3) of the Act.
15.2 SWBT shall provide IntraLATA Dialing Parity in accordance with
Section 271(e)(2) of the Act.
16.0 ACCESS TO RIGHTS-OF-WAY -- SECTION 251(b)(4) AND 271(c)(2)(B)(iii)
Each Party shall provide the other Party access to its poles, ducts,
rights-of-way and conduits it owns or controls in accordance with Section 224 of
the Act on terms, conditions and prices comparable to those offered to any other
entity pursuant to each Party's applicable tariffs and/or standard agreements.
<PAGE> 27
GENERAL TERMS AND CONDITIONS - KS
PAGE 27 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
17.0 DATABASE ACCESS -- SECTION 271(c)(2)(B)(x)
In accordance with Section 271(c)(2)(B)(x) of the Act, SWBT shall
provide CLEC with nondiscriminatory access to databases and associated signaling
necessary for call routing and completion. When requesting access to databases
not otherwise provided for in this Agreement, or appropriate interfaces,
regardless of whether they constitute Unbundled Network Elements, CLEC will use
the Network Element Bona Fide Request process. This process is defined in
Appendix UNE, which is attached hereto and incorporated herein by reference.
18.0 INTERCEPT REFERRAL ANNOUNCEMENTS
The Party formerly providing service to an end user shall provide a
Basic Referral announcement, reciprocally and free of charge on the abandoned
telephone number. The announcement states that the called number has been
disconnected or changed and provides the end user's new telephone number to the
extent that it is listed.
(a) Basic Intercept Referral Announcements are to be provided on
residential numbers for a minimum of thirty (30) days where
facilities exist and the threat of telephone number exhaustion
is not imminent.
(b) Basic Intercept Referral Announcements for a single line
business end user and the primary listed telephone number for
DID and "Centrex-type" end users, shall be available for a
minimum of thirty (30) days or the life of the White Pages
directory, whichever is greater. If the threat of telephone
number exhaustion becomes imminent for a particular Central
Office, the service provider may reissue a disconnected number
prior to the expiration of the directory, but no earlier than
thirty (30) days after the disconnection of the business
telephone number.
19.0 COORDINATED REPAIR CALLS
To avoid and minimize the potential for end user confusion, each Party
shall inform their respective end users of their respective repair bureau
telephone number(s) to access such bureaus. In the event that either Party
receives a misdirected repair call, the Parties agree to employ the following
procedures for handling such calls:
(a) To the extent the correct provider can be determined,
misdirected repair calls will be referred to the proper provider
of local exchange service in a courteous manner, at no charge,
and the end user will be provided the correct contact telephone
number.
(b) In responding to repair calls, neither Party shall make
disparaging remarks about the other, nor shall they use these
repair calls as the basis for internal referrals or
<PAGE> 28
GENERAL TERMS AND CONDITIONS - KS
PAGE 28 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
to solicit customers or to market services, nor shall they
initiate extraneous communications beyond the direct referral to
the correct repair telephone number.
20.0 OTHER SERVICES 271(c)(B)(2)(vii) AND 271(c)(2)(B)(viii)
20.1 WHITE PAGES. In accordance with Section 271(c)(2)(B)(viii) of the
Act, SWBT will make nondiscriminatory access to White Pages service available
under the terms and conditions of Appendix WP, attached hereto and incorporated
by reference.
20.2 CALLING NAME INFORMATION. The Parties shall provide, on mutually
agreeable and reciprocal terms, each other with access to Calling Name
information of their respective end users whenever one Party initiates a query
from a Signaling System Point for such information associated with a call
terminating to an end user who subscribes to a calling name service. SWBT will
provide Calling Name Information in accordance with and under the terms and
conditions of Appendix CNAM, attached hereto and incorporated by reference.
20.3 BILLING/COLLECTING/REMITTING. The Parties will jointly agree to
terms and conditions for Billing, Collecting and Remitting for alternated billed
local message as described in Appendix BCR, attached hereto and incorporated by
reference.
20.4 911 AND E911 SERVICES. Pursuant to Section 271(c)(2)(B)(vii) of
the Act, SWBT will make nondiscriminatory access to 911 and E911 services
available under the terms and conditions of Appendix 911, attached hereto and
incorporated by reference.
20.5 DIRECTORY ASSISTANCE (DA). Pursuant to Section
271(c)(2)(B)(vii)(II) of the Act, SWBT will provide nondiscriminatory access to
DA services under the terms and conditions identified in Appendix DA, attached
hereto and incorporated by reference.
20.6 DIRECT ACCESS (DIRECT). Pursuant to Section 271(c)(2)(B)(ii) of
the Act, SWBT will provide nondiscriminatory access to subscriber listing
information contained in SWBT's Directory Assistance database under the terms
and conditions identified in Appendix DIRECT, attached hereto and incorporated
by reference.
20.7 OPERATOR SERVICES. Pursuant to Section 271(c)(2)(B)(vii)(III) of
the Act, SWBT shall provide nondiscriminatory access to Operator Services under
the terms and conditions identified in Appendix OS, attached hereto and
incorporated by reference.
20.8 CLEARINGHOUSE SERVICES. To the extent requested by CLEC, SWBT
shall provide for the tracking of message revenues from certain messages to
facilitate the transfer of revenues between the billing company and the earning
company through the Clearinghouse Services provided by SWBT pursuant to the
terms and conditions in Appendix CH, attached hereto and incorporated by
reference.
<PAGE> 29
GENERAL TERMS AND CONDITIONS - KS
PAGE 29 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
20.9 HOSTING. At CLEC's request, SWBT shall perform hosting
responsibilities for the provision of billable message data and/or access usage
data received from CLEC for distribution to the appropriate billing and/or
processing location or for delivery to CLEC of such data via SWBT's internal
network or the nationwide CMDS network pursuant to Appendix HOST, attached
hereto and incorporated by reference
20.10 SIGNALING SYSTEM 7 INTERCONNECTION. At CLEC's request, SWBT shall
perform SS7 interconnection services for CLEC pursuant to Appendix SS7, attached
hereto and incorporated by reference.
21.0 GENERAL RESPONSIBILITIES OF THE PARTIES
21.1 IMPLEMENTATION SCHEDULE. Upon approval by the SCC, the Parties
shall convene an Implementation Team and meet to develop an Implementation Plan
whose purpose is to take all steps necessary to allow the Parties to exchange
traffic as soon as possible consistent with the Parties' business plans.
21.2 SWBT and CLEC shall each use their best efforts to meet the
Interconnection Activation Dates.
21.3 Each Party is individually responsible to provide facilities
within its network that are necessary for routing, transporting, measuring, and
billing traffic from the other Party's network and for delivering such traffic
to the other Party's network in the standard format compatible with SWBT's
network as referenced in Bellcore's BOC Notes on LEC Networks Practice No.
SR-TSV-002275, and to terminate the traffic it receives in that standard format
to the proper address on its network. The Parties are each solely responsible
for participation in and compliance with national network plans, including the
National Network Security Plan and the Emergency Preparedness Plan.
21.4 Neither Party shall use any service related to or use any of the
services or elements provided in this Agreement in any manner that interferes
with other persons in the use of their service, prevents other persons from
using their service, or otherwise impairs the quality of service to other
carriers or to either Party's end users, and either Party may discontinue or
refuse service, but only for so long as the other Party is violating this
provision. Upon such violation, either Party shall provide the other Party
notice of the violation at the earliest practicable time. The Party receiving
notice of such violation may invoke the Dispute Resolution procedures of this
Agreement and service shall not be interrupted until the Dispute Resolution
procedures are completed, provided however, that in the event the Party giving
notice of the violation reasonably believes the alleged violation of this
provision is causing imminent network harm or significantly interfering with the
Party's ability to serve its customers, the Party may discontinue or refuse to
provide service as provided for in this provision but either Party may
thereafter invoke the Dispute Resolution procedures.
<PAGE> 30
GENERAL TERMS AND CONDITIONS - KS
PAGE 30 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
21.5 Each Party is solely responsible for the services it provides to
its end users and to other Telecommunications Carriers.
21.6 The Parties shall work cooperatively to minimize fraud associated
with third-number billed calls, calling card calls, and any other services
related to this Agreement.
21.7 At all times during the term of this Agreement, each Party shall
keep and maintain in force at each Party's expense all insurance required by law
(e.g. workers' compensation insurance) as well as general liability insurance
for personal injury or death to any one person, property damage resulting from
any one incident, automobile liability with coverage for bodily injury for
property damage. Upon request from the other Party, each Party shall provide to
the other Party evidence of such insurance (which may be provided through a
program of self insurance).
21.8 Intentionally left blank.
21.9 Unless otherwise stated, each Party will render a monthly bill to
the other for service(s) provided hereunder. Remittance in full will be due
within thirty (30) days of that billing date. Interest shall apply on overdue
amounts (other than disputed amounts which are subject to Section 30.12) at the
rate specified in Section 30.12, unless otherwise specified in an applicable
tariff. Each Party reserves the right to net delinquent amounts against amounts
otherwise due the other.
21.10 SWBT is participating with the industry to develop standardized
methods through the OBF and shall implement ordering and billing
formats/processes consistent with industry guidelines as capabilities are
deployed. Where such guidelines are not available or SWBT decides not to fully
utilize industry guidelines, SWBT will provide CLEC with information on its
ordering and billing format/process and requirements at the earliest practicable
time.
21.11 Each Party represents that it shall not send Local Traffic to the
other Party that is destined for the network of a third party unless and until
such Party has the authority to exchange traffic with the third party; provided,
however, if such traffic is passed without a third party agreement, the CLEC
will hold SWBT harmless/indemnify/defend or impose a penalty so that SWBT has
protection against third party claims including recovery of attorney fees.
21.12 Unless otherwise agreed, if the designated Party fails to file
the jointly signed agreement with the Commission within thirty (30) days of both
Parties signatures, then the signed agreement is null and no longer valid. If
the contract becomes null, either Party can initiate negotiations to a new
agreement.
<PAGE> 31
GENERAL TERMS AND CONDITIONS - KS
PAGE 31 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
22.0 EFFECTIVE DATE, TERM, AND TERMINATION
22.1 This Agreement shall be effective ten (10) days after approval by
the Kansas Commission when it has determined that the Agreement complies with
Sections 251 and 252 of the Act ("Effective Date").
22.2 The initial term of this Agreement shall be one (1) year (the
"Term") which shall commence on the Date of Execution. Absent the receipt by one
Party of written notice from the other Party at least sixty (60) days prior to
the expiration of the Term to the effect that such Party does not intend to
extend the Term of this Agreement, this Agreement shall automatically renew and
remain in full force and effect on and after the expiration of the Term until
terminated by either Party pursuant to Section 22.3, below.
22.3 Either Party may terminate this Agreement in the event that the
other Party fails to perform a material obligation that disrupts the operation
of either Party's network and/or end user service and fails to cure such
material nonperformance within forty-five (45) days after written notice
thereof. The Party receiving notice of such violation may invoke the Dispute
Resolution procedures of this Agreement and such forty-five (45) day period
shall not begin to run until the Dispute Resolution procedures are completed,
provided however, that in the event the Party giving notice of the violation
reasonably believes the alleged violation of the Agreement is causing imminent
network harm or significantly interfering with the Party's ability to serve its
customers, the Party may discontinue or refuse to provide service as provided
for in Section 21.4 but either Party may thereafter invoke the Dispute
Resolution procedures.
22.4 If pursuant to Section 22.2, above, this Agreement continues in
full force and effect after the expiration of the Term, either Party may
terminate this Agreement ninety (90) days after delivering written notice to the
other Party of its intention to terminate this Agreement, subject to Section
22.5, below. Neither Party shall have any liability to the other Party for
termination of this Agreement pursuant to this Section 22.4 other than its
obligations under Section 22.5, below.
22.5 Upon termination or expiration of this Agreement in accordance
with this Section 22.0, above:
(a) each Party shall comply immediately with its obligations set
forth in Section 30.6.2, below; and
(b) each Party shall promptly pay all amounts (including any
late payment charges) owed under this Agreement; and
(c) each Party 's indemnification obligations shall survive.
<PAGE> 32
GENERAL TERMS AND CONDITIONS - KS
PAGE 32 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
22.6 In the event the Agreement would otherwise terminate (other than
by being superseded by a new agreement between the Parties), CLEC may elect to
continue to operate under the terms and conditions of the Agreement (or upon
such other terms and conditions as the Parties may agree) during a holdover
period as herein described ("Holdover Period") provided CLEC complies with the
steps detailed herein. Within ten (10) days of receiving notice of termination
from SWBT, CLEC shall send a request for negotiations for a new agreement under
Sections 251 and 252 of the Communications Act. CLEC may then operate under the
terms of this Agreement until the Parties reach agreement or have completed the
processes provided for in Section 252 of the Communications Act provided that if
the Parties have not reached agreement, CLEC must seek arbitration at the
earliest time permitted under Section 252. In any event, SWBT may not terminate
this Agreement while any agreement between the Parties that would supersede this
Agreement is pending approval at the Commission.
22.7 No remedy set forth in this Agreement is intended to be exclusive
and each and every remedy shall be cumulative and in addition to any other
rights or remedies now or hereafter existing under applicable law or otherwise.
23.0 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
EXCEPT AS EXPRESSLY PROVIDED UNDER THIS AGREEMENT, NO PARTY MAKES OR
RECEIVES ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE SERVICES,
FUNCTIONS AND PRODUCTS IT PROVIDES UNDER OR CONTEMPLATED BY THIS AGREEMENT AND
THE PARTIES DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR
A PARTICULAR PURPOSE. ADDITIONALLY, NEITHER SWBT NOR CLEC ASSUMES RESPONSIBILITY
WITH REGARD TO THE CORRECTNESS OF DATA OR INFORMATION SUPPLIED BY THE OTHER WHEN
THIS DATA OR INFORMATION IS ACCESSED AND USED BY A THIRD PARTY.
24.0 CHANGES IN END USER LOCAL EXCHANGE SERVICE PROVIDER SELECTION
Each Party will abide by applicable state or federal laws and
regulations in obtaining end user authorization prior to changing end user's
Competitive Local Exchange Carrier to itself and in assuming responsibility for
any applicable charges as specified in Section 258 (b) of the Telecommunications
Act of 1996. CLEC shall make authorization available to SWBT upon request and at
no charge. Only an end user can initiate a challenge to a change in its local
exchange service provider. If an end user notifies SWBT or CLEC that the end
user requests local exchange service, the Party receiving such request shall be
free to immediately provide service to such end user, except in those instances
where the end user's account is local PIC protected. It is the responsibility of
the end user to provide express authorization to the current provider or record
to remove local service provider protection before any changes in local exchange
service provider are processed.
<PAGE> 33
GENERAL TERMS AND CONDITIONS - KS
PAGE 33 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
When an end user changes or withdraws authorization, each Party shall
release customer-specific facilities in accordance with the end user's direction
or the end user's authorized agent. Further, when an end user abandons the
premise, SWBT is free to reclaim the unbundled network element facilities for
use by another customer and is free to issue service orders required to reclaim
such facilities.
25.0 SEVERABILITY
25.1 The Parties negotiated the services, arrangements,
Interconnection, terms and conditions of this Agreement by the Parties as a
total arrangement and are intended to be nonseverable, subject only to Section
30.16 of this Agreement.
25.2 In the event the Commission, the FCC, or a court rejects any
portion or determines that any provision of this Agreement is contrary to law,
or is invalid or unenforceable for any reason, the Parties shall continue to be
bound by the terms of this Agreement, insofar as possible, except for the
portion rejected or determined to be unlawful, invalid, or unenforceable. In
such event, the Parties shall negotiate in good faith to replace the rejected,
unlawful, invalid, or unenforceable provision and shall not discontinue service
to the other party during such period if to do so would disrupt existing service
being provided to an end user. Nothing in this Agreement shall be construed as
requiring or permitting either Party to contravene any mandatory requirement of
federal or state law, or any regulations or orders adopted pursuant to such law.
26.0 INTELLECTUAL PROPERTY
CLEC is responsible for obtaining any license or right to use agreement
associated with a Unbundled Network Element purchased from SWBT. SWBT will
provide a list of all known and necessary licenses or right to use agreements
applicable to the subject Network Element(s) within seven days of a request for
such a list by CLEC. SWBT agrees to use its best efforts to facilitate the
obtaining of any necessary license or right to use agreement. SWBT makes no
warranties, express or implied, concerning CLEC's (or any third party's) rights
with respect to intellectual property (including with limitation, patent,
copyright, and trade secret rights) or contract rights associated with CLEC's
rights to interconnect with SWBT's network and to Unbundled Network Elements.
27.0 INDEMNIFICATION
27.1 Except as otherwise provided herein or in specific appendices,
each Party shall be responsible only for service(s) and facility(ies) which are
provided by that Party, its authorized agents, subcontractors, or others
retained by such parties, and neither Party shall bear any responsibility for
the service(s) and facility(ies) provided by the other Party, its agents,
subcontractors, or others retained by such parties.
<PAGE> 34
GENERAL TERMS AND CONDITIONS - KS
PAGE 34 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
27.2 Except as otherwise provided herein or in specific appendices, and
to the extent not prohibited by law and not otherwise controlled by tariff, each
Party (the "Indemnifying Party") shall defend and indemnify the other Party (the
"Indemnified Party") and hold such Indemnified Party harmless against any Loss
to a third party arising out of the negligence or willful misconduct by such
Indemnifying Party, its agents, its end user, contractors, or others retained by
such parties, in connection with the provision of services or functions under
this Agreement.
27.3 In the case of any Loss alleged or made by an end user of either
Party, the Party whose end user alleged or made such Loss (Indemnifying Party)
shall defend and indemnify the other Party (Indemnified Party) against any and
all such claims or Loss by its end users regardless of whether the underlying
service was provided or unbundled element was provisioned by the Indemnified
Party, unless the Loss was caused by the gross negligence or intentional
misconduct of the other (Indemnified) Party.
27.4 CLEC agrees to indemnify, defend and hold harmless SWBT from any
Loss arising out of SWBT's provision of 911 services or out of CLEC's end users'
use of the 911 service, whether suffered, made, instituted, or asserted by CLEC
or its end users, including for any personal injury or death of any person or
persons, except for Loss which is the direct result of SWBT's own negligence or
willful misconduct.
27.5 SWBT shall not be liable for damages to an end user's premises
resulting from the furnishing of unbundled elements, including the installation
and removal of equipment and associated wiring, unless the damage is caused by
SWBT's negligence or willful misconduct. SWBT does not guarantee or make any
warranty with respect to unbundled elements when used in an explosive
atmosphere.
27.6 Each Party shall be indemnified, defended and held harmless by the
other Party against any Loss arising from a Party's use of services or elements
provided under this Agreement involving: tort claims, including claims for
libel, slander, invasion of privacy, or infringement of copyright arising from a
Party's own communications. This includes, but is not limited to, suits arising
from disclosure of any customer-specific information associated with either the
originating or terminating numbers used to provision unbundled elements provided
hereunder or all other claims arising out of any act or omission of the end user
in the course of using services or functions provided pursuant to this
Agreement.
27.7 The Indemnifying Party agrees to defend any suit brought against
the Indemnified Party for any Loss identified in this Section or specific
appendices. The Indemnified Party agrees to notify the Indemnifying Party
promptly in writing of any written claims, lawsuits or demands for which the
Indemnifying Party may be responsible under this Agreement. The Indemnified
Party shall cooperate in every reasonable way to facilitate defense or
settlement. The Indemnifying Party shall have the right to control and conduct
the defense and settlement of any action or claim subject to the consultation of
the Indemnified Party. The Indemnifying Party
<PAGE> 35
GENERAL TERMS AND CONDITIONS - KS
PAGE 35 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
shall not be responsible for any settlement unless the Indemnifying Party
approved such settlement in advance and agrees to be bound by the settlement
agreement.
27.8 CLEC acknowledges that its right under this contract to
interconnect with SWBT's network and to unbundle and/or combine SWBT's network
elements (including combining with the CLEC's network elements) may be subject
to or limited by intellectual property (including, without limitation, patent,
copyright, and trade secret rights) and contract rights of third parties. It is
the sole obligation of CLEC to obtain any consents, authorizations, or licenses
under intellectual property or proprietary rights held by third parties that may
be necessary for its use of SWBT network facilities under this Agreement. SWBT
hereby conveys no licenses to use such intellectual property rights and makes no
warranties, express or implied, concerning CLEC's (or any third party's) rights
with respect to such intellectual property and contract rights, including,
without limitation, whether such rights will be violated by such interconnection
or unbundling and/or combining or elements (including combining with the CLEC's
network elements) in SWBT's network. SWBT does not and shall not indemnify or
defend, nor be responsible for indemnifying or defending, CLEC for any liability
losses, claims, costs, damages, demand, penalties, or other expenses arising out
of, caused by, or relating to CLEC's interconnection with SWBT's network and
unbundling and/or combining SWBT's network elements (including combining with
CLEC's network elements).
27.9 CLEC agrees to indemnify and hold SWBT harmless from and against
all liability, losses, claims, costs, damages, demand, penalties, or other
expenses, including but not limited to costs of litigation and reasonable
attorneys fees, arising out of, caused by, or relating to any real or potential
claim, demand, or action that CLEC's interconnection with SWBT's network, or
CLEC's use of services or functions offered hereunder, or unbundling and/or
combining of SWBT's network elements (including combining with CLEC's network
elements) violates or infringes upon any intellectual property rights of any
third party or constitutes a breach of contract. CLEC shall notify SWBT in
writing within ten (10) days after CLEC receives notification of any claim or
suit subject to this provision. CLEC shall undertake and control the defense and
settlement of any such claim or suit and CLEC shall cooperate fully with SWBT in
connection herewith. In no event shall SWBT be liable for any consequential
damages or loss of profits which CLEC may suffer arising out of same.
27.10 CLEC shall reimburse SWBT for damages to SWBT facilities utilized
to provide unbundled elements hereunder caused by the negligence or willful act
of the CLEC or resulting from CLEC's improper use of SWBT facilities, or due to
malfunction of any facilities or equipment provided by other than SWBT. Nothing
in the foregoing provision shall be interpreted to hold one CLEC liable for
another Competitive Local Exchange Carrier or end user's actions. Upon
reimbursement for damages, SWBT will cooperate with CLEC in prosecuting a claim
against the person causing such damage. CLEC shall be subrogated to the right of
recovery by SWBT for the damages to the extent of such payment.
<PAGE> 36
GENERAL TERMS AND CONDITIONS - KS
PAGE 36 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
28.0 LIMITATION OF LIABILITY
28.1 Except for indemnity obligations under this Agreement, grossly
negligent or willful misconduct, or except as otherwise provided in specific
appendices, each Party's liability to the other Party for any Loss relating to
or arising out of any negligent act or omission in its performance under this
Agreement, whether in contract or tort, shall not exceed in total the amount
SWBT or CLEC has to or would have charged the other Party for the affected
service(s) or function(s) which were not performed or were otherwise improperly
performed.
28.2 Except for Losses alleged or made by an end user of either Party,
or except as otherwise provided in specific appendices, in the case of any Loss
alleged or made by a third party arising under the negligence or willful
misconduct of both Parties, each Party shall bear, and its obligation under this
section shall be limited to, that portion (as mutually agreed to by the Parties)
of the resulting expense caused by its own negligence or willful misconduct or
that of its agents, servants, contractors, or others acting in aid or concert
with it.
28.3 In no event shall either Party have any liability whatsoever to
the other Party for any indirect, special, consequential, incidental, or
punitive damages, including but not limited to, loss of anticipated profits or
revenue or other economic loss in connection with or arising from anything said,
omitted, or done hereunder (collectively, "Consequential Damages"), even if the
other Party has been advised of the possibility of such damages; provided that
the foregoing shall not limit a Party's obligation under this Agreement to
indemnify, defend, and hold the other Party harmless against any amounts payable
to a third party, including any losses, costs, fines, penalties, criminal or
civil judgments or settlements, expenses (including attorney's fees) and
Consequential Damages of such third party, unless the other Party has engaged in
gross negligence or willful misconduct.
29.0 REGULATORY APPROVAL
29.1 The Parties understand and agree that this Agreement will be filed
with the Commission and may thereafter be filed with the FCC. The Parties
believe in good faith and agree that the services to be provided under this
Agreement satisfy the specifically mentioned sections of the Act and are in the
public interest. Each Party covenants and agrees to fully support approval of
this Agreement by the Commission or the FCC under Section 252 of the Act without
modification.
29.2 Intentionally Left Blank
30.0 MISCELLANEOUS
30.1 AUTHORIZATION.
(a) SWBT is a corporation duly organized, validly existing and in
good standing under the laws of the State of Missouri and has
full power and
<PAGE> 37
GENERAL TERMS AND CONDITIONS - KS
PAGE 37 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
authority to execute and deliver this Agreement and to
perform the obligations hereunder.
(b) CLEC is a corporation duly organized, validly existing and in
good standing under the laws of the State of Kansas and has
full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder.
30.2 COMPLIANCE AND CERTIFICATION.
30.2.1 Each Party shall be responsible for its own compliance
with all federal, state, and local laws, rules, and regulations applicable to
its performance under this Agreement.
30.2.2 Each Party warrants that it has obtained all necessary
state certification required in those states in which it has ordered services
from the other Party pursuant to this Agreement. Upon request by any state
governmental entity, each Party shall provide proof of certification.
30.2.3 Each Party represents and warrants that any equipment,
facilities or services provided to the other Party under this Agreement comply
with the Communications Law Enforcement Act ("CALEA"). Each Party shall
indemnify and hold the other Party harmless from any and all penalties imposed
upon the other Party for such noncompliance and shall at the non-compliant
Party's sole cost and expense, modify or replace any equipment, facilities or
services provided to the other Party under this Agreement to ensure that such
equipment, facilities and services fully comply with CALEA.
30.2.4 For the purposes of establishing, provisioning and billing
service to the CLEC, the CLEC is required to provide to SWBT its state-specific
authorized and nationally recognized OCN/AECNs for facilities-based business
(interconnection and/or unbundled network elements) in each SWBT state and a
single separate and distinct OCN/AECN for resale services in any SWBT state.
CLEC name associated with specific OCN/AECN must be consistent among SWBT
states.
30.3 LAW ENFORCEMENT.
30.3.1 SWBT and CLEC shall handle law enforcement requests as
follows:
(a) Intercept Devices: Local and federal law enforcement
agencies periodically request information or
assistance from local telephone service providers.
When either Party receives a request associated with
an end user of the other Party, it shall refer such
request to the
<PAGE> 38
GENERAL TERMS AND CONDITIONS - KS
PAGE 38 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
Party that serves such end user, unless the request
directs the receiving Party to attach a pen register,
trap-and-trace or form of intercept on the Party's
facilities, in which case that Party shall comply with
any valid request.
(b) Subpoenas: If a Party receives a subpoena for
information concerning an end user the Party knows to
be an end user of the other Party, it shall refer the
subpoena to the requesting party with an indication
that the other Party is the responsible company,
unless the subpoena requests records for a period of
time during which the Party was the end user's service
provider, in which case the Party will respond to any
valid request.
(c) Emergencies: If a Party receives a request from a law
enforcement agency for temporary number change,
temporary disconnect, or one-way denial of outbound
calls for an end user of the other Party by the
receiving Party's switch, that Party will comply with
an valid emergency request. However, neither Party
shall be held liable for any claims or damages arising
from compliance with such requests on behalf of the
other Party's end user and the Party serving such end
user agrees to indemnify and hold the other Party
harmless against any and all such claims.
30.4 INDEPENDENT CONTRACTOR. Each Party and each Party's contractor
shall be solely responsible for the withholding or payment of all applicable
federal, state and local income taxes, social security taxes and other payroll
taxes with respect to its employees, as well as any taxes, contributions or
other obligations imposed by applicable state unemployment or workers'
compensation acts. Each Party has sole authority and responsibility to hire,
fire and otherwise control its employees.
30.5 FORCE MAJEURE. Neither Party shall be liable for any delay or
failure in performance of any part of this Agreement from any cause beyond its
control and without its fault or negligence including, without limitation, acts
of nature, acts of civil or military authority, government regulations,
embargoes, epidemics, terrorist acts, riots, insurrections, fires, explosions,
earthquakes, nuclear accidents, floods, work stoppages, equipment failure, cable
cuts, power blackouts, volcanic action, other major environmental disturbances,
unusually severe weather conditions, inability to secure products or services of
other persons or transportation facilities or acts or omissions of
transportation carriers In such event, the Party affected shall, upon giving
prompt notice to the other Party, be excused from such performance on a
day-to-day basis to the extent of such interference (and the other Party shall
likewise be excused from performance of its obligations on a day-for-day basis
to the extent such Party's obligations related to the performance so interfered
with). The affected Party shall use its best efforts to avoid or remove the
cause of nonperformance and both Parties shall proceed to perform with dispatch
once the causes are removed or cease.
<PAGE> 39
GENERAL TERMS AND CONDITIONS - KS
PAGE 39 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
30.6 CONFIDENTIALITY.
30.6.1 All information, including but not limited to
specifications, microfilm, photocopies, magnetic disks, magnetic tapes,
drawings, sketches, models, samples, tools, technical information, data,
employee records, maps, financial reports, and market data; (i) furnished by one
Party (the "Disclosing Party") to the other Party (the "Receiving Party")
dealing with customer-specific, facility-specific, or usage-specific
information, other than customer information communicated for the purpose of
publication or directory database inclusion, 911, call processing, billing or
settlement or as otherwise mutually agreed upon; or (ii) in written, graphic,
electromagnetic, or other tangible form and marked at the time of delivery as
"Confidential" or "Proprietary;" or (iii) communicated orally and declared to
the Receiving Party at the time of delivery, or by written notice given to the
Receiving Party within ten (10) days after declaration to be "Confidential" or
"Proprietary" (collectively referred to as "Proprietary Information"), shall
remain the property of the Disclosing Party.
30.6.2 Upon request by the Disclosing Party, the Receiving
Party shall return all tangible copies of Proprietary Information, whether
written, graphic, or otherwise. In the event of the expiration or termination of
this Agreement for any reason whatsoever, each Party shall return to the other
Party or destroy all Proprietary Information and other documents, work papers
and other material (including all copies thereof) obtained from the other Party
in connection with this Agreement.
30.6.3 Each Party shall keep all the other Party's Proprietary
Information confidential in the same manner in which it keeps its own
Proprietary Information confidential, and shall use the other Party's
Proprietary Information only for performing the covenants contained in the
Agreement and shall disclose such Proprietary Information only to those
employees, contractors, agents or Affiliates who have a need to know. Neither
Party shall use the other Party's Proprietary Information for any other purpose
except upon such terms and conditions as may be agreed upon between the Parties
in writing.
30.6.4 Unless otherwise agreed, the obligations of
confidentiality and nonuse set forth in the Agreement do not apply to such
Proprietary Information that:
(a) was at the time of receipt, already known to the
Receiving Party, free of any obligation to keep
confidential and evidenced by written records prepared
prior to delivery by the Disclosing Party;
(b) is, or becomes publicly known through no wrongful act
of the receiving Party;
(c) is rightfully received from a third person having no
direct or indirect secrecy or confidentiality
obligation to the Disclosing Party with respect to such
information;
<PAGE> 40
GENERAL TERMS AND CONDITIONS - KS
PAGE 40 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
(d) is independently developed by an employee, agent, or
contractor of the Receiving Party which individual is
not involved in any manner with the provision of
services pursuant to the Agreement and does not have
any direct or indirect access to the Proprietary
Information;
(e) is disclosed to a third person by the Disclosing Party
without similar restrictions on such third person's
rights;
(f) is approved for release by written authorization of the
Disclosing Party;
(g) is required to be made public by the Receiving Party
pursuant to applicable law or regulation provided that
the Receiving party shall provide the Disclosing Party
with written notice of such requirement as soon as
possible and prior to such disclosure. The Disclosing
Party may then either seek appropriate protective
relief from all or part of such requirement or, if it
fails to successfully do so, it shall be deemed to
have waived the Receiving Party's compliance with
Section 30.6 with respect to all or part of such
requirement. The Receiving Party shall use all
commercially reasonable efforts to cooperate with the
Disclosing Party in attempting to obtain any protective
relief which such Disclosing Party chooses to obtain.
Notwithstanding the foregoing, SWBT shall be entitled
to disclose confidential information on a confidential
basis to regulatory agencies upon request for
information as to SWBT's activities under the Act.
30.6.5 Notwithstanding any other provision of this Agreement,
the Proprietary Information provisions of this Agreement shall apply to all
information furnished by either Party to the other in furtherance of the purpose
of this Agreement, even if furnished before the date of this Agreement.
30.6.6 Pursuant to Section 222(b) of the Act, both parties
agree to limit their use of Proprietary Information received from the other to
the permitted purposed identified in the Act.
30.7 GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of Kansas without reference to conflict of law
provisions. In no event shall either Party seek the jurisdiction of the FCC
except pursuant 252 of the Act.
30.8 TAXES.
30.8.1 Each Party purchasing services hereunder shall pay or
otherwise be responsible for all federal, state, or local sales, use, excise,
gross receipts, transaction or similar taxes, fees, or surcharges (hereinafter
"Tax") imposed on or with respect to the services provided by or to such Party,
except for any Tax on either party's corporate existence,
<PAGE> 41
GENERAL TERMS AND CONDITIONS - KS
PAGE 41 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
status, or income. Whenever possible, these amounts shall be billed as a
separate item on the invoice. To the extent a sale is claimed to be for resale
tax exemption, the purchasing party shall furnish the providing party a proper
resale tax exemption certificate as authorized or required by statute or
regulation by the jurisdiction providing said resale tax exemption. Failure to
timely provide said resale tax exemption certificate will result in no exemption
being available to the purchasing Party until such time as the purchasing Party
presents a valid certificate.
30.8.2 With respect to any purchase of services, facilities or
other arrangements, if any Tax is required or permitted by applicable law to be
collected from the purchasing party by the providing party, then: (i) the
providing party shall bill the purchasing party for such Tax; (ii) the
purchasing party shall remit such Tax to the providing party; and (iii) the
providing party shall remit such collected Tax to the applicable taxing
authority.
30.8.3 With respect to any purchase hereunder of services,
facilities or arrangements that are resold to a third party, if any Tax is
imposed by applicable law on the end user in connection with any such purchase,
then: (i) the purchasing party shall be required to impose and/or collect such
Tax from the end user; and (ii) the purchasing party shall remit such Tax to the
applicable taxing authority. The purchasing party agrees to indemnify and hold
harmless the providing party on an after-tax basis for any costs incurred by the
providing party as a result of actions taken by the applicable taxing authority
to collect the Tax from the providing party due to the failure of the purchasing
party to pay or collect and remit such tax to such authority.
30.8.4 If the providing party fails to collect any Tax as
required herein, then, as between the providing party and the purchasing party:
(i) the purchasing party shall remain liable for such uncollected Tax; and (ii)
the providing party shall be liable for any penalty and interest assessed with
respect to such uncollected Tax by such authority. However, if the purchasing
party fails to pay any taxes properly billed, then, as between the providing
party and the purchasing party, the purchasing party will be solely responsible
for payment of the taxes, penalty and interest.
30.8.5 If the purchasing party fails to impose and/or collect
any Tax from end users as required herein, then, as between the providing party
and the purchasing party, the purchasing party shall remain liable for such
uncollected Tax and any interest and penalty assessed thereon with respect to
the uncollected Tax by the applicable taxing authority. With respect to any Tax
that the purchasing party has agreed to pay or impose on and/or collect from end
users, the purchasing party agrees to indemnify and hold harmless the providing
party on an after-tax basis for any costs incurred by the providing party as a
result of actions taken by the applicable taxing authority to collect the Tax
from the providing Party due to the failure of the purchasing party to pay or
collect and remit such Tax to such authority.
30.9 NON-ASSIGNMENT. Each Party covenants that, if it sells or
otherwise transfers to a third party its Telephone Exchange and Exchange Access
network facilities within any territory
<PAGE> 42
GENERAL TERMS AND CONDITIONS - KS
PAGE 42 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
within which SWBT is an Incumbent Local Exchange Carrier as of the date of this
Agreement (the SWBT Territory), or any portion thereof, to a third party, it
will require as a condition of such transfer that the transferee agree to be
bound by this Agreement with respect to services provided over the transferred
facilities. Except as provided in this paragraph, neither Party may assign or
transfer (whether by operation of law or otherwise) this Agreement (or any
rights or obligations hereunder) to a third party without the prior written
consent of the other Party; provided that each Party may assign this Agreement
to a corporate Affiliate or an entity under its common control or an entity
acquiring all or substantially all of its assets or equity by providing prompt
written notice to the other Party of such assignment or transfer. Provided
however, any costs associated with updating CLEC's accounts in SWBT's systems to
accept the identity or name of the new entity shall be paid by CLEC prior to
when such assignment shall be effective. Any attempted assignment or transfer
that is not permitted is void ab initio. Without limiting the generality of the
foregoing, this Agreement shall be binding upon and shall inure to the benefit
of the Parties' respective successors and assigns.
30.10 NON-WAIVER. Failure of either Party to insist on performance of
any term or condition of this Agreement or to exercise any right or privilege
hereunder shall not be construed as a continuing or future waiver of such term,
condition, right or privilege.
30.11 AUDITS. Each Party to this Agreement will be responsible for the
accuracy and quality of its data as submitted to the respective Parties
involved.
30.11.1 Upon reasonable written notice and at its own expense,
each Party or its authorized representative (providing such authorized
representative does not have a conflict of interest related to other matters
before one of the Parties) shall have the right to conduct an audit of the other
Party to give assurances of compliance with the provisions of this Agreement;
provided, that neither Party may request more than two (2) such audits within
any twelve (12) month period. This includes on-site audits at the other Party's
or the Party's vendor locations. Each Party, whether or not in connection with
an audit, shall maintain reasonable records for a minimum of twenty-four (24)
months and provide the other Party with reasonable access to such information as
is necessary to determine amounts receivable or payable under this Agreement.
Each Party's right to access information for audit purposes is limited to data
not in excess of twenty-four (24) months in age.
30.12 DISPUTED AMOUNTS. If any portion of an amount due to a Party (the
"Billing Party") under this Agreement is subject to a bona fide dispute between
the Parties, the Party billed (the "Billed Party") shall within sixty (60) days
of its receipt of the invoice containing such disputed amount give notice to the
Billing Party of the amounts it disputes ("Disputed Amounts") and include in
such notice the specific details and reasons for disputing each item. The Billed
Party shall pay when due: (i) all undisputed amounts to the Billing Party; and
(ii) all Disputed Amounts to Billing Party. Any amounts not paid when due shall
accrue interest from the date such amounts were due at the lesser of: (i) one
and one-half percent (1-1/2%) interest per month; or (ii) the highest rate of
interest that may be charged under applicable law. If the Billed Party prevails
with regard to any of the amount disputed, it shall be entitled to interest on
such amount
<PAGE> 43
GENERAL TERMS AND CONDITIONS - KS
PAGE 43 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
from date of payment at the lesser of (i) one and one-half percent (1-1/2%) per
month; or (ii) the highest rate of interest that may be charged under applicable
law.
30.13 DISPUTE RESOLUTION.
30.13.1 Finality of Disputes
30.13.1.1 Except as otherwise specifically provided
for in this Agreement, no claims will be brought for
disputes arising from this Agreement more than 24
months from the date the occurrence which gives rise
to the dispute is discovered or reasonably should
have been discovered with the exercise of due care
and attention.
30.13.2 Alternative to Litigation
30.13.2.1 The Parties desire to resolve disputes
arising out of this Agreement without litigation.
Accordingly, the Parties agree to use the following
Dispute Resolution procedure with respect to any
controversy or claim arising out of or relating to
this Agreement or its breach.
30.13.3 Commencing Dispute Resolution
30.13.3.1 Dispute Resolution shall commence upon the
sending from one Party to the other of written notice
of a controversy or claim arising out of or relating
to this Agreement or its breach. No Party may pursue
any claim unless such written notice has first been
given to the other Party.
30.13.4 Informal Resolution of Disputes
30.13.4.1 When such written notice has been given, as
required by Section 30.13.3.1, each Party will
appoint a knowledgeable, responsible representative
to meet and negotiate in good faith to resolve any
dispute arising under this Agreement. The location,
form, frequency, duration, and conclusion of these
discussions will be left to the discretion of the
representatives. Upon agreement, the representatives
may utilize other alternative dispute resolution
procedures such as mediation to assist in the
negotiations. Discussions and the correspondence
among the representatives for purposes of settlement
are exempt from discovery and production and will not
be admissible in the arbitration described below or
in any lawsuit without the concurrence of both
parties. Documents identified in or provided with
such communications, which are not prepared for
purposes of the negotiations, are not so exempted
and, if otherwise admissible, may be admitted in
evidence in the arbitration or lawsuit
<PAGE> 44
GENERAL TERMS AND CONDITIONS - KS
PAGE 44 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
30.13.5 Formal Dispute Resolution
30.13.5.1 If the Parties are unable to resolve the
dispute through the informal procedure described
above in Section 30.13.4, then either Party may invoke
the following formal Dispute Resolution procedures.
Unless agreed upon by the Parties, formal dispute
resolution procedures described below, including
arbitration or other procedures as appropriate, may
be invoked not earlier than sixty (60) days after the
date of the letter initiating dispute resolution under
Section 30.13.3.1.
30.13.5.2 Claims Subject to Mandatory Arbitration.
The following claims, if not settled through informal
dispute resolution, will be subject to mandatory
arbitration pursuant to Section 30.13.6 below:
30.13.5.2.1 All unresolved billing disputes involving
one (1) percent or less of the amounts charged to
CLEC by SWBT under this Agreement during the Contract
Year in which the dispute arises. During the first
Contract Year the Parties will annualize the initial
months up to one year.
30.13.5.2.2 All other claims involving one (1)
percent or less of the amounts charged to CLEC by
SWBT under this Agreement during the Contract Year in
which the matter in dispute arises, whether measured
by the disputing Party in terms of actual amounts
owed or owing, or as amounts representing its
business or other risks or obligations relating to
the matter in dispute. During the first Contract Year
the Parties will annualize the initial months up to
one year.
30.13.5.3 Claims Subject to Elective Arbitration. The
following claims will be subject to arbitration
pursuant to Section 30.13.6 if, and only if, the claim
is not settled through informal dispute resolution and
both parties agree to arbitration. If both parties do
not agree to arbitration, then either party may
proceed with any remedy available to it pursuant to
law, equity or agency mechanism.
30.13.5.3.1 All unresolved billing disputes involving
more than one (1) percent of the amounts charged to
CLEC by SWBT under this Agreement during the Contract
Year in which the matter in dispute arises, whether
measured by the disputing Party in terms of actual
amounts owed or owning, or as amounts representing
its business or other risks or obligation relating to
the matter in dispute. During the first Contract Year
the Parties will annualize the initial months up to
one year.
<PAGE> 45
GENERAL TERMS AND CONDITIONS - KS
PAGE 45 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
30.13.5.3.2 All other claims involving more than one
(1) percent of the amounts charged to CLEC by SWBT
under this Agreement during the Contract Year in
which the matter in dispute arises, whether measured
by the disputing Party in terms of actual amounts
owed or owing, or as amounts representing its
business or other risks or obligations relating to
the matter in dispute. During the first Contract Year
the Parties will annualize the initial months up to
one year.
30.13.5.4 Claims Not Subject to Arbitration If the
following claims are not resolved through informal
dispute resolution, they will not be subject to
arbitration and must be resolved through any remedy
available to a Party pursuant to law, equity or
agency mechanism.
30.13.5.4.1 Actions seeking a temporary restraining
order or an injunction related to the purposes of
this Agreement.
30.13.5.4.2 Actions to compel compliance with the
Dispute Resolution process.
30.13.5.4.3 All claims arising under federal or state
statute(s), including, but not limited to, antitrust
claims.
30.13.6 Arbitration
30.13.6.1 Disputes subject to mandatory or elective
arbitration under the provisions of this
Agreement will be submitted to a single
arbitrator pursuant to the Commercial Arbitration
Rules of the American Arbitration Association or
pursuant to such other provider of arbitration
services or rules as the Parties may agree. Each
arbitration will be held in Dallas, Texas, unless
the parties agree otherwise. The arbitration
hearing will be requested to commence within
sixty (60) days of the demand for arbitration.
The arbitrator will control the scheduling so as
to process the matter expeditiously. The Parties
may submit written briefs upon a schedule
determined by the arbitrator. The Parties will
request that the arbitrator rule on the dispute
by issuing a written opinion within thirty (30)
days after the close of hearings. The Federal
Arbitration Act, 9 U.S.C. Secs. 1-16, not state
law, shall govern the arbitrability of all
disputes. The arbitrator will have no authority
to award punitive damages, exemplary damages,
consequential damages, multiple damages, or any
other damages not measured by the prevailing
party's actual damages, and may not, in any
event, make any ruling, finding or award that
does not conform to the terms and conditions of
the Agreement. The arbitrator shall be
knowledgeable of telecommunications issues. The
times specified in
<PAGE> 46
GENERAL TERMS AND CONDITIONS - KS
PAGE 46 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
this Section may be extended or shortened upon
mutual agreement of the Parties or by the
arbitrator upon a showing of good cause. Each
Party will bear its own costs of these
procedures, including attorneys' fees. The
Parties will equally split the fees of the
arbitration and the arbitrator. The arbitrator's
award shall be final and binding and may be
entered in any court having jurisdiction thereof.
Judgment upon the award rendered by the
arbitrator may be entered in any court having
jurisdiction.
30.13.7 Billing Disputes
30.13.7.1 The following provisions apply specifically
to billing disputes.
30.13.7.1.1 The Parties agree that all bills,
including bills disputed in whole or in part,
are to be paid when due, that interest
applies to all overdue invoices as set forth
in the applicable provisions of this
Agreement, and that no other late payment fee
or charge applies to overdue invoices. The
Parties further agree that if any billing
dispute is resolved in favor of the disputing
Party the disputing Party will receive, by
crediting or otherwise, interest applied to
the disputed amount as set forth in the
applicable provisions of this Agreement.
30.13.7.1.2 To the extent that any other
portions of this Agreement provide for a bill
closure process between the parties, or if
such a process is mutually agreed to by the
Parties, the procedures involved in such
processes will not be deemed to place a
particular billing item in dispute for
purposes of Section 30.13--Dispute
Resolution.
30.13.7.1.3 Each Party agrees to notify the
other Party of a billing dispute and may
invoke the informal dispute resolution
process described in Section 30.13.2. The
parties will endeavor to resolve the dispute
within sixty (60) calendar days of the Bill
Date on which such disputed charges appear,
or, if the charges have been subject to the
bill closure process described in Section
30.13.5.1, above, within sixty (60) calendar
days of the closure of the billing period
covered by such bill closure process.
30.13.8 No Conflict
30.13.8.1 The Dispute Resolution procedures set forth
in this Agreement are not intended to conflict with
applicable requirements of the Act or the state
commission with regard to procedures for the
resolution of disputes arising out of this Agreement.
<PAGE> 47
GENERAL TERMS AND CONDITIONS - KS
PAGE 47 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
30.14 NOTICES. Any notice to a Party required or permitted under this
Agreement shall be in writing and shall be deemed to have been received on the
date of service if served personally; on the date receipt is acknowledged in
writing by the recipient if delivered by regular mail; or on the date stated on
the receipt if delivered by certified or registered mail or by a courier service
that obtains a written receipt. Notice may also be provided by facsimile, which
shall be effective on the next Business Day following the date of transmission
as reflected in the facsimile confirmation sheet. "Business Day" shall mean
Monday through Friday, SWBT/CLEC holidays excepted. Any notice shall be
delivered using one of the alternatives mentioned in this section and shall be
directed to the applicable address indicated below or such address as the Party
to be notified has designated by giving notice in compliance with this section,
except that notices to a Party's twenty-four (24) hour contact number shall be
by telephone and/or facsimile and shall be deemed to have been received on the
date transmitted.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NOTICE CONTACT CLEC CONTACT SWBT CONTACT
- --------------------------------------------------------------------------------
<S> <C> <C>
NAME/TITLE Greg Lawhon Account Manager
- --------------------------------------------------------------------------------
STREET ADDRESS 1004 Baltimore Ave., Four Bell Plaza,
Suite 900 7th Floor
311 S. Akard St.
- --------------------------------------------------------------------------------
CITY, STATE, ZIP CODE Kansas City, MO 64105 Dallas, TX 75202-5398
- --------------------------------------------------------------------------------
TELEPHONE NUMBER 816 842-7560 X 225 214 464-5969
- --------------------------------------------------------------------------------
FAX NUMBER 816 842-7507 214 464-1486
- --------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------
24-HOUR NETWORK CLEC CONTACT SWBT CONTACT
MGMT CONTACT
- --------------------------------------------------------------------------------
<S> <C> <C>
NAME/TITLE NOC Mgr. NSMC Control
- --------------------------------------------------------------------------------
TELEPHONE NUMBER 1 800-813-4653 1-800-792-2662
- --------------------------------------------------------------------------------
FAX NUMBER 816 221-5025 972 301-6702
- --------------------------------------------------------------------------------
</TABLE>
30.15 PUBLICITY AND USE OF TRADEMARKS OR SERVICE MARKS.
30.15.1 The Parties agree not to use in any advertising or
sales promotion, press releases, or other publicity matters any endorsements,
direct or indirect quotes, or pictures implying endorsement by the other Party
or any of its employees without such Party's prior written approval. The Parties
will submit to each other for written approval, prior to publication, all
publicity matters that mention or display one another's name and/or marks or
contain language from which a connection to said name and/or marks may be
inferred or implied; the Party to whom a request is directed shall respond
promptly. Nothing herein, however, shall be construed as preventing either Party
from publicly stating the fact that it has executed this Agreement with the
other Party.
30.15.2 Nothing in this Agreement shall grant, suggest, or
imply any authority for one Party to use the name, trademarks, service marks, or
trade names of the other for commercial purposes without prior written approval.
<PAGE> 48
GENERAL TERMS AND CONDITIONS - KS
PAGE 48 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
30.16 SECTION 252(I) OBLIGATIONS. If SWBT enters into an agreement with
another CLEC in Kansas (the "Other Agreement") approved by the Kansas Commission
or FCC pursuant to Section 252 of the Act (regardless of whether the approved
agreement was negotiated or arbitrated), SWBT will make available to CLEC the
Other Agreement in its entirety. SWBT will have no obligation to offer any part
of the Other Agreement separately from the whole, nor to offer the Other
Agreement (even in its entirety) beyond the termination date of the Other
Agreement.
30.17 JOINT WORK PRODUCT. This Agreement is the joint work product of
the Parties and has been negotiated by the Parties and their respective counsel
and shall be fairly interpreted in accordance with its terms and, in the event
of any ambiguities, no inferences shall be drawn against either Party.
30.18 INTERVENING LAW. This Agreement is entered into as a result of
both private negotiation between the Parties and the incorporation of some of
the results of arbitration by the State Corporation Commission of the State of
Kansas. If the actions of Kansas or federal legislative bodies, courts, or
regulatory agencies of competent jurisdiction invalidate, modify, or stay the
enforcement of laws or regulations that were the basis for a provision of the
contract, the affected provision shall be invalidated, modified, or stayed,
consistent with the action of the legislative body, court, or regulatory agency.
In such event, the Parties shall expend diligent efforts to arrive at an
agreement respecting the modifications to the Agreement. If negotiations fail,
disputes between the Parties concerning the interpretation of the actions
required or provisions affected by such governmental actions shall be resolved
pursuant to the dispute resolution process provided for in this Agreement.
30.19 NO THIRD PARTY BENEFICIARIES; DISCLAIMER OF AGENCY. This
Agreement is for the sole benefit of the Parties and their permitted assigns,
and nothing herein express or implied shall create or be construed to create
any third-party beneficiary rights hereunder. Except for provisions herein
expressly authorizing a Party to act for another, nothing in this Agreement
shall constitute a Party as a legal representative or agent of the other Party,
nor shall a Party have the right or authority to assume, create or incur any
liability or any obligation of any kind, express or implied, against or in the
name or on behalf of the other Party unless otherwise expressly permitted by
such other Party. Except as otherwise expressly provided in this Agreement, no
Party undertakes to perform any obligation of the other Party, whether
regulatory or contractual, or to assume any responsibility for the management
of the other Party's business.
30.20 NO LICENSE. No license under patents, copyrights or any other
intellectual property right (other than the limited license to use consistent
with the terms, conditions and restrictions of this Agreement) is granted by
either Party or shall be implied or arise by estoppel with respect to any
transactions contemplated under this Agreement.
30.21 SURVIVAL. The Parties' obligations under this Agreement which by
their nature are intended to continue beyond the termination or expiration of
this Agreement shall survive the termination or expiration of this Agreement.
<PAGE> 49
GENERAL TERMS AND CONDITIONS - KS
PAGE 49 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
30.22 SCOPE OF AGREEMENT. This Agreement is intended to describe and
enable specific Interconnection and compensation arrangements between the
Parties. This Agreement does not obligate either Party to provide arrangements
not specifically provided herein.
30.23 ENTIRE AGREEMENT. The terms contained in this Agreement and any
Schedules, Exhibits, Appendices, tariffs and other documents or instruments
referred to herein, which are incorporated into this Agreement by this
reference, constitute the entire agreement between the Parties with respect to
the subject matter hereof, superseding all prior understandings, proposals and
other communications, oral or written. Neither Party shall be bound by any
preprinted terms additional to or different from those in this Agreement that
may appear subsequently in the other Party's form documents, purchase orders,
quotations, acknowledgments, invoices or other communications. This Agreement
may only be modified by a writing signed by an officer of each Party.
30.24 PERFORMANCE MEASUREMENTS. Pursuant to Appendix Performance
Measurements, which is attached hereto and made a part hereof SWBT will pay
liquidated damages, as negotiated, in the event of a Specified Performance
Breach as defined in Appendix Performance Measurements.
30.25 REMEDIES. Liquidated Damages shall be the sole remedy of CLEC if
SWBT fails to meet Specified Performance Criteria set forth in the terms and
conditions of Appendix Performance Measurements.
<PAGE> 50
GENERAL TERMS AND CONDITIONS - KS
PAGE 50 OF 50
SWBT/BIRCH TELECOM OF KANSAS, INC.
100198
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
as of this 12th day of January, 1999.
BIRCH TELECOM OF KANSAS, INC. SOUTHWESTERN BELL TELEPHONE COMPANY
AECN/OCN # 8856
Signature: /s/ Rick Tidwell Signature: /s/ Larry B. Cooper
------------------------- --------------------------
Name: Rick Tidwell Name: Larry B. Cooper
------------------------------ -------------------------------
(Print or Type) (Print or Type)
Title: Vice President Title: President-Industry Markets
---------------------------- ------------------------------
<PAGE> 1
INTERCONNECTION AGREEMENT-TEXAS
between
Southwestern Bell Telephone Company
and
Birch Telecom of Texas Ltd., L.L.P.
<PAGE> 2
TABLE OF CONTENTS
INTERCONNECTION AGREEMENT-TEXAS
BETWEEN
SOUTHWESTERN BELL TELEPHONE COMPANY
AND
BIRCH TELECOM OF TEXAS LTD., L.L.P.
<TABLE>
<S> <C> <C>
1. Introduction.........................................................1
2. Effective Date.......................................................2
3. Intervening Law......................................................2
4. Term of Agreement....................................................3
5. Assignment...........................................................4
6. Confidentiality and Proprietary Information..........................4
7. Liability and Indemnification........................................6
8. Payment of Rates and Charges.........................................9
9. Dispute Resolution...................................................9
10. Termination of Service to CLEC......................................11
11. Notices.............................................................13
12. Taxes...............................................................13
13. Force Majeure.......................................................15
14. Publicity...........................................................15
15. Network Maintenance and Management..................................16
16. Law Enforcement and Civil Process...................................16
17. Changes in Subscriber Carrier Selection.............................17
18. Amendments or Waivers...............................................18
19. Authority...........................................................18
20. Binding Effect......................................................18
21. Consent.............................................................18
22. Expenses............................................................18
23. Headings............................................................19
24. Relationship of Parties.............................................19
25. Conflict of Interest................................................19
26. Multiple Counterparts...............................................19
27. Third Party Beneficiaries...........................................19
28. Regulatory Approval.................................................19
29. Trademarks and Trade Names..........................................20
30. Regulatory Authority................................................20
31. Effect of Other Agreements..........................................21
32. Verification Reviews................................................21
33. Complete Terms......................................................23
34. Cooperation on Preventing End User Fraud............................23
35. Notice of Network Changes...........................................23
36. Good Faith Performance..............................................23
37. Responsibility of Each Party........................................24
</TABLE>
<PAGE> 3
Interconnection Agreement-TX
General Terms and Conditions
Page ii
<TABLE>
<S> <C> <C>
38. Transmission of Traffic to Third Parties............................24
39. Governmental Compliance.............................................24
40. Responsibility for Environmental Contamination......................25
41. Subcontracting......................................................25
42. Referenced Documents................................................25
43. Severability........................................................26
44. Survival of Obligations.............................................26
45. Governing Law.......................................................26
46. Performance Criteria................................................26
47 Other Obligations of CLEC...........................................27
48. Dialing Parity; Interim Number Portability..........................27
49. Branding............................................................27
50. Customer Inquiries..................................................27
51. Disclaimer of Warranties............................................27
52. No Waiver...........................................................28
53. Definitions.........................................................28
54. Resale..............................................................28
55. Unbundled Network Elements..........................................28
56. Ordering and Provisioning, Maintenance, Connectivity Billing
and Reordering, and Provision of Customer Usage Data................29
57. Network Interconnection Architecture................................29
58. Compensation for Delivery of Traffic................................29
59. Ancillary Functions.................................................29
60. Conforming Amendments...............................................29
61. Other Requirement and Attachments...................................30
ATTACHMENTS.........................................................
</TABLE>
RESALE
Attachment 1: Resale
Appendix Services/Pricing
Exhibit A: SWBT's Telecommunications Services Available for
Resale
Exhibit B: SWBT's Other Services Available for Resale
Appendix Customized Routing-Resale
Appendix DA-Resale
Appendix OS-Resale
Appendix White Pages (WP)-Resale
Attachment 2: Ordering and Provisioning-Resale
Attachment 3: Maintenance-Resale
Attachment 4: Connectivity Billing-Resale
Attachment 5: Provision of Customer Usage Data-Resale
<PAGE> 4
Interconnection Agreement-TX
General Terms and Conditions
Page iii
UNBUNDLED NETWORK ELEMENTS
Attachment 6: Unbundled Network Elements (UNE)
Appendix Pricing-UNE
Appendix Pricing-UNE Schedule of Prices
Attachment 7: Ordering and Provisioning-UNE
Attachment 8: Maintenance-UNE
Attachment 9: Billing-Other
Attachment 10: Provision of Customer Usage Data-UNE
NETWORK INTERCONNECTION ARCHITECTURE AND COMPENSATION
Attachment 11: Network Interconnection Architecture
Appendix Interconnection Trunking Requirement (ITR)
Appendix Network Interconnection Methods (NIM)
Appendix SS7 Interconnection
Attachment 12: Compensation
Appendix Cellular
Appendix FGA
ANCILLARY FUNCTIONS
Attachment 13: Ancillary Functions
Appendix Collocation
Appendix Poles, Conduit, ROW
OTHER REQUIREMENTS
Attachment 14: Interim Number Portability
Attachment 15: E911
Attachment 16: Network Security and Law Enforcement
Attachment 17: Failure to Meet Performance Criteria
Attachment 18: Mutual Exchange of Directory Listing Information
Attachment 19: White Pages-Other (WP-O)
Attachment 20: Clearinghouse
Attachment 21: Numbering
Attachment 22: DA-Facilities Based
Attachment 23: OS-Facilities Based
Attachment 24: Recording-Facilities Based
<PAGE> 5
Interconnection Agreement-TX
General Terms and Conditions
Page 1 of 32
INTERCONNECTION AGREEMENT - TEXAS
This Interconnection Agreement - Texas (Agreement) is between Birch
Telecom of Texas Ltd., L.L.P. ("CLEC"), having an office at 1004 Baltimore Ave.,
Suite 900, Kansas City, MO 64105, and Southwestern Bell Telephone Company
(SWBT), a Missouri corporation, having an office at 1010 Pine Street, St. Louis,
Missouri 63101, (collectively the Parties).
WHEREAS, pursuant to the Telecommunications Act of 1996 (the Act), the
Parties wish to establish terms for the resale of SWBT services and for the
provision by SWBT of Interconnection, unbundled Network Elements, and Ancillary
Functions as designated in the Attachments hereto. Pursuant to Section 252(i) of
the Federal Telecommunications Act of 1996 CLEC and SWBT have entered into an
Agreement on the same terms and conditions contained in the SWBT/AT&T Agreement
for the State of Texas.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants of this Agreement CLEC and SWBT hereby agree as follows:
1.0 INTRODUCTION
1.1 This Agreement sets forth the terms, conditions and prices under which
SWBT agrees to provide (a) services for resale (hereinafter referred to
as Resale services), (b) unbundled Network Elements, or combinations of
such Network Elements (Combinations), (c) Ancillary Functions and (d)
Interconnection to CLEC. This Agreement also sets forth the terms and
conditions for the interconnection of CLEC's network to SWBT's network
and reciprocal compensation for the transport and termination of
telecommunications.
1.2 The Network Elements, Combinations or Resale services provided pursuant
to this Agreement may be connected to other Network Elements,
Combinations or Resale services provided by SWBT or to any network
components provided by CLEC itself or by any other vendor. Subject to
the requirements of this Agreement, CLEC may at any time add, delete,
relocate or modify the Resale services, Network Elements or
Combinations purchased hereunder.
1.3 During the term of this Agreement, SWBT will not discontinue, as to
CLEC, any Network Element, Combination, or Ancillary Functions offered
to CLEC hereunder. During the term of this Agreement, SWBT will not
discontinue any Resale services or features offered to CLEC hereunder
except as provided in Attachment 1: Resale hereto and subject to the
provisions of Section 30.2 of the General Terms and Conditions of this
Agreement. This Section is not intended to impair SWBT's ability to
make changes in its Network, so long as such changes are consistent
with the Act and do not result in the
<PAGE> 6
Interconnection Agreement-TX
General Terms and Conditions
Page 2 of 32
discontinuance of the offerings of Network Elements, Combinations, or
Ancillary Functions made by SWBT to CLEC as set forth in an during the
terms of this Agreement.
1.4 SWBT may fulfill the requirements imposed upon it by this Agreement by
itself or may cause its Affiliates to take such actions to fulfill the
responsibilities.
1.5 This Agreement includes and incorporates herein the Attachments listed
in Section 6 of this Agreement, and all accompanying Appendices,
Addenda and Exhibits.
1.6 Unless otherwise provided in the Agreement, SWBT will perform all of
its obligations concerning its offering of Resale services and
unbundled Network Elements under this Agreement throughout the entire
service area where SWBT is the incumbent local exchange carrier;
provided, that SWBT's obligations to provide Ancillary Functions or to
meet other requirements of the Act covered by this Agreement are not
necessarily limited to such service areas.
2.0 EFFECTIVE DATE
2.1 This Agreement becomes effective (1) when executed by each Party and
approved by the State Commission; or (2) by operation of law pursuant
to the Order of the State Commission, whichever is earlier.
3.0 INTERVENING LAW
3.1 This Agreement is entered into as a result of both private negotiation
between the Parties and arbitration by the Public Utility Commission of
Texas (PUC), acting pursuant to FTA96, PURA95, and the PUC's
Substantive Rules. If the actions of Texas or federal legislative
bodies, courts, or regulatory agencies of competent jurisdiction
invalidate, modify, or stay the enforcement of laws or regulations that
were the basis for a provision of the contract required by the
Arbitration Award approved by the PUC, the affected provision will be
invalidated, modified, or stayed as required by action of the
legislative body, court, or regulatory agency. In such event, the
Parties will expend diligent efforts to arrive at an agreement
respecting the modifications to the Agreement required. If negotiations
fail, disputes between the Parties concerning the interpretation of the
actions required or provisions affected by such governmental actions
will be resolved pursuant to the dispute resolution process provided
for in this Agreement. The invalidation, stay, or modification of the
pricing provisions of the FCC's First Report and Order in CC Docket
No.96-98 (August 8, 1996) and the FCC's Order on Reconsideration
(September 27, 1996) will not be considered an invalidation, stay, or
modification requiring changes to provisions of the Agreement required
by the PUC Arbitration Award, in that the FCC's pricing provisions are
not the basis for the costing and pricing provisions of the PUC's
Arbitration Award.
<PAGE> 7
Interconnection Agreement-TX
General Terms and Conditions
Page 3 of 32
3.2 In the event a court or regulatory agency of competent jurisdiction
should determine that modifications of this Agreement are required to
bring the services being provided hereunder into compliance with the
Act, the affected Party will promptly give the other Party written
notice of the modifications deemed required. Upon delivery of such
notice, the Parties will expend diligent efforts to arrive at an
agreement respecting such modifications required, and if the Parties
are unable to arrive at such agreement within sixty (60) days after
such notice, either Party may invoke the Dispute Resolution process set
forth in Section 9.5 of this Agreement.
4.0 TERM OF AGREEMENT
4.1 This Agreement will become effective as of the Effective Date stated
above, and will expire on January 22, 2000 plus two one year
extensions, unless written Notice of Non Renewal and Request for
Negotiation (Non Renewal Notice) is provided by either Party in
accordance with the provisions of this Section. Any such Non Renewal
Notice must be provided not later than 180 days before the day this
Agreement would otherwise renew for an additional year. The noticing
Party will delineate the items desired to be negotiated. Not later than
30 days from receipt of said notice, the receiving Party will notify
the sending Party of additional items desired to be negotiated, if any.
Not later than 135 days from the receipt of the Non Renewal Notice,
both parties will commence negotiations.
4.2 The same terms, conditions, and prices will continue in effect, on a
month-to-month basis as were in effect at the end of the latest term,
or renewal, so long as negotiations are continuing without impasse and
then until resolution pursuant to this Section. The Parties agree to
resolve any impasse by submission of the disputed matters to the Texas
PUC for arbitration. Should the PUC decline jurisdiction, the Parties
will resort to a commercial provider of arbitration services.
4.3 Upon termination of this Agreement, CLEC's liability will be limited to
payment of the amounts due for Network Elements, Combinations,
Ancillary Functions and Resale Services provided up to and including
the date of termination and thereafter as reasonably requested by CLEC
to prevent service interruption, but not to exceed one (1) year. The
Network Elements, Combinations, Ancillary Functions and Resale services
provided hereunder are vital to CLEC and must be continued without
interruption. When CLEC provides or retains another vendor to provide
such comparable Network Elements, Combinations, Ancillary Functions or
Resale services, SWBT and CLEC agree to co-operate in an orderly and
efficient transition to CLEC or another vendor. SWBT and CLEC further
agree to coordinate the orderly transition to CLEC or another vendor
such that the level and quality of the Network Elements, Combinations,
Ancillary Functions and Resale Services is not degraded and each Party
will exercise its best efforts to effect an orderly and efficient
transition.
<PAGE> 8
Interconnection Agreement-TX
General Terms and Conditions
Page 4 of 32
5.0 ASSIGNMENT
5.1 Neither Party hereto may assign or otherwise transfer its rights or
obligations under this Agreement, except with the prior written consent
of the other Party hereto, which consent will not be unreasonably
withheld; provided, that SWBT may assign its rights and delegate its
benefits and delegate its duties and obligations under this Agreement
without the consent of CLEC to a 100 per cent owned affiliate of SWBT,
provided the performance of any such assignee is guaranteed by the
assignor. Nothing in this Section is intended to impair the right of
either Party to utilize subcontractors.
5.2 Each Party will notify the other in writing not less than 60 days in
advance of anticipated assignment.
6.0 CONFIDENTIALITY AND PROPRIETARY INFORMATION.
6.1 For the purposes of this Agreement, "Confidential Information" means
confidential or proprietary technical or business information given by
the Discloser to the Recipient. All information which is disclosed by
one party to the other in connection with this Agreement, during
negotiations (also see the Confidentiality Agreement between the
Parties dated April 1, 1996) and the term of this Agreement, will
automatically be deemed proprietary to the Discloser and subject to
this Agreement, unless otherwise confirmed in writing by the Discloser.
In addition, by way of example and not limitation, all orders for
Resale Services, Network Elements or Combinations placed by CLEC
pursuant to this Agreement, and information that would constitute
Customer Proprietary Network Information of CLEC's customers pursuant
to the Act and the rules and regulations of the Federal Communications
Commission (FCC), and Recorded Usage Data as described in Attachments 5
and 10 concerning Recorded Usage Data, whether disclosed by CLEC to
SWBT or otherwise acquired by SWBT in the course of the performance of
this Agreement, will be deemed Confidential Information of CLEC for all
purposes under this Agreement.
6.2 For a period of five (5) years from the receipt of Confidential
Information from the Discloser, except as otherwise specified in this
Agreement, the Recipient agrees (a) to use it only for the purpose of
performing under this Agreement, (b) to hold it in confidence and
disclose it to no one other than its employees having a need to know
for the purpose of performing under this Agreement, and (c) to
safeguard it from unauthorized use or disclosure using at least the
same degree of care with which the Recipient safeguards its own
Confidential Information. If the Recipient wishes to disclose the
Discloser's Confidential Information to a third-party agent or
consultant, such disclosure must be agreed to in writing by the
Discloser, and the agent or consultant must have executed a written
agreement of nondisclosure and nonuse comparable in scope to the terms
of this Section.
<PAGE> 9
Interconnection Agreement-TX
General Terms and Conditions
Page 5 of 32
6.3 The Recipient may make copies of Confidential Information only as
reasonably necessary to perform its obligations under this Agreement.
All such copies will be subject to the same restrictions and
protections as the original and will bear the same copyright and
proprietary rights notices as are contained on the original.
6.4 The Recipient agrees to return all Confidential Information in tangible
form received from the Discloser, including any copies made by the
Recipient within thirty (30) days after a written request is delivered
to the Recipient, or to destroy all such Confidential Information if
directed to do so by Discloser except for Confidential Information that
the Recipient reasonably requires to perform its obligations under this
Agreement. If either Party loses or makes an unauthorized disclosure of
the other Party's Confidential Information, it will notify such other
party immediately and use reasonable efforts to retrieve the lost or
wrongfully disclosed information.
6.5 The Recipient will have no obligation to safeguard Confidential
Information: (a) which was in the possession of the Recipient free of
restriction prior to its receipt from the Discloser, (b) after it
becomes publicly known or available through no breach of this Agreement
by the Recipient; (c) after it is rightfully acquired by the Recipient
free of restrictions on its disclosure; or (d) after it is
independently developed by personnel of the Recipient to whom the
Discloser's Confidential Information had not been previously disclosed.
In addition, either Party will have the right to disclose Confidential
Information to any mediator, arbitrator, state, or federal regulatory
body, or a court in the conduct of any mediation, arbitration or
approval of this Agreement, so long as, in the absence of an applicable
protective order, the Discloser has been promptly notified by the
Recipient and so long as the Recipient undertakes all lawful measures
to avoid disclosing such information until Discloser has had reasonable
time to negotiate a protective order with any such mediator,
arbitrator, state or regulatory body or a court, and complies with any
protective order that covers the Confidential Information.
6.6 The Parties acknowledge that an individual end user may simultaneously
seek to become or be a customer of both Parties. Nothing in this
Agreement is intended to limit the ability of either Party to use
customer specific information lawfully obtained from end users or
sources other than the Disclosing Party.
6.7 Each Party's obligations to safeguard Confidential Information
disclosed prior to expiration or termination of this Agreement will
survive such expiration or termination.
6.8 Except as otherwise expressly provided elsewhere in this Agreement, no
license is hereby granted under any patent, trademark, or copyright,
nor is any such license implied solely by virtue of the disclosure of
any Confidential Information.
6.9 Each Party agrees that the Discloser may be irreparably injured by a
disclosure in breach of this Agreement by the Recipient or its
representatives and the Discloser will be entitled
<PAGE> 10
Interconnection Agreement-TX
General Terms and Conditions
Page 6 of 32
to seek equitable relief, including injunctive relief and specific
performance, in the event of any breach or threatened breach of the
confidentiality provisions of this Agreement. Such remedies will not
be deemed to be the exclusive remedies for a breach of this Agreement,
but will be in addition to all other remedies available at law or in
equity.
7.0 LIABILITY AND INDEMNIFICATION
7.1 LIMITATION OF LIABILITIES
7.1.1 The Parties' liability to each other during any Contract Year
resulting from any and all causes, other than as specified below in
Sections 7.3.1 and 7.3.3, following, and for willful or intentional
misconduct (including gross negligence), will not exceed the total of
any amounts due and owing to CLEC pursuant to Section 46 (Performance
Criteria) and the Attachment referenced in that Section, plus the
amounts charged to CLEC by SWBT under this Agreement during the
Contract Year in which such cause accrues or arises. For purposes of
this Section, the first Contract Year commences on the first day this
Agreement becomes effective and each subsequent Contract Year
commences on the day following that anniversary date.
7.1.2 Except for losses alleged or made by an end user of either Party, or
except as otherwise provided in specific appendices, in the case of any
loss alleged or made by a third party arising under the negligence or
willful misconduct of both Parties, each Party shall bear, and its
obligation under this section shall be limited to, that portion (as
mutually agreed to by the Parties) of the resulting expense caused by
its own negligence or willful misconduct or that of its agents,
servants, contractors, or others acting in aid or concert with it.
7.2 NO CONSEQUENTIAL DAMAGES
7.2.1 NEITHER CLEC NOR SWBT WILL BE LIABLE TO THE OTHER PARTY FOR ANY
INDIRECT, INCIDENTAL CONSEQUENTIAL, RELIANCE, OR SPECIAL DAMAGES
SUFFERED BY SUCH OTHER PARTIES (INCLUDING WITHOUT LIMITATION DAMAGES
FOR HARM TO BUSINESS, LOST REVENUES, LOST SAVINGS, OR LOST PROFITS
SUFFERED BY SUCH OTHER PARTIES), REGARDLESS OF THE FORM OF ACTION,
WHETHER IN CONTRACT, WARRANTY, STRICT LIABILITY, OR TORT, INCLUDING
WITHOUT LIMITATION NEGLIGENCE OF ANY KIND WHETHER ACTIVE OR PASSIVE,
AND REGARDLESS OF WHETHER THE PARTIES KNEW OF THE POSSIBILITY THAT
SUCH DAMAGES COULD RESULT. EACH PARTY HEREBY RELEASES THE OTHER PARTY
(AND SUCH OTHER PARTY'S SUBSIDIARIES AND AFFILIATES, AND THEIR
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS FROM ANY SUCH
CLAIM. NOTHING CONTAINED IN THIS SECTION WILL LIMIT SWBT'S OR CLEC'S
LIABILITY TO THE OTHER FOR (i)
<PAGE> 11
Interconnection Agreement-TX
General Terms and Conditions
Page 7 of 32
WILLFUL OR INTENTIONAL MISCONDUCT (INCLUDING GROSS NEGLIGENCE); (ii)
BODILY INJURY, DEATH, OR DAMAGE TO TANGIBLE REAL OR TANGIBLE PERSONAL
PROPERTY PROXIMATELY CAUSED BY SWBT OR CLEC'S NEGLIGENT ACT OR
OMISSION OR THAT OF THEIR RESPECTIVE AGENTS, SUBCONTRACTORS OR
EMPLOYEES, NOR WILL ANYTHING CONTAINED IN THIS SECTION LIMIT THE
PARTIES INDEMNIFICATION OBLIGATIONS, AS SPECIFIED BELOW.
7.3 OBLIGATION TO INDEMNIFY
7.3.1 Each Party will and hereby agrees to defend at the other's request,
indemnify, and hold harmless the other Party and each of its officers,
directors, employees, and agents (each, an Indemnitee) against and in
respect of any loss, debt, liability, damage, obligation, claim,
demand, judgment, or settlement of any nature or kind, known or
unknown, liquidated or unliquidated, including without limitation all
reasonable costs and expenses incurred (legal, account or otherwise)
(collectively, Damages) arising out of, resulting from, or based upon
any pending or threatened claim, action, proceeding or suit by any
third party (a Claim) (i) alleging any omissions, breach of any
representation, warranty, or covenant made by such indemnifying Party
(the Indemnifying Party) in this Agreement, (ii) based upon injuries
or damages to any person or property or the environment arising out of
or in connection with this Agreement that are the result of the
Indemnifying Party's actions, breach of Applicable Law, or the
actions, omissions or status of its employees, agents, and
subcontractors.
7.3.1.1 In the case of any loss alleged or made by an end user of either Party,
the Party whose end user alleged or made such loss (Indemnifying Party)
shall defend and indemnify the other party (Indemnified Party) against
any and all such claims or loss by its end users regardless of whether
the underlying service was provided or unbundled element was
provisioned by the Indemnified Party, unless the loss was caused by the
gross negligence or intentional or willful misconduct or breach of
applicable law of the other (Indemnified) Party.
7.3.2 CLEC is responsible for obtaining any license or right to use
agreement associated with a Network Element purchased from SWBT, and
further will provide SWBT, prior to using any such Network Element,
with either: (1) a copy of the applicable license or right to use
agreement (or letter from the licenser attesting as such); or (2) an
affidavit signed by CLEC attesting to the acquisition of any known and
necessary licenses or right to use agreements. SWBT will provide a
list of all known and necessary licenses or right to use agreements
applicable to the subject Network Element(s) within seven days of a
request for such a list by CLEC. SWBT agrees to use its best efforts
to facilitate the obtaining of any necessary license or right to use
agreement. In the event such an agreement is not forthcoming for a
Network Element ordered by CLEC, the Parties commit to negotiate in
<PAGE> 12
Interconnection Agreement-TX
General Terms and Conditions
Page 8 of 32
good faith for the provision of alternative Elements or services which
shall be equivalent to or superior to the Element for which CLEC is
unable to obtain such license or agreement.
7.3.3 Each Party will and hereby agrees to defend at the other's request,
indemnify, and hold harmless the other Party and each of its officers,
directors, employees, and agents (each, an "Indemnitee") against and
in respect of any loss, debt, liability, damage, obligation, claim
demand, judgment, or settlement of any nature or kind, known or
unknown, liquidated or unliquidated, including without limitation all
reasonable costs and expenses incurred (legal, account or otherwise)
arising out of, resulting from, or based upon any pending or
threatened claim, action, proceeding or suit by any third party for
actual infringement of any patent, copyright, trademark, service mark,
trade name, trade dress, trade secret or any other intellectual
property right now known or later developed to the extent that such
claim or action arises from the actions of the respective Parties, or
failure to act, as required pursuant to this Agreement.
7.3.4 SWBT makes no warranties, express or implied, concerning CLEC's (or
any third party's) rights with respect to intellectual property
(including without limitation, patent, copyright and trade secret
rights) or contract rights associated with CLEC's rights to
interconnect with SWBT's network and to Unbundled Network Elements
and/or combine SWBT's network elements (including combining with
CLEC's Network Elements) such interconnection or unbundling and/or
combining of Elements (including combining with components of CLEC's
network) in SWBT's network. Section 7 applies solely to this Agreement.
Nothing in this Section will be deemed to supersede or replace any
other agreements, if any, between the Parties with respect to CLEC's
intellectual property or contract rights.
7.4 OBLIGATION TO DEFEND; NOTICE; COOPERATION
7.4.1 Whenever a Claim will arise for indemnification under this Section,
the relevant Indemnitee, as appropriate, will promptly notify the
Indemnifying party and request the Indemnifying Party to defend the
same. Failure to so notify the Indemnifying Party will not relieve the
Indemnifying Party of any liability that the Indemnifying Party might
have, except to the extent that such failure prejudices the
Indemnifying Party's ability to defend such Claim. The Indemnifying
Party will have the right to defend against such liability or
assertion in which event the Indemnifying Party will give written
notice to the Indemnitee of acceptance of the defense of such Claim
and the identity of counsel selected by the Indemnifying Party. Except
as set forth below, such notice to the relevant Indemnitee will give
the Indemnifying Party full authority to defend, adjust, compromise,
or settle such Claim with respect to which such notice will have been
given, except to the extent that any compromise or settlement might
prejudice the Intellectual Property Rights of the relevant Indemnities.
The Indemnifying Party will consult with the relevant Indemnitee prior
to any compromise or settlement that would affect the Intellectual
Property Rights
<PAGE> 13
Interconnection Agreement-TX
General Terms and Conditions
Page 9 of 32
or other rights of any Indemnitee, and the relevant Indemnitee will
have the right to refuse such compromise or settlement and, at the
refusing Party's or refusing Party's cost, to take over such defense,
provided that in such event the Indemnifying Party will not be
responsible for, nor will it be obligated to indemnify the relevant
Indemnitee against any cost or liability in excess of such refused
compromise or settlement. With respect to any defense accepted by the
Indemnifying Party, the relevant Indemnitee will be entitled to
participate with the Indemnifying Party in such defense if the Claim
requests equitable relief or other relief that could affect the rights
of the Indemnitee and also will be entitled to employ separate counsel
for such defense at such Indemnitee's expense. In the event the
Indemnifying Party does not accept the defense of any indemnified
Claim as provided above, the relevant Indemnitee will have the right
to employ counsel for such defense at the expense of the Indemnifying
Party. Each Party agrees to cooperate and to cause its employees and
agents to cooperate with the other Party in the defense of any such
Claim.
7.5 OSHA STATEMENT
7.5.1 CLEC, in recognition of SWBT's status as an employer, agrees to abide
by and to undertake the duty of compliance on behalf of SWBT with all
federal, state and local laws, safety and health regulations relating
to CLEC's activities concerning Collocated Space, and to indemnify and
hold SWBT harmless for any judgments, citations, fines, or other
penalties which are assessed against SWBT as the result solely of
CLEC's failure to comply with any of the foregoing. SWBT, in its status
as an employer, will comply with all federal, state and local laws,
safety and health standards and regulations with respect to all other
portions of the Premises, and agrees to indemnify and hold CLEC
harmless for any judgments, citations, fines or other penalties which
are assessed against CLEC as a result solely of SWBT's failure to
comply with any of the foregoing.
8.0 PAYMENT OF RATES AND CHARGES
8.1 Except as otherwise specifically provided elsewhere in this Agreement,
the Parties will pay all rates and charges due and owing under this
Agreement within thirty (30) days of receipt of an invoice. Except as
otherwise specifically provided in this Agreement interest on overdue
invoices will apply at the six (6) month Commercial Paper Rate
applicable on the first business day of each calendar year.
9.0 DISPUTE RESOLUTION
9.1 FINALITY OF DISPUTES
9.1.1 Except as otherwise specifically provided in this Agreement, no claims
will be brought for disputes arising from this Agreement more than 24
months from the date the occurrence which gives rise to the dispute is
discovered or reasonably should have been discovered with the exercise
of due care and attention.
<PAGE> 14
Interconnection Agreement-TX
General Terms and Conditions
Page 10 of 32
9.2 ALTERNATIVE TO LITIGATION
9.2.1 The Parties desire to resolve disputes arising out of this Agreement
without litigation. Accordingly, except for action seeking a temporary
restraining order or an injunction related to the purposes of this
Agreement, or suit to compel compliance with this Dispute Resolution
process, the Parties agree to use the following Dispute Resolution
procedure with respect to any controversy or claim arising out of or
relating to this Agreement or its breach.
9.3 INFORMAL RESOLUTION OF DISPUTES
9.3.1 In the case of any dispute and at the written request of a Party, each
Party will appoint a knowledgeable, responsible representative to meet
and negotiate in good faith to resolve any dispute arising under this
Agreement. The location, form, frequency, duration, and conclusion of
these discussions will be left to the discretion of the
representatives. Upon agreement, the representatives may utilize other
alternative informal dispute resolution procedures such as mediation
to assist in the negotiations. Discussions and the correspondence
among the representatives for purposes of settlement are exempt from
discovery and production and will not be admissible in the arbitration
described below or in any lawsuit without the concurrence of both
parties. Documents identified in or provided with such communications,
which are not prepared for purposes of the negotiations, are not so
exempted and, if otherwise admissible, may be admitted in evidence in
the arbitration or lawsuit.
9.4 BILLING DISPUTES
9.4.1 The Parties agree that with respect to matters that are purely
unresolved billing disputes, all bills, including bills disputed in
whole or in part, are to be paid when due, that interest applies to all
overdue invoices as set forth in Section 8.1 to this Agreement, and
that no other late payment fee or charge applies to overdue invoices.
The Parties further agree that if any billing dispute is resolved in
favor of the disputing Party the disputing Party will receive, by
crediting or otherwise, interest applied to the disputed amount as set
forth in Section 8.1.
9.4.2 To the extent that any other portions of this Agreement provide for a
bill closure process between the parties, or if such a process is
mutually agreed to by the Parties, the procedures involved in such
processes will not be deemed to place a particular billing item in
dispute for purposes of this Section.
9.4.3 Each Party agrees to notify the other Party of a billing dispute and
may invoke the informal dispute resolution process described in Section
9.2. The parties will endeavor to resolve the dispute within thirty
(30) calendar days of the Bill Date on which such
<PAGE> 15
Interconnection Agreement-TX
General Terms and Conditions
Page 11 of 32
disputed charges appear, or, if the charges have been subject to the
bill closure process described in Section 9.4.2, above, within thirty
(30) calendar days of the closure of the billing period covered by such
bill closure process.
9.5 FORMAL RESOLUTION OF DISPUTES
9.5.1 Except as otherwise specifically set forth in this Agreement, for all
disputes arising out of or pertaining to this Agreement, including but
not limited to matters not specifically addressed elsewhere in this
Agreement which require clarification, renegotiation, modifications or
additions to this Agreement, either party may invoke dispute resolution
procedures available pursuant to the dispute resolution rules, as
amended from time to time, of the Public Utility Commission of Texas.
Also, upon mutual agreement, the parties may seek commercial binding
arbitration as specified in Section 9.6.
9.5.2 The Parties agree that the Dispute Resolution procedures set forth in
this Agreement are not intended to conflict with applicable
requirements of the Act or the state commission with regard to
procedures for the resolution of disputes arising out of this
Agreement.
9.6 ARBITRATION
9.6.1 When both parties agree to binding arbitration, disputes will be
submitted to a single arbitrator pursuant to the Commercial
Arbitration Rules of the American Arbitration Association or pursuant
to such other provider of arbitration services or rules as the Parties
may agree. The place where each separate arbitration will be held will
alternate between Dallas, Texas, and St. Louis, Missouri, unless the
Parties agree otherwise. The arbitration hearing will be requested to
commence within 60 days of the demand for arbitration. The arbitrator
will control the scheduling so as to process the matter expeditiously.
The Parties may submit written briefs upon a schedule determined by
the arbitrator. The Parties will request that the arbitrator rule on
the dispute by issuing a written opinion within 30 days after the
close of hearings. The arbitrator has no authority to order punitive
or consequential damages. The times specified in this Section may be
extended or shortened upon mutual agreement of the Parties or by the
arbitrator upon a showing of good cause. Each Party will bear its own
costs of these procedures. The Parties will equally split the fees of
the arbitration and the arbitrator. Judgment upon the award rendered
by the arbitrator may be entered in any court having jurisdiction.
10.0 TERMINATION OF SERVICE TO CLEC
10.1 Failure of CLEC to pay charges may be grounds for termination of this
Agreement. If CLEC fails to pay when due, any and all charges billed to
them under this Agreement, (Unpaid Charges), and any portion of such
charges remain unpaid more than fifteen (15) calendar days after the
due date of such Unpaid Charges, SWBT will notify CLEC in writing that
in order to avoid having service disconnected, CLEC must remit all
Unpaid
<PAGE> 16
Interconnection Agreement-TX
General Terms and Conditions
Page 12 of 32
Charges, whether disputed or undisputed, to SWBT within fifteen (15)
calendar days after receipt of said notice. Disputes hereunder will be
resolved in accordance with the Dispute Resolution Procedures set out
in Section 9 of this Agreement.
10.2 If any CLEC charges remain unpaid at the conclusion of the time period
as set forth in Section 10.1 above (30 calendar days from the due date
of such unpaid charges), SWBT will notify CLEC, the appropriate
commission(s) and the end user's IXC(s) of Record in writing, that
unless all charges are paid within fifteen (15) calendar days, CLEC's
service will be disconnected and CLEC's end users may be switched to
SWBT local service. SWBT will also suspend order acceptance at this
time.
10.3 If any CLEC charges remain unpaid or undisputed thirty (30) calendar
days past the due date of the unpaid charges as described in Section
10.2 above, CLEC will, at its sole expense, notify its end users, the
Commission and the end user's of Record that their service may be
disconnected for CLEC failure to pay unpaid charges, and that its end
users must select a new local service provider within fifteen (15)
calendar days. The notice will also advise the end user that SWBT will
assume the end user's account at the end of the fifteen (15) calendar
day period should the end user fail to select a new local service
provider.
10.4 If any CLEC charges remain unpaid or undisputed forty-five (45)
calendar days past the due date, SWBT will disconnect CLEC and transfer
all CLEC's end users who have not selected another local service
provider directly to SWBT's service. These end users will receive the
same services provided through CLEC at the time of service. These end
users will receive the same services provided through CLEC at the time
of transfer. SWBT will inform the Commission and the end user's IXC(s)
of Record of the names of all end users transferred through this
process. Applicable service establishment charges for switching end
users from CLEC to SWBT will be assessed to CLEC.
10.5 Within five (5) calendar days of the transfer (50 calendar days past
CLEC's due date), SWBT will notify all affected end users that because
of a CLEC's failure to pay, their service is now being provided by
SWBT. SWBT will also notify the end user that they have thirty (30)
calendar days to select a local service provider. If the end user does
not select an LSP within 30 calendar days the customer will remain a
SWBT local customer.
10.6 SWBT may discontinue service to CLEC upon failure to pay undisputed
charges as provided in this section, and will have no liability to CLEC
in the event of such disconnection.
10.7 After disconnect procedures have begun, SWBT will not accept service
orders from CLEC until all unpaid charges are paid. SWBT will have the
right to require a deposit equal to one month's charges (based on the
highest previous month of service from SWBT) prior to resuming service
to CLEC after disconnect for nonpayment.
<PAGE> 17
Interconnection Agreement-TX
General Terms and Conditions
Page 13 of 32
10.8 Beyond the specifically set out limitations in this section, nothing
herein will be interpreted to obligate SWBT to continue to provide
service to any such end users or to limit any and all disconnection
rights SWBT may have with regard to such end users.
11.0 NOTICES
11.1 In the event any notices are required to be sent under the terms of
this Agreement, they may be sent by mail and are deemed to have been
given on the date received. Notice may also be effected by personal
delivery or by overnight courier, and will be effective upon receipt.
Notice may also be provided by facsimile, which will be effective on
the next business day following the date of transmission; provided,
however, notices to a Party's 24-hour maintenance contact number will
be by telephone and/or facsimile and will be deemed to have been
received on the date transmitted. The Parties will provide the
appropriate telephone and facsimile numbers to each other. Unless
otherwise specifically provided in this Agreement, notice will be
directed as follows:
11.2 If to CLEC:
Birch Telecom of Texas Ltd., L.L.P.
Greg Lawhon, Sr. VP & General Counsel
1004 Baltimore Ave., Suite 900
Kansas City, MO 64105
816-842-7560 x225 (voice contact); 816-842-7507 (fax)
11.3 If to SWBT:
Account Manager
Four Bell Plaza, 7th Flr
311 S. Akard St.
Dallas, Tx 75202-5398
214-464-5969
Either Party may unilaterally change its designated representative
and/or address, telephone contact number or facsimile number for the
receipt of notices by giving seven (7) days' prior written notice to
the other Party in compliance with this Section. Any notice or other
communication will be deemed given when received.
12.0 TAXES
12.1 With respect to any purchase of service under this Agreement, if any
Federal, state or local government tax, fee, surcharge, or other
tax-like charge (a "Tax") is required or permitted by applicable law,
ordinance or tariff to be collected from a purchasing Party by
<PAGE> 18
Interconnection Agreement-TX
General Terms and Conditions
Page 14 of 32
the providing Party, then (i) the providing Party will bill, as a
separately stated item, the purchasing Party for such Tax, (ii) the
purchasing Party will timely remit such Tax to the providing Party,
and (iii) the providing Party will remit such collected Tax to the
applicable taxing authority.
12.2 If the providing Party does not collect a Tax because the purchasing
Party asserts that it is not responsible for the tax, or is otherwise
excepted from the obligation which is later determined by formal action
to be wrong then, as between the providing Party and the purchasing
Party, the purchasing Party will be liable for such uncollected Tax and
any interest due and/or penalty assessed on the uncollected Tax by the
applicable taxing authority or governmental entity.
12.3 If either Party is audited by a taxing authority or other governmental
entity the other Party agrees to reasonably cooperate with the Party
being audited in order to respond to any audit inquiries in a proper
and timely manner so that the audit and/or any resulting controversy
may be resolved expeditiously.
12.4 If applicable law excludes or exempts a purchase of services under this
Agreement from a Tax, and if such applicable law also provides an
exemption procedure, such as an exemption certificate requirement,
then, if the purchasing Party complies with such procedure, the
providing Party, subject to Section 12.2, will not collect such Tax
during the effective period of the exemption. Such exemption will be
effective upon receipt of the exemption certificate or affidavit in
accordance with Section 12.7.
12.5 If applicable law excludes or exempts a purchase of services under this
Agreement from a Tax, but does not also provide an exemption procedure,
then the providing Party will not collect such Tax if the purchasing
Party (i) furnishes the providing Party with a letter signed by an
officer of the purchasing Party claiming an exemption and identifying
the applicable law which allows such exemption, and (ii) supplies the
providing Party with an indemnification agreement, reasonably
acceptable to the providing Party, which holds the providing Party
harmless on an after-tax basis with respect to forbearing to collect
such Tax.
12.6 With respect to any Tax or Tax controversy covered by this Section 12,
the purchasing Party will be entitled to contest, pursuant to
applicable law, and at its own expense, any Tax that it is ultimately
obligated to pay. The purchasing Party will be entitled to the benefit
of any refund or recovery resulting from such a contest. The providing
Party will cooperate in any such contest.
12.7 All notices, affidavits, exemption certificates or other communications
required or permitted to be given by either Party to the other under
this Section 12, will be made in writing and will be delivered by
certified mail, and sent to the addresses stated in Section 11 and to
the following:
<PAGE> 19
Interconnection Agreement-TX
General Terms and Conditions
Page 15 of 32
To SWBT: Executive Director - Tax
Southwestern Bell - Room 34/L/1
One Bell Center
St. Louis, Missouri 63101
To: Birch Telecom of Texas Ltd., L.L.P.
Greg Lawhon, Sr. VP & General Counsel
1004 Baltimore Ave., Suite 900
Kansas City, MO 64105
Either Party may from time-to-time designate another address or
addressee by giving notice in accordance with the terms of this Section
12.7.
Any notice or other communication will be deemed to be given when
received.
13.0 FORCE MAJEURE
Except as otherwise specifically provided in this Agreement, neither
Party will be liable for any delay or failure in performance of any
part of this Agreement caused by a Force Majeure condition, including
acts of the United States of America or any state, territory, or
political subdivision thereof, acts of God or a public enemy, fires,
floods, labor disputes such as strikes and lockouts, freight embargoes,
earthquakes, volcanic actions, wars, civil disturbances, cable cuts, or
other causes beyond the reasonable control of the Party claiming
excusable delay or other failure to perform. Provided, Force Majeure
will not include acts of any Governmental Authority relating to
environmental, health, or safety conditions at work locations. If any
Force Majeure condition occurs the Party whose performance fails or is
delayed because of such Force Majeure conditions will give prompt
notice to the other Party, and upon cessation of such Force Majeure
condition, will give like notice and commence performance hereunder as
promptly as reasonably practicable.
14.0 PUBLICITY
14.1 The Parties agree not to use in any advertising or sales promotion,
press releases or other publicity matters, any endorsements, direct or
indirect quotes or pictures implying endorsement by the other Party or
any of its employees without such Party's prior written approval. The
Parties will submit to each other for written approval, prior to
publication, all such publicity endorsement matters that mention or
display the other's name and/or marks or contain language from which a
connection to said name and/or marks may be inferred or implied.
<PAGE> 20
Interconnection Agreement-TX
General Terms and Conditions
Page 16 of 32
14.2 Neither Party will offer any services using the trademarks, service
marks, trade names, brand names, logos, insignia, symbols or decorative
designs of the other Party or its affiliates without the other Party's
written authorization.
15.0 NETWORK MAINTENANCE AND MANAGEMENT
15.1 The Parties will work cooperatively to implement this Agreement. The
Parties will exchange appropriate information (e.g., maintenance
contact numbers, network information, information required to comply
with law enforcement and other security agencies of the Government,
etc.) to achieve this desired reliability.
15.2 Each Party will provide a 24-hour contact number for Network Traffic
Management issues to the other's surveillance management center. A
facsimile (FAX) number must also be provided to facilitate event
notifications for planned mass calling events. Additionally, both
Parties agree that they will work cooperatively to ensure that all such
events will attempt to be conducted in such a manner as to avoid
disruption or loss of service to other end users. Each party will
maintain the capability of respectively implementing basic protective
controls such as "Cancel To" or "Call Gap."
15.3 Neither Party will use any service provided under this Agreement in a
manner that impairs the quality of service to other carriers or to
either Party's subscribers. Either Party will provide the other Party
notice of said impairment at the earliest practicable time.
16.0 LAW ENFORCEMENT AND CIVIL PROCESS
16.1 INTERCEPT DEVICES
16.1.1 Local and federal law enforcement agencies periodically request
information or assistance from local telephone service providers. When
either Party receives a request associated with a customer of the other
Party, the receiving Party will refer such request to the appropriate
Party, unless the request directs the receiving Party to attach a pen
register, trap-and-trace or form of intercept on the Party's own
facilities, in which case that Party will comply with any valid
request, to the extent the receiving party is able to do so; if such
compliance requires the assistance of the other Party such assistance
will be provided.
16.2 SUBPOENAS
16.2.1 If a Party receives a subpoena for information concerning an end user
the Party knows to be an end user of the other Party, the receiving
Party will refer the subpoena to the requesting entity with an
indication that the other Party is the responsible company.
<PAGE> 21
Interconnection Agreement-TX
General Terms and Conditions
Page 17 of 32
Provided, however, if the subpoena requests records for a period of
time during which the receiving Party was the end user's service
provider, the receiving Party will respond to any valid request to the
extent the receiving party is able to do so; if response requires the
assistance of the other party such assistance will be provided.
16.3 LAW ENFORCEMENT EMERGENCIES
16.3.1 If a Party receives a request from a law enforcement agency to
implement at its switch a temporary number change, temporary
disconnect, or one-way denial of outbound calls for an end user of the
other Party, the receiving Party will comply so long as it is a valid
emergency request. Neither Party will be held liable for any claims or
damages arising from compliance with such requests, and the Party
serving the end user agrees to indemnify and hold the other Party
harmless against any and all such claims.
17.0 CHANGES IN SUBSCRIBER CARRIER SELECTION
17.1 With respect to Resale services and unbundled Network Elements provided
to end users, each Party must obtain end user authorization prior to
requesting a change in the end users' provider of local exchange
service (including ordering end user specific Network Elements) and
must retain such authorizations for twelve (12) months. The
authorization must conform with federal rules regarding changes of
presubscribed interexchange carriers until such time as there are
federal or state rules applicable to changes of local exchange service
providers. Thereafter, the authorization must comply with each such
rule. The Party submitting the change request assumes responsibility
for applicable charges as specified in Section 258(b) of the
Telecommunications Act of 1996.
17.2 Only an end user can initiate a challenge to a change in its local
exchange service provider. In connection with such challenges each
Party will follow procedures which conform with federal rules regarding
challenges to changes of presubscribed interexchange carriers until
such time as there are federal or state rules applicable to challenges
to changes of Local Exchange Service Providers. Thereafter, the
procedures each Party will follow concerning challenges to changes of
local exchange service providers will comply with such rule. If an end
user notified SWBT or CLEC that the end user requests local exchange
service, the Party receiving such request shall be free to immediately
provide service to such end user. SWBT shall be free to connect the end
user to any local service provider based upon the local service
provider's request and assurance that proper end user authorization has
been obtained. CLEC shall make authorization available to SWBT upon
request and at no charge.
17.3 When an end user changes or withdraws authorization, each Party will
release customer specific facilities in accordance with the end user
customer's directions, or the directions
<PAGE> 22
Interconnection Agreement-TX
General Terms and Conditions
Page 18 of 32
of the end user's agent. Further, when an end user abandons the
premise, SWBT is free to reclaim the facilities for use by another
customer and is free to issue service orders required to reclaim such
facilities.
17.4 Neither Party shall be obligated by this Agreement to investigate any
allegations of unauthorized changes in local exchange service
("slamming") on behalf of the other Party or a third party. If SWBT, on
behalf of CLEC, agrees to investigate an alleged incidence of slamming,
SWBT shall charge CLEC a cost-based or mutually agreed investigation
fee.
18.0 AMENDMENTS OR WAIVERS
18.1 Except as otherwise provided in this Agreement, no amendment or waiver
of any provision of this Agreement and no consent to any default under
this Agreement will be effective unless the same is in writing and
signed by an officer of the Party against whom such amendment, waiver
or consent is claimed. In addition, no course of dealing or failure of
a Party strictly to enforce any term, right or condition of this
Agreement will be construed as a waiver of such term, right, or
condition. By entering into this Agreement, the Parties do not waive
any right granted to them pursuant to the Act; however, the Parties
enter into this Agreement without prejudice to any positions they have
taken previously, or may take in the future in any legislative,
regulatory or other public forum addressing any matters, including
matters related to the types of arrangements prescribed by this
Agreement.
19.0 AUTHORITY
19.1 Each person whose signature appears below represents and warrants that
he or she has authority to bind the Party on whose behalf he or she has
executed this Agreement.
20.0 BINDING EFFECT
20.1 This Agreement will be binding on and inure to the benefit of the
respective successors and permitted assigns of the Parties.
21.0 CONSENT
21.1 Where consent, approval, or mutual agreement is required of a Party, it
will not be unreasonably withheld or delayed.
22.0 EXPENSES
22.1 Except as specifically set out in this Agreement, each party will be
solely responsible for its own expenses involved in all activities
related to the subject of this Agreement.
<PAGE> 23
Interconnection Agreement-TX
General Terms and Conditions
Page 19 of 32
23.0 HEADINGS
23.1 The headings in this Agreement are inserted for convenience and
identification only and will not be considered in the interpretation of
this Agreement.
24.0 RELATIONSHIP OF PARTIES
24.1 This Agreement will not establish, be interpreted as establishing, or
be used by either party to establish or to represent their relationship
as any form of agency, partnership or joint venture. Neither Party will
have any authority to bind the other or to act as an agent for the
other unless written authority, separate from this Agreement, is
provided. Nothing in the Agreement will be construed as providing for
the sharing of profits or losses arising out of the efforts of either
or both of the Parties. Nothing herein will be construed as making
either Party responsible or liable for the obligations and undertakings
of the other Party.
25.0 CONFLICT OF INTEREST
25.1 The Parties represent that no employee or agent of either Party has
been or will be employed, retained, paid a fee, or otherwise received
or will receive any personal compensation or consideration from the
other Party, or any of the other Party's employees or agents in
connection with the arranging or negotiation of this Agreement or
associated documents.
26.0 MULTIPLE COUNTERPARTS
26.1 This Agreement may be executed in multiple counterparts, each of which
will be deemed an original but all of which will together constitute
but one, and the same document.
27.0 THIRD PARTY BENEFICIARIES
27.1 Except as may be specifically set forth in this Agreement, this
Agreement does not provide and will not be construed to provide third
parties with any remedy, claim, liability, reimbursement, cause of
action, or other privilege.
28.0 REGULATORY APPROVAL
28.1 Each Party agrees to cooperate with the other and with any regulatory
agency to obtain regulatory approval. During the term of this
Agreement, each Party agrees to continue to cooperate with each other
and any regulatory agency so that the benefits of this Agreement may be
achieved.
<PAGE> 24
Interconnection Agreement-TX
General Terms and Conditions
Page 20 of 32
29.0 TRADEMARKS AND TRADE NAMES
29.1 Except as specifically set out in this Agreement, nothing in this
Agreement will grant, suggest, or imply any authority for one Party to
use the name, trademarks, service marks, or trade names of the other
for any purpose whatsoever, absent written consent of the other Party.
30.0 REGULATORY AUTHORITY
30.1 SWBT will be responsible for obtaining and keeping in effect all
Federal Communications Commission, state regulatory commission,
franchise authority and other regulatory approvals that may be required
in connection with the performance of its obligations under this
Agreement. CLEC will be responsible for obtaining and keeping in effect
all Federal Communications Commission, state regulatory commission,
franchise authority and other regulatory approvals that may be required
in connection with its offering of services to CLEC Customers
contemplated by this Agreement. CLEC will reasonably cooperate with
SWBT in obtaining and maintaining any required approvals for which SWBT
is responsible, and SWBT will reasonably cooperate with CLEC in
obtaining and maintaining any required approvals for which CLEC is
responsible.
30.2 SWBT will not, of its own volition, file a tariff or make another
similar filing which supersedes this Agreement in whole or in part.
SWBT will make no filings which are inconsistent with this commitment.
This Section is not intended to apply to any SWBT tariffs or filings
which do not affect CLEC's rights or SWBT's obligations to CLEC under
this Agreement. This Section does not impair SWBT's right to file
tariffs nor does it impair SWBT's right to file tariffs proposing new
products and services and changes in the prices, terms and conditions
of existing products and services, including discontinuance or
grandfathering of existing features or services, of any
telecommunications services that SWBT provides or hereafter provides to
CLEC under this Agreement pursuant to the provision of Attachment 1:
Resale, nor does it impair CLEC's right to contest such tariffs before
the appropriate Commission.
30.3 SWBT will provide CLEC notice of any tariff or filing which concerns
the subject matter of this Agreement at the time a Preliminary Rate
Authority (PRA) is transmitted to the state commission, or, in
situations where a PRA would not be issued, within ninety (90) days
(forty five (45) days for price changes) of the expected effective date
of the tariff or filing.
30.4 In the event that SWBT is required by any governmental authority to
file a tariff or make another similar filing in connection with the
performance of any action that would otherwise be governed by this
Agreement, SWBT will provide CLEC notice of the same as set forth in
Section 30.3 above.
<PAGE> 25
Interconnection Agreement-TX
General Terms and Conditions
Page 21 of 32
30.5 If any tariff referred to in Section 30.4 becomes ineffective by
operation of law, through deregulation or otherwise, the terms and
conditions of such tariffs, as of the date on which the tariffs became
ineffective, will be deemed incorporated if not inconsistent with this
Agreement.
31.0 EFFECT OF OTHER AGREEMENTS
31.1 If SWBT enters into an agreement (the "Other Agreement") approved by
the Texas Public Utility Commission pursuant to Section 252 of the Act,
which provides for the provision of arrangements covered in this
Agreement, to another requesting Telecommunications Carrier, SWBT will
make available in Texas, to CLEC such arrangements upon the same rates,
terms and conditions as those provided in the Other Agreement. At its
sole option, CLEC may avail itself of either (i) the Other Agreement in
its entirety or (ii) the prices, terms and all material conditions of
the Other Agreement that directly relate to any of the following duties
as a whole:
(1) All Interconnection Rates - Section 251 (c) (2) of the Act;
or Access to Unbundled Network Elements - Section 251 (c)
(3) of the Act;
(2) Resale - Section 251 (c) (4) of the Act; or
(3) Collocation - Section 251 (c) (6) of the Act; or
(4) Number Portability - Section 251(b)(2) of the Act of this
STC; or
(5) Access to Rights of Way - Section 251(b)(4) of the Act; or
(6) Cellular Traffic;
(7) White Pages;
(8) Operator Services;
(9) Directory Assistance.
32.0 VERIFICATION REVIEWS
32.1 Subject to each Party's reasonable security requirements and except as
may be otherwise specifically provided in this Agreement, either Party
may audit the other Party's books, records and other documents once in
each Contract Year for the purpose of evaluating the accuracy of the
other Party's billing and invoicing. The Parties may employ other
persons or firms for this purpose. Such audit will take place at a time
and place agreed on by the Parties no later than thirty (30) days after
notice thereof.
32.2 Each Party will promptly correct any billing error that is revealed in
an audit, including making refund of any overpayment by the other Party
in the form of a credit on the invoice for the first full billing cycle
after the Parties have agreed upon the accuracy of the audit results.
Any disputes concerning audit results will be resolved pursuant to the
Dispute Resolution procedures described in Section 9 of this Agreement.
<PAGE> 26
Interconnection Agreement-TX
General Terms and Conditions
Page 22 of 32
32.3 Each Party will cooperate fully in any such audit, providing reasonable
access to any and all appropriate employees and books, records and
other documents reasonably necessary to assess the accuracy of the
Party's bills.
32.4 Either Party may audit the other Party's books, records and documents
more than once during any Contract Year if the previous audit found
previously uncorrected net variances or errors in invoices in the other
Party's favor with an aggregate value of at least two percent (2%) of
the amounts payable by CLEC for Resale services, Network Elements or
Combinations provided during the period covered by the audit.
32.5 Audits will be at the auditing Party's expense.
32.6 Upon (i) the discovery by either Party of overcharges not previously
reimbursed to the other Party or (ii) the resolution of disputed
audits, the affected Party will promptly reimburse the other Party the
amount of any overpayment times the commercial paper rate applicable on
the last day of the month preceding the month of discovery or
resolution as above. In no event, however, will interest be assessed on
any previously assessed or accrued late payment charges.
32.7 CLEC may require that, at the end of the first year of implementation
of this Agreement, SWBT submit to an audit or examination of services
performed under the interconnection agreement. Subsequent to the first
year of implementation, CLEC may require that audits or examinations be
performed if: (1) CLEC can show cause that it has a commercially
reasonable basis to seek an audit or examination; and (2) the request
for audit or examination specifically defines the particular services
that it seeks to audit or examine. All audits requested by CLEC under
this section shall be conducted at its expense. The dispute resolution
provisions of this Agreement shall be used to resolve disputes arising
concerning requests for audits or examinations, or the results of the
audits or examinations.
32.8 For a period of fourteen (14) months from the Effective Date of this
Agreement, SWBT may audit CLEC's operations, books, records, and other
documents related to the development of the percent local usage (PLU)
to be used to measure and settle untransmitted calling party numbers
(CPN) in connection with Attachment 12: Compensation. SWBT will bear
the reasonable expenses associated with this inspection.
32.9 Information obtained or received by CLEC in conducting the inspections
described in Section 32.7 and information obtained or received by
either Party in connection with Sections 32.1 through 32.6 and 32.8
will be subject to the confidentiality provisions of Section 6 of this
Agreement.
<PAGE> 27
Interconnection Agreement-TX
General Terms and Conditions
Page 23 of 32
33.0 COMPLETE TERMS
33.1 This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof and supersedes any prior
agreements, representations, statements, negotiations, understandings,
proposals or undertakings, oral or written, with respect to the subject
matter expressly set forth herein.
33.2 Neither Party will be bound by an amendment, modification or additional
term unless it is reduced to writing signed by an authorized
representative of the Party sought to be bound.
34.0 COOPERATION ON PREVENTING END USER FRAUD
34.1 The Parties agree to cooperate with one another to investigate,
minimize, and take corrective action in cases of fraud. The Parties'
fraud minimization procedures are to be cost-effective and implemented
so as not to unduly burden or harm one Party as compared to the other.
34.2 In cases of suspected fraudulent activity by an end user, at a minimum,
the cooperation referenced in the above paragraph will include
providing to the other Party, upon request, information concerning end
users who terminate services to that Party without paying all
outstanding charges. The Party seeking such information is responsible
for securing the end user's permission to obtain such information.
35.0 NOTICE OF NETWORK CHANGES
SWBT agrees to provide CLEC reasonable notice consistent with
applicable FCC rules of changes in the information necessary for the
transmission and routing of services using SWBT's facilities or
networks, as well as other changes that affect the interoperability of
those respective facilities and networks. This Agreement is not
intended to limit SWBT's ability to upgrade its network through the
incorporation of new equipment, new software or otherwise so long as
such upgrades are not inconsistent with SWBT's obligations to CLEC
under the terms of this Agreement.
36.0 GOOD FAITH PERFORMANCE
36.1 In the performance of their obligations under this Agreement the
Parties will act in good faith and consistently with the intent of the
Act. Where notice, approval or similar action by a Party is permitted
or required by any provision of this Agreement, (including, without
limitation, the obligation of the parties to further negotiate the
resolution of new or open issues under this Agreement) such action will
not be unreasonably delayed, withheld or conditioned.
<PAGE> 28
Interconnection Agreement-TX
General Terms and Conditions
Page 24 of 32
37.0 RESPONSIBILITY OF EACH PARTY
37.1 Each Party is an independent contractor, and has and hereby retains the
right to exercise full control of and supervision over its own
performance of its obligations under this Agreement and retains full
control over the employment, direction, compensation and discharge of
its employees assisting in the performance of such obligations. Each
Party will be solely responsible for all matters relating to payment of
such employees, including compliance with social security taxes,
withholding taxes and all other regulations governing such matters.
Each party will be solely responsible for proper handling, storage,
transport and disposal at its own expense of all (i) substances or
materials that it or its contractors or agents bring to, create or
assume control over at Work Locations or, (ii) Waste resulting
therefrom or otherwise generated in connection with its or its
contractors' or agents' activities at the Work Locations. Subject to
the limitations on liability and except as otherwise provided in this
Agreement, each Party will be responsible for (i) its own acts and
performance of all obligations imposed by applicable law in connection
with its activities, legal status and property, real or personal and,
(ii) the acts of its own affiliates, employees, agents and contractors
during the performance of the Party's obligations hereunder.
38.0 TRANSMISSION OF TRAFFIC TO THIRD PARTIES
38.1 CLEC will not send to SWBT local traffic that is destined for the
network of a third party unless CLEC has the authority to exchange
traffic with that third party.
39.0 GOVERNMENTAL COMPLIANCE
39.1 CLEC and SWBT each will comply at its own expense with all applicable
law related to i) its obligations under or activities in connection
with this Agreement; of ii) its activities undertaken at, in connection
with or relating to Work Locations. CLEC and SWBT each agree to
indemnify, defend, (at the other party's request) and save harmless the
other, each of its officers, directors and employees from and against
any losses, damages, claims, demands, suits, liabilities, fines,
penalties, and expenses (including reasonable attorneys' fees) that
arise out of or result from i) its failure or the failure of its
contractors or agents to so comply or ii) any activity, duty or status
of it or its contractors or agents that triggers any legal obligation
to investigate or remediate environmental contamination. SWBT, at its
own expense, will be solely responsible for obtaining from governmental
authorities, building owners, other carriers, and any other persons or
entities, all rights and privileges (including, but not limited to,
space and power), which are necessary for SWBT to provide the Network
Elements and Resale services pursuant to this Agreement.
<PAGE> 29
Interconnection Agreement-TX
General Terms and Conditions
Page 25 of 32
40.0 RESPONSIBILITY FOR ENVIRONMENTAL CONTAMINATION
40.1 CLEC will in no event be liable to SWBT for any costs whatsoever
resulting from the presence or Release of any Environmental Hazard that
CLEC did not introduce to the affected Work Location. SWBT will
indemnify, defend (at CLEC's request) and hold harmless CLEC, each of
its officers, directors and employees from and against any losses,
damages, claims, demands, suits, liabilities, fines, penalties and
expenses (including reasonable attorneys' fees) that arise out of or
result from (i) any Environmental Hazard that SWBT, its contractors or
agents introduce to the Work locations or (ii) the presence or Release
of any Environmental Hazard for which SWBT is responsible under
applicable law.
40.2 SWBT will in no event be liable to CLEC for any costs whatsoever
resulting from the presence or Release of any Environmental Hazard that
SWBT did not introduce to the affected Work Location. CLEC will
indemnify, defend (at SWBT's request) and hold harmless SWBT, each of
its officers, directors and employees from and against any losses,
damages, claims, demands, suits, liabilities, fines, penalties and
expenses (including reasonable attorneys' fees) that arise out of or
result from i) any Environmental Hazard that CLEC, its contractors or
agents introduce to the Work Locations or ii) the presence or Release
of any Environmental Hazard for which CLEC is responsible under
applicable law.
41.0 SUBCONTRACTING
41.1 If any obligation is performed through a subcontractor, each party will
remain fully responsible for the performance of this Agreement in
accordance with its terms, including any obligations either party
performs through subcontractors, and each party will be solely
responsible for payments due the party's subcontractors. No contract,
subcontract or other Agreement entered into by either Party with any
third party in connection with the provision of Resale services or
Network Elements hereunder will provide for any indemnity, guarantee or
assumption of liability by, or other obligation of, the other Party to
this Agreement with respect to such arrangement, except as consented to
in writing by the other Party. No subcontractor will be deemed a third
party beneficiary for any purposes under this Agreement. Any
subcontractor who gains access to CPNI or Confidential Information
covered by this Agreement will be required by the subcontracting Party
to protect such CPNI or Confidential Information to the same extent the
subcontracting Party is required to protect the same under the terms of
this Agreement.
42.0 REFERENCED DOCUMENTS
42.1 Whenever any provision of this Agreement refers to a technical
reference, technical publication, CLEC Practice, SWBT Practice, any
publication of telecommunications
<PAGE> 30
Interconnection Agreement-TX
General Terms and Conditions
Page 26 of 32
industry administrative or technical standards, or any other document
specifically incorporated into this Agreement, it will be deemed to be
a reference to the most recent version or edition (including any
amendments, supplements, addenda, or successors) of each document that
is in effect, and will include the most recent version or edition
(including any amendments, supplements, addenda, or successors) of
each document incorporated by reference in such a technical reference,
technical publication, CLEC Practice, SWBT Practice, or publication of
industry standards.
43.0 SEVERABILITY
43.1 If any term, condition or provision of this Agreement is held to be
invalid or unenforceable for any reason, such invalidity or
unenforceability will not invalidate the entire Agreement, unless such
construction would be unreasonable. The Agreement will be construed as
if it did not contain the invalid or unenforceable provision or
provisions, and the rights and obligations of each party will be
construed and enforced accordingly; provided, however, that in the
event such invalid or unenforceable provision or provisions are
essential elements of this Agreement and substantially impair the
rights or obligations of either Party, the Parties will promptly
negotiate a replacement provision or provisions. If impasse is reached,
the Parties will resolve said impasse under the dispute resolution
procedures set forth in Section 9.5.
44.0 SURVIVAL OF OBLIGATIONS
44.1 Any liabilities or obligations of a Party for acts or omissions prior
to the cancellation or termination of this Agreement, any obligation of
a Party under the provisions regarding indemnification, Confidential
Information, limitations on liability, and any other provisions of this
Agreement which, by their terms, are contemplated to survive (or to be
performed after) termination of this Agreement, will survive
cancellation or termination thereof.
45.0 GOVERNING LAW
45.1 The validity of this Agreement, the construction and enforcement of its
terms, and the interpretation of the rights and duties of the Parties
will be governed by the laws of the State of Texas other than as to
conflicts of laws, except insofar as federal law may control any aspect
of this Agreement, in which case federal law will govern such aspect.
The Parties submit to personal jurisdiction in Dallas, Texas, and waive
any and all objections to a Texas venue.
46.0 PERFORMANCE CRITERIA
46.1 Specific provisions governing failure to meet Performance Criteria are
contained in Attachment 17: Failure to Meet Performance Criteria.
<PAGE> 31
Interconnection Agreement-TX
General Terms and Conditions
Page 27 of 32
47.0 OTHER OBLIGATIONS OF CLEC
47.1 For the purposes of establishing service and providing efficient and
consolidated billing to CLEC, CLEC is required to provide SWBT its
authorized and nationally recognized Operating Company Number (OCN).
48.0 DIALING PARITY; INTERIM NUMBER PORTABILITY
48.1 SWBT will ensure that all CLEC Customers experience the same dialing
parity as similarly-situated customers of SWBT services, such that, for
all call types: (i) an CLEC Customer is not required to dial any
greater number of digits than a similarly-situated SWBT customer; (ii)
the post-dial delay (time elapsed between the last digit dialed and the
first network response), call completion rate and transmission quality
experienced by an CLEC Customer is at least equal in quality to that
experienced by a similarly-situated SWBT customer; and (iii) the CLEC
Customer may retain its local telephone number. SWBT further agrees to
provide Interim Number Portability in accordance with the requirements
of the Act. Specific requirements concerning Interim Number Portability
are set forth in Attachment 14: Interim Number Portability.
49.0 BRANDING
49.1 Specific provisions concerning the branding of services provided to
CLEC by SWBT under this Agreement are contained in the following
Attachments and Appendices to this Agreement: Attachment 1: Resale;
Appendix OS-Resale; Appendix DA-Resale; Attachment 2: Ordering &
Provisioning-Resale; Attachment 3: Maintenance-Resale; Attachment 7:
Ordering & Provision in-Unbundled Network Elements; Attachment 8:
Maintenance-Unbundled Network Elements.
50.0 CUSTOMER INQUIRIES
50.1 Each Party will refer all questions regarding the other Party's
services or products directly to the other Party at a telephone number
specified by that Party.
50.2 Each Party will ensure that all of their representatives who receive
inquiries regarding the other Party's services: (i) provide the numbers
described in Section 50.1 to callers who inquire about the other
Party's services or products; and (ii) do not in any way disparage or
discriminate against the other Party or its products or services.
51.0 DISCLAIMER OF WARRANTIES
51.1 TO THE EXTENT CONSISTENT WITH ITS OBLIGATIONS UNDER THE ACT, SWBT MAKES
NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR
<PAGE> 32
Interconnection Agreement-TX
General Terms and Conditions
Page 28 of 32
IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTY AS TO
MERCHANTABILITY OR FITNESS FOR INTENDED OR PARTICULAR PURPOSE WITH
RESPECT TO SERVICES PROVIDED HEREUNDER.
52.0 NO WAIVER
52.1 CLEC's agreement herein to accept less than fully operational
electronic interfaces to operations support systems functions on and
after January 1, 1997, will not be deemed a waiver of Section 251(c)(3)
of the Act to receive such interfaces on that date.
53.0 DEFINITIONS
53.1 For purposes of this Agreement, certain terms have been defined in this
Agreement to encompass meanings that may differ from, or be in addition
to, the normal connotation of the defined word. Unless the context
clearly indicates otherwise, any term defined or used in the singular
will include the plural. The words "will" and "shall" are used
interchangeably throughout this Agreement and the use of either
connotes a mandatory requirement. The use of one or the other will not
mean a different degree of right or obligation for either Party. A
defined word intended to convey its special meaning is capitalized when
used. Other terms that are capitalized and not defined in this
Agreement will have the meaning in the Act.
54.0 RESALE
54.1 At the request of CLEC, and pursuant to the requirements of the Act,
any telecommunications service that SWBT currently provides or
hereafter offers to any customer in the geographic area where SWBT is
the incumbent LEC will be made available to CLEC by SWBT for Resale in
accordance with the terms, conditions and prices set forth in this
Agreement. Specific provisions concerning Resale are addressed in
Attachment 1: Resale, and other applicable Attachments.
55.0 UNBUNDLED NETWORK ELEMENTS
55.1 At the request of CLEC and pursuant to the requirements of the Act,
SWBT will offer in the geographic area where SWBT is the incumbent LEC
Network Elements to CLEC on an unbundled basis on rates, terms and
conditions set forth in this Agreement that are just, reasonable, and
non-discriminatory. Specific Provisions concerning Unbundled Network
Elements are addressed in Attachment 6: Unbundled Network Elements, and
other applicable Attachments.
<PAGE> 33
Interconnection Agreement-TX
General Terms and Conditions
Page 29 of 32
56.0 ORDERING AND PROVISIONING, MAINTENANCE, CONNECTIVITY BILLING AND
RECORDING, AND PROVISION OF CUSTOMER USAGE DATA
56.1 In connection with its Resale of services to CLEC, SWBT agrees to
provide to CLEC Ordering and Provisioning Services, Maintenance
services, Connectivity Billing and Recording services and Provision of
Customer Usage Data services pursuant to the terms specified in
Attachments 2, 3, 4 and 5, respectively.
56.2 In connection with its furnishing Unbundled Networks Elements to CLEC,
SWBT agrees to provide to CLEC Ordering and Provisioning Services,
Maintenance services, Connectivity Billing and Recording services and
Provision of Customer Usage Data services pursuant to the terms
specified in Attachments 7, 8, 9 and 10, respectively.
57.0 NETWORK INTERCONNECTION ARCHITECTURE
57.1 Where the Parties interconnect their networks, for purposes of
exchanging traffic between their networks, the Parties agree to utilize
the interconnection methods specified in Attachment 11: Network
Interconnection Architecture. SWBT expressly recognizes that this
provision and said Attachment are in no way intended to impair in any
way CLEC's right to interconnect with unbundled Network Elements
furnished by SWBT at any technically feasible point within SWBT's
network, as provided in the Act.
58.0 COMPENSATION FOR DELIVERY OF TRAFFIC
58.1 The Parties agree to compensate each other for the transport and
termination of traffic as provided in Attachment 12: Compensation.
59.0 ANCILLARY FUNCTIONS
Ancillary Functions may include, but are not limited to, Collocation,
Rights-of-Way, Conduit and Pole Attachments. SWBT agrees to provide
Ancillary Functions to CLEC as set forth in Attachment 13: Ancillary
Functions.
60.0 CONFORMING AMENDMENTS
60.1 SWBT and CLEC have already entered into an interconnection agreement in
Texas which has been approved by the Texas Public Utility Commission
and on file with the Texas Public Utility Commission since April 10,
1998 ("Agreement"). This document is an amendment to the Agreement, and
except as otherwise provided herein, the Agreement remains in full
force and effect. For the convenience of the parties, the parties have
separately prepared a document that includes the operative terms of the
Agreement and this amendment ("Conforming Agreement"), and the parties
agree that the Conforming Agreement accurately reflect all the terms of
the Agreement, as amended.
<PAGE> 34
Interconnection Agreement-TX
General Terms and Conditions
Page 30 of 32
61.0 OTHER REQUIREMENTS AND ATTACHMENTS
61.1 This Agreement incorporates a number of listed Attachments which,
together with their associated Appendices, Exhibits, and Addenda,
constitute the entire Agreement between the Parties. In order to
facilitate use and comprehension of the Agreement, the Attachments have
been grouped under the following broad headings: Resale; Unbundled
Network Elements; Network Interconnection Architecture; Ancillary
Functions; and Other Requirements. It is understood that these
groupings are for convenience of reference only, and are not intended
to limit the applicability which any particular Attachment may
otherwise have.
61.2 Appended to this Agreement and incorporated herein are the Attachments
listed below. To the extent that any definitions, terms or conditions
in any given Attachment differ from those contained in the main body of
this Agreement, those definitions, terms or conditions will supersede
those contained in the main body of this Agreement, but only in regard
to the services or activities listed in that particular Attachment. In
particular, if an Attachment contains a term length that differs from
the term length in the main body of this Agreement, the term length of
that Attachment will control the length of time that services or
activities are to occur under the Attachment, but will not affect the
term length of the remainder of this Agreement, except as may be
necessary to interpret the Attachment.
RESALE
Attachment 1: Resale
Appendix Services/Pricing
Exhibit A: SWBT's Telecommunications Services Available for
Resale
Exhibit B: SWBT's Other Services Available for Resale
Appendix Customized Routing-Resale
Appendix DA-Resale
Appendix OS-Resale
Appendix White Pages (WP)-Resale
Attachment 2: Ordering and Provisioning-Resale
Attachment 3: Maintenance-Resale
Attachment 4: Connectivity Billing-Resale
Attachment 5: Provision of Customer Usage Data-Resale
UNBUNDLED NETWORK ELEMENTS
Attachment 6: Unbundled Network Elements (UNE)
Appendix Pricing-UNE
Appendix Pricing-UNE Schedule of Prices
Attachment 7: Ordering and Provisioning-UNE
Exhibit A-Electronic Ordering and Provisioning-UNE
Attachment 8: Maintenance-UNE
<PAGE> 35
Interconnection Agreement-TX
General Terms and Conditions
Page 31 of 32
Attachment 9: Billing-Other
Attachment 10: Provision of Customer Usage Data-UNE
NETWORK INTERCONNECTION ARCHITECTURE AND COMPENSATION
Attachment 11: Network Interconnection Architecture
Appendix Interconnection Trunking Requirement (ITR)
Appendix Network Interconnection Methods (NIM)
Appendix SS7 Interconnection
Attachment 12: Compensation
Appendix Cellular
Appendix FGA
ANCILLARY FUNCTIONS
Attachment 13: Ancillary Functions
Appendix Collocation
Appendix Poles, Conduit, ROW
OTHER REQUIREMENTS
Attachment 14: Interim Number Portability
Attachment 15: E911
Attachment 16: Network Security and Law Enforcement
Attachment 17: Failure to Meet Performance Criteria
Attachment 18: Mutual Exchange of Directory Listing Information
Attachment 19: White Pages-Other (WP-O)
Attachment 20: Clearinghouse
Attachment 21: Numbering
Attachment 22: DA-Facilities Based
Attachment 23: OS-Facilities Based
Attachment 24: Recording-Facilities Based
<PAGE> 36
Interconnection Agreement-TX
General Terms and Conditions
Page 32 of 32
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
/s/ Gregory C. Lawhon 1/4/99 /s/ Larry B. Cooper 1/5/99
- ------------------------------------- -----------------------------------
Sign and Print Name: Date Sign and Print Name: Date
Gregory C. Lawhon
Senior Vice President of
Birch Texas Holdings, Inc., the
General Partner of Birch Telecom Larry B. Cooper
of Texas Ltd., L.L.P. President-industry Markets
- ------------------------------------- -----------------------------------
Position/Title *Position/Title
BIRCH TELECOM OF TEXAS LTD., L.L.P. SOUTHWESTERN BELL TELEPHONE COMPANY
* Although Southwestern Bell Telephone (Southwestern Bell) intends to fully
comply with the PUC's December 19, 1996 Order pending appeal and/or stay,
Southwestern Bell Telephone Company has not voluntarily signed this document.
Instead, Southwestern Bell has signed the document under specific compulsion of
the Texas Public Utility Commission's directive at the Open Meeting on February
25, 1998 that Southwestern Bell must sign the document. Southwestern Bell
reserves all of its appellate rights under federal and state law and, by signing
this document under compulsion, Southwestern Bell does not waive any legal
arguments that the Arbitration Awards of November 7, 1996, September 30, 1997,
December 19, 1997, and associated Orders and resulting document is, in whole or
in part, unlawful. Because the arbitration/negotiation process has been tainted
by the FCC's rules, as has been recognized by the US Eighth Circuit Court of
Appeals, Southwestern Bell reserves its rights regarding all aspects of the
document whether reflecting negotiated, stipulated or arbitrated provisions.
Furthermore, in signing this document Southwestern Bell does not agree to the
application of the dispute resolution provisions of the document (General Terms
and Conditions, sections 9.0 through 9.6.1) to any nonarbitrated, nonstipulated
and/or nonagreed-to language not contained in this document.
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
THE PREDECESSOR(1) THE COMPANY
------------------------------------------------- ------------------------
1994 1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earnings
Total earnings (loss)................... $ 440 $ 94 $ 289 $ 268 $ (1,789) $ (16,208)
Income tax.............................. 319 81 205 186 - -
Capitalized interest.................... - - - - - -
--------- --------- ---------- ---------- ---------- -----------
Subtotal.................................. 759 175 494 454 (1,789) (16,208)
Fixed charges
Interest charges........................ 48 58 102 97 - -
Interest factor of operating rents...... 10 13 16 19 - -
--------- --------- ---------- ---------- ---------- -----------
Total fixed charges....................... 58 71 118 116 - -
--------- --------- ---------- ---------- ---------- -----------
Earnings, as adjusted..................... $ 817 $ 246 $ 612 $ 570 $ (1,789) $ (16,208)
========= ========= ========== ========== ========== ==========
Ratio of earnings to fixed charges........ 14.09x 3.46x 5.19x 4.91x - -
Deficiency of earnings to fix charges - - - - $ (1,789) $ (16,208)
</TABLE>
Notes: 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.
(1) The Predecessor company is the Valu-Line Companies which were merged
with Birch during February 1998. Prior to February 1998, Birch had no
revenues and was in the developmental stage.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BIRCH TELECOM, INC. AS OF, AND FOR THE YEAR
ENDING DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K OF
BIRCH TELECOM, INC.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 39,745
<SECURITIES> 15,888
<RECEIVABLES> 4,267
<ALLOWANCES> 228
<INVENTORY> 916
<CURRENT-ASSETS> 61,114
<PP&E> 26,900
<DEPRECIATION> 747
<TOTAL-ASSETS> 134,149
<CURRENT-LIABILITIES> 11,394
<BONDS> 114,681
14,063
8
<COMMON> 5
<OTHER-SE> (7,112)
<TOTAL-LIABILITY-AND-EQUITY> 134,149
<SALES> 26,087
<TOTAL-REVENUES> 26,087
<CGS> 18,886
<TOTAL-COSTS> 18,886
<OTHER-EXPENSES> 18,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,254
<INCOME-PRETAX> (16,208)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,208)
<EPS-PRIMARY> (4.71)
<EPS-DILUTED> (4.71)
</TABLE>
