<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] 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 (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes X No
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE PAGE 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 39,745 $ 2,067
Pledged securities...................................................... 15,888 15,573
Accounts receivable, net................................................ 4,039 6,743
Inventory............................................................... 916 3,676
Prepaid expenses and other.............................................. 526 2,979
------------ ------------
Total current assets ...................................................... 61,114 31,038
Property and equipment, net ............................................... 26,153 45,907
Pledged securities - noncurrent............................................ 21,897 15,075
Goodwill, net.............................................................. 16,863 19,513
Other intangibles, net .................................................... 7,689 7,310
Other assets............................................................... 433 1,076
------------ ------------
Total assets............................................................... $ 134,149 $ 119,919
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease obligations...... $ 335 $ 800
Accounts payable ....................................................... 8,503 12,712
Accrued expenses........................................................ 2,556 5,667
------------ ------------
Total current liabilities ................................................. 11,394 19,179
14% Senior Notes........................................................... 114,681 114,698
Capital lease obligations, net of current maturities....................... 778 1,129
Other long-term debt, net of current maturities............................ 332 328
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 15,049
Stockholders' deficit:
Series C Preferred Stock, 8,492,749 shares issued and outstanding....... 8 8
Common stock, $.001 par value, 27,000,000 shares authorized,
5,000,296 shares issued and outstanding............................... 5 5
Warrants ............................................................... 337 337
Additional paid-in capital ............................................. 12,273 12,485
Accumulated deficit .................................................... (19,722) (43,299)
------------ ------------
Total stockholders' deficit................................................ (7,099) (30,464)
------------ ------------
Total liabilities and stockholders' deficit................................ $ 134,149 $ 119,919
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Communications services, net ..................... $ 5,560 $ 11,589 $ 8,817 $ 20,897
Equipment sales, net ............................. 500 2,386 948 3,714
------- -------- ------- --------
Total revenue ...................................... 6,060 13,975 9,765 24,611
Cost of services:
Cost of communications services .................. 4,102 9,034 6,430 16,172
Cost of equipment sales .......................... 330 1,367 644 2,154
------- -------- ------- --------
Total cost of services ............................. 4,432 10,401 7,074 18,326
------- -------- ------- --------
Gross margin ....................................... 1,628 3,574 2,691 6,285
Selling, general and administrative expense ........ 2,740 11,068 4,112 19,364
Depreciation and amortization expense .............. 374 2,031 632 3,574
------- -------- ------- --------
Loss from operations ............................... (1,486) (9,525) (2,053) (16,653)
Interest expense ................................... (280) (3,769) (336) (7,484)
Interest income .................................... -- 655 -- 1,562
------- -------- ------- --------
Net loss ........................................... (1,766) (12,639) (2,389) (22,575)
Preferred stock dividends .......................... (479) (492) (695) (986)
Amortization of preferred stock issuance costs ..... (11) (8) (11) (16)
------- -------- ------- --------
Loss applicable to common stock .................... $(2,256) $(13,139) $(3,095) $(23,577)
======= ======== ======= ========
Loss per common share-- basic and diluted .......... $ (0.55) $ (2.60) $ (1.20) $ (4.68)
======= ======== ======= ========
Weighted average number of common shares
outstanding...................................... 4,069 5,044 2,582 5,035
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
---- ----
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES .................................. $ (695) $(18,356)
INVESTING ACTIVITIES
Purchase of property and equipment ................................... (3,495) (20,496)
Business acquisitions, net of cash acquired .......................... (5,133) (4,756)
Purchase of pledged securities ....................................... (44,247) --
Maturity of pledged securities ....................................... -- 8,050
Amortization of discount on pledged securities ....................... -- (913)
--------- --------
Net cash used in investing activities ................................ (52,875) (18,115)
FINANCING ACTIVITIES
Proceeds from issuance of common stock and warrants .................. 342 --
Proceeds from issuance of preferred stock ............................ 9,500 --
Payment of financing costs ........................................... (5,106) --
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 short term notes ........................................ (250) (200)
Repayment of long-term debt .......................................... (573) (680)
Repayment of capital lease obligations ............................... (40) (327)
--------- --------
Net cash provided by (used in) financing activities .................. 117,118 (1,207)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 63,548 (37,678)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 210 39,745
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 63,758 $ 2,067
========= ========
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 ......... $ 4,762 $ 2,678
Fair value of intangible assets ................................. 18,469 4,087
Assumption of liabilities ....................................... 2,321 926
Assumption of long-term debt and capital lease obligations ...... 1,027 872
Issuance of Series A Preferred Stock ............................ 4,750 --
Issuance of Series C Preferred Stock ............................ 10,000 --
Issuance of common stock ........................................ -- 211
Property and equipment additions included in accounts payable ...... 7,213 2,646
Property and equipment additions acquired through capital lease .... -- 1,147
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BIRCH TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Birch Telecom, Inc. ("Birch" or "the Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months and six months ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Birch Telecom, Inc.
annual report on Form 10-K for the fiscal year ended December 31, 1998.
2. RECLASSIFICATIONS
Certain items in the 1998 condensed consolidated financial statements
have been reclassified to be consistent with the classification in the 1999
condensed consolidated financial statements.
3. ACQUISITIONS
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 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 May 1998, Birch acquired Boulevard Phone Company (Boulevard), a
shared tenant service provider in the Kansas City metropolitan area, for
$300,000 in cash and Telesource Communications, Inc. (Telesource), a CPE
provider in the Kansas City metropolitan area, for $325,000 in cash.
In February 1999, the Company acquired American Local
Telecommunications, LLC (ALT), a competitive local exchange carrier based in the
Dallas, Texas metropolitan area. The acquisition included substantially all
assets of ALT. The total purchase price was approximately $1.6 million.
In March 1999, the Company acquired the stock of Capital Communications
Corporation (Capital), a telecommunications equipment provider based in the St.
Louis, Missouri metropolitan area. The total purchase price was approximately
$3.0 million plus the additional cash consideration based on local service lines
converted to the Company's service from Capital's existing customer base, which
totaled $100,000 through June 30, 1999.
The Valu-Line, Boulevard, Telesource, ALT and Capital acquisitions were
recorded using the purchase method of accounting. Accordingly, the operations of
each are included in the condensed consolidated statements of operations and
cash flows from the date of acquisition.
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4. PLEDGED SECURITIES, WARRANTS, AND DEBT
During June 1998, the Company completed a $115 million private offering
of 14% Senior Notes due June 2008 (the Senior Notes) 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
$30.6 million and $37.8 million of U.S. Treasury securities at June 30, 1999 and
December 31, 1998, respectively, as held to maturity recorded at amortized cost
and maturing between six and twenty-four months. A portion of the proceeds from
the Senior Notes, $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 $302,000 and $319,000 at June 30, 1999 and December 31,
1998, respectively. 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.
A Registration Statement on Form S-4, registering the Company's 14%
Senior Notes and offering to exchange (the Exchange Offer) any and all of the
outstanding 14% Senior Notes for Exchange Notes, was declared effective by the
Securities and Exchange Commission (SEC) in March 1999. The Exchange Offer
terminated after all of the outstanding 14% Senior Notes were exchanged. The
terms and conditions of the Exchange Notes are identical to those of the 14%
Senior Notes in all material respects.
5. SUBSEQUENT EVENTS
During July and August 1999, the Company generated $44.0 million in net
proceeds from the following transactions: sale of $10.0 million of Series D
Preferred Stock to primarily existing stockholders; sale of $60.0 million of
Series F Preferred Stock to an affiliate of Kohlberg Kravis Roberts & Co.;
repurchase and retirement of 2,222,222 of the outstanding shares of Series C
Preferred Stock for $10.0 million; conversion of each share of the Company's
Series B Preferred Stock into, (1) one share of the Company's amended and
restated Series B Preferred Stock, and (2) 0.22222 of a share of the Company's
Series E Preferred Stock; and the subsequent redemption of all of its Series E
Preferred Stock for $8.6 million.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company has used strategic acquisitions (the Acquisitions) to
expand its business capabilities. The following acquisitions were completed
during 1998 and the six months ending June 30, 1999:
<TABLE>
<CAPTION>
Acquired Date of
Company Acquisition Principal Business Activity
------- ----------- ---------------------------
<S> <C> <C>
Valu-Line February 1998 Provider of switched long distance,
resold local services and CPE
sales and services in Kansas
Boulevard May 1998 Provider of shared tenant service
in the Kansas City, MO metropolitan
area
Telesource May 1998 Provider of CPE sales and service
in the Kansas City, MO
metropolitan area
TFSnet September 1998 Provider of Internet service in
the Kansas City, MO metropolitan
area
ALT February 1999 Competitive local exchange carrier
based in the Dallas, TX
metropolitan area
Capital March 1999 Provider of telecommunications
equipment based in the St. Louis,
MO metropolitan area
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June
30, 1998
Revenue. Revenue increased 130.6% to $14.0 million for the 1999 period
compared to $6.1 million for the 1998 period. The increase in revenue is
primarily a result of new customer sales from new and existing markets and the
Acquisitions. For the 1999 and 1998 quarters, as a percentage of total revenue,
communications services were 82.9% and 91.7%, respectively, and CPE sales were
17.1% and 8.3%, respectively. Lines in service increased 205.4% to 67,400 at
June 30, 1999 compared to 22,070 at June 30, 1998.
Cost of services. Cost of services increased 134.7% to $10.4 million
for the 1999 period compared to $4.4 million for the 1998 period. The increase
in cost of services is primarily the result of associated revenue increases.
Gross margin increased 119.5% to $3.6 million (25.6% of revenue) for the 1999
period compared to $1.6 million (26.9% of revenue) for the 1998 period. The
decline in gross margin as a percentage of revenue is principally from a greater
percentage of revenue being derived from resold local service during the 1999
period compared to the 1998 period.
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Selling, general and administrative expense. Selling, general and
administrative expense increased 303.9% to $11.1 million for the 1999 period
compared to $2.7 million for the 1998 period. The increase in expense is
primarily a result of supporting and attracting customers from new and existing
markets, preparations for market launches in Texas and the Acquisitions, each of
which affected wages, rent and advertising expenses. Additionally, the Company
had approximately 670 employees at June 30, 1999, compared to 180 employees at
June 30, 1998. EBITDA, a commonly used measure by securities analysts of
earnings before deducting interest, taxes, depreciation and amortization,
increased 573.9% to a loss of $7.5 million for the 1999 period compared to a
loss of $1.1 million for the 1998 period.
Depreciation and amortization. Depreciation and amortization increased
443.0% to $2.0 million for the 1999 period compared to $374,000 for the 1998
period. The increase in depreciation and amortization is primarily attributable
to the fixed and intangible assets related to the Acquisitions, as well as the
deployment of network assets in the Company's markets.
Interest. Interest expense increased to $3.8 million for the 1999
period compared to $280,000 for the 1998 period. The increase in interest
expense is primarily attributable to the interest charges on the $115 million
Senior Notes due 2008. Interest income was $655,000 for the 1999 period
resulting primarily from invested funds received from the $115 million Senior
Notes due 2008.
Net loss. Net loss increased 615.7% to $12.6 million for the 1999
period compared to $1.8 million for the 1998 period.
Six Months Ended June 30, 1999 Compared to Six Months Ended June
30, 1998
Revenue. Revenue increased 152.0% to $24.6 million for the 1999 period
compared to $9.8 million for the 1998 period. The increase in revenue is
primarily a result of new customer sales from new and existing markets and the
Acquisitions. For the 1999 and 1998 periods, as a percentage of total revenue,
communications services were 84.9% and 90.3%, respectively, and CPE sales were
15.1% and 9.7%, respectively.
Cost of services. Cost of services increased 159.1% to $18.3 million
for the 1999 period compared to $7.1 million for the 1998 period. The increase
in cost of services is primarily a result of associated revenue increases. Gross
margin increased 133.6% to $6.3 million (25.5% of revenue) for the 1999 period
compared to $2.7 million (27.6% of revenue) for the 1998 period. The decline in
gross margin as a percentage of total revenue is principally from a greater
percentage of revenue being derived from resold local service during the 1999
period compared to the 1998 period.
Selling, general and administrative expense. Selling, general and
administrative expense increased 370.9% to $19.4 million for the 1999 period
compared to $4.1 million for the 1998 period. The increase in expense is
primarily a result of supporting and attracting customers from new and existing
markets, preparations for market launches in Texas and the Acquisitions, each of
which affected wages, rent and advertising expenses. Additionally, the Company
had approximately 670 employees at June 30, 1999 compared to 180 employees at
June 30, 1998. EBITDA, a commonly used measure by securities analysts of
earnings before deducting interest, taxes, depreciation and amortization,
increased 820.4% to a loss of $13.1 million for the 1999 period compared to a
loss of $1.4 million for the 1998 period.
Depreciation and amortization. Depreciation and amortization increased
465.5% to $3.6 million for the 1999 period compared to $632,000 for the 1998
period. The increase in depreciation and amortization is primarily attributable
to the fixed and intangible assets related to the Acquisitions, as well as the
deployment of network assets in the Company's markets.
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Interest. Interest expense increased to $7.5 million for the 1999
period compared to $336,000 for the 1998 period. The increase in interest
expense is primarily attributable to the interest charges on the $115 million
Senior Notes due 2008. Interest income was $1.6 million for the 1999 period
resulting primarily from invested funds received from the $115 million Senior
Notes due 2008.
Net loss. Net loss increased 845.0% to $22.6 million for the 1999
period compared to $2.4 million for the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets decreased from $134.1 million at December 31, 1998
to $119.9 million at June 30, 1999, primarily due to the use of cash to fund
operations offset by capital outlays for expansion of the Company's local and
data networks and development of operations support systems and automated back
office systems. At June 30, 1999, the Company's current assets of $31.0 million
exceeded its current liabilities of $19.2 million, providing working capital of
$11.8 million, representing a decrease of $37.9 million compared to December 31,
1998. Of working capital at June 30, 1999, $15.6 million represents securities
pledged to satisfy interest payments on senior notes, compared to $662,000 of
accrued interest at June 30, 1999 related to such Notes. At December 31, 1998,
the Company's current assets of $61.1 million exceeded current liabilities of
$11.4 million, providing working capital of $49.7 million. This decrease is
primarily attributable to the use of cash to fund operations and capital outlays
for expansion of the Company's network, support systems and back office systems
as previously stated.
Net cash used in operating activities was $18.4 million for the six
months ended June 30, 1999 compared to $695,000 for the same period in 1998. Net
cash used in operating activities was primarily used to fund the Company's net
losses of $22.6 million in the 1999 period and $2.4 million in the 1998 period.
Net cash used in investing activities was $18.1 million for the six
months ended June 30, 1999 compared to $52.9 million during the same period in
1998. In the 1999 period, net cash used in investing activities was primarily
used for the purchase of property and equipment related to the expansion of the
network, support systems and back office systems of $20.5 million, net proceeds
from the sale of pledged securities of $8.1 million for the semi-annual interest
payment on the $115 million Senior Notes due 2008 and acquisitions of $4.8
million. In the 1998 period, net cash used in investing activities was primarily
used for purchases of pledged securities related to the $115 million Senior
Notes due 2008 of $44.2 million, acquisitions of $5.1 million, and purchases of
property and equipment related to the expansion of the network, support systems
and back office systems of $3.5 million.
Net cash used in financing activities was $1.2 million for the six
months ended June 30, 1999 compared to net cash provided by financing activities
of $117.1 million for the same period in 1998. In the 1999 period, net cash used
in financing activities was primarily used for the scheduled repayment of debt
and capital lease obligations. In the 1998 period, net cash provided by
financing activities was primarily a result of proceeds from the Company's
private offering of the $115 million Senior Notes due 2008.
The expansion of the Company's business will continue to require
significant capital to fund capital expenditures, working capital needs, debt
service and the cash flow deficits generated by operating losses. The Company's
principal capital expenditure requirements include the purchase, installation,
and expansion of switches and transmission equipment for the Company's local and
data networks and the further development of operations support systems and
automated back office systems. Management does not expect that the growth of the
Company's long distance and CPE business will require significant capital
expenditures. The Company currently estimates that the cash required to fund
capital expenditures for its expansion plans will be approximately $50.0 million
in 1999.
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To date, the Company has primarily funded its expenditures through
proceeds from the $115 million Senior Notes due 2008 and private sales of equity
securities. In February and March 1998, the Company 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 the $115 million Senior Notes due 2008
for net proceeds of $110.2 million. During July and August 1999, the Company
completed the following equity transactions generating $44.0 million in net
proceeds:
- Issuance of $10.0 million of Series D Preferred Stock to existing
stockholders
- Issuance of $60.0 million of Series F Preferred Stock to an
affiliate of Kohlberg Kravis Roberts & Co.
- Repurchase and retirement of 2,222,222 of the outstanding shares of
Series C Preferred Stock for $15.0 million
- Conversion of each share of the Company's Series B Preferred Stock
into (1) one share of the Company's amended and restated Series B
Preferred Stock, and (2) 0.22222 of a share of the Company's
Series E Preferred Stock
- Redemption of all Series E Preferred Stock for $8.6 million.
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 the
Company's computer programs that have date-sensitive software may recognize the
date using "00" as the year 1900 rather than the year 2000. In addressing this
problem, the Company anticipates spending $20 million on new systems from
inception through the end of 1999. 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 end 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 an
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 the incumbent local
exchange carrier'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 the Company's business, operating results and financial
condition and its ability to achieve sufficient cash flow.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth and expansion strategy. The forward-looking statements are
subject to risks, uncertainties and assumptions, including, but not limited to,
the impact of competitive products and pricing, product developments, changes in
law and regulations, customer demand, litigation, availability of future
financing, uncertainty of market acceptance of new products, and other risks.
Actual results may differ materially from anticipated results described in these
forward-looking statements.
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ITEM 3. 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.
12
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(27) Financial Data Schedule (for SEC use only)
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1999.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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.
BIRCH TELECOM, INC.
DATE: AUGUST 12, 1999 BY: /S/ DAVID E. SCOTT
------------------------------------
DAVID E. SCOTT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: AUGUST 12, 1999 BY: /S/ BRADLEY A. MOLINE
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BRADLEY A. MOLINE
CHIEF FINANCIAL OFFICER
14
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15,049
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