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UNITED STATES
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 March 31, 2000
/ / 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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. There were 8,589,601
shares of common stock, $.001 par value, outstanding as of May 8, 2000.
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TABLE OF CONTENTS
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<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ -----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000 3
Condensed Consolidated Statements of Operations for the three months ended March
31, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 10
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE PAGE 13
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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>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 8,078 $ 5,053
Pledged securities...................................................... 16,153 15,936
Accounts receivable, net................................................ 12,902 11,612
Inventory............................................................... 3,530 3,735
Prepaid expenses and other.............................................. 3,299 3,759
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Total current assets....................................................... 43,962 40,095
Property and equipment..................................................... 84,151 70,192
Less: accumulated depreciation............................................ 11,482 8,080
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Property and equipment, net................................................ 72,669 62,112
Pledged securities - noncurrent............................................ 7,587 7,484
Goodwill, net.............................................................. 19,293 19,316
Other intangibles, net..................................................... 21,176 16,911
Other assets............................................................... 1,409 1,053
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Total assets............................................................... $ 166,096 $ 146,971
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease obligations...... $ 1,381 $ 1,300
Accounts payable ....................................................... 7,356 13,300
Accrued expenses........................................................ 17,521 10,793
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Total current liabilities ................................................. 26,258 25,393
Senior credit facility..................................................... 50,000 10,000
14% senior notes........................................................... 114,723 114,715
Other long-term debt and capital lease obligations, net of current maturities 1,033 1,070
Series F redeemable preferred stock, 13,333,334 shares issued and outstanding
(stated at redemption and aggregate liquidation value).................. 65,800 63,550
Stockholders' deficit:
Series B preferred stock, 8,572,039 shares issued and outstanding....... 8 8
Series C preferred stock, 6,270,527 shares issued and outstanding....... 6 6
Series D preferred stock, 2,622,222 and 2,222,222 shares issued and
outstanding........................................................... 3 2
Common stock, $.001 par value, 80,000,000 shares authorized, 8,587,102 and
8,414,541 shares issued and outstanding............................... 5 5
Warrants ............................................................... 337 337
Additional paid-in capital ............................................. 11,767 11,686
Accumulated deficit .................................................... (103,144) (79,801)
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(91,018) (67,757)
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Less receivable from stockholders....................................... 700 --
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Total stockholders' deficit................................................ (91,718) (67,757)
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Total liabilities and stockholders' deficit................................ $ 166,096 $ 146,971
------------- -------------
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</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 per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
2000 1999
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Revenue:
Communications services.............................................. $ 21,286 $ 9,308
Equipment sales...................................................... 2,522 1,328
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Total revenue.......................................................... 23,808 10,636
Cost of services:
Cost of communications services...................................... 15,697 7,138
Cost of equipment sales.............................................. 1,639 787
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Total cost of services................................................. 17,336 7,925
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Gross margin........................................................... 6,472 2,711
Selling, general and administrative expenses........................... 21,203 8,296
Depreciation and amortization expense.................................. 4,460 1,543
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Loss from operations................................................... (19,191) (7,128)
Interest expense....................................................... (4,598) (3,715)
Interest income........................................................ 446 907
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Net loss............................................................... (23,343) (9,936)
Preferred stock dividends.............................................. (2,250) (493)
Amortization of preferred stock issuance costs......................... (175) (8)
------------ -----------
Loss applicable to common stock........................................ $ (25,768) $ (10,437)
------------ -----------
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Loss per common share-- basic and diluted.............................. $ (3.06) $ (1.15)
------------ -----------
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Weighted average number of common shares outstanding................... 8,415 9,072
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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<CAPTION>
Three months ended
March 31,
------------------------
2000 1999
---- ----
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NET CASH FROM OPERATING ACTIVITIES $ (20,821) $ (5,722)
INVESTING ACTIVITIES
Purchase of property and equipment........................................ (14,008) (6,957)
Business acquisitions, net of cash acquired............................... (169) (4,368)
Amortization of discount on pledged securities............................ (319) (511)
--------- ---------
Net cash from investing activities........................................ (14,496) (11,836)
FINANCING ACTIVITIES
Proceeds from long-term debt and capital lease financing.................. 40,406 --
Proceeds from issuance of common stock.................................... 7 --
Payment of financing costs................................................ (1,709) --
Repayment of long-term debt and capital lease obligations................. (362) (774)
Repayment of short-term notes............................................. -- (200)
--------- ---------
Net cash from financing activities........................................ 38,342 (974)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 3,025 (18,532)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 5,053 39,745
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 8,078 $ 21,213
========= =========
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.............. $ -- $ 2,678
Fair value of intangible assets..................................... 169 3,699
Assumption of liabilities............................................ -- (926)
Assumption of long-term debt and capital lease obligations........... -- (872)
Issuance of common stock............................................. -- (211)
Property and equipment additions included in accounts payable........... 1,556 --
Series D preferred stock issued for payment of preferred stock issuance
costs................................................................ 1,800 --
Series D preferred stock to be issued for payment of preferred stock
issuance costs....................................................... 1,200 --
Receivable from stockholders for common stock........................... 700 --
Supplemental disclosure of cash flow information:
Cash payment for interest, net of interest capitalized of $203 in
2000 and $285 in 1999................................................ 164 254
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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BIRCH TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three Months Ended March 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Birch Telecom, Inc. ("Birch") 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 ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Birch's annual report on Form 10-K for the fiscal year ended
December 31, 1999.
2. LOSS PER SHARE
The net loss per share amount reflected on the consolidated statements
of operations is based on the weighted-average number of common shares
outstanding. Stock options and convertible preferred stock are anti-dilutive,
and therefore excluded from the computation of earnings per share. In the
future, these stock equivalents may become dilutive.
3. RECLASSIFICATIONS
Certain items in the 1999 condensed consolidated financial statements
have been reclassified to be consistent with the classification in the 2000
condensed consolidated financial statements.
4. CAPITAL STRUCTURE
During March 2000, the following equity transactions occurred:
o Birch filed a registration statement on Form S-1 with the
Securities and Exchange Commission (SEC) for an underwritten
initial public offering of common stock. In connection with
the filing, Birch's board of directors approved a 1.795-for-1
split of common stock. All prior period share and per share
information has been restated to reflect the split. All
outstanding shares of Birch's preferred stock will
automatically convert into shares of common stock upon
completion of the proposed offering. Additionally, the
conversion ratio on the preferred stock has been adjusted in
accordance with the 1.795-for-1 common stock split;
o BTI Ventures, L.L.C. (BTI), an affiliate of Kohlberg Kravis
Roberts & Co. (KKR), Birch's largest stockholder, exercised
its options to purchase an additional 5,263,158 shares of
series F preferred stock at $4.75 per share and 5,000,000
shares of series F preferred stock at $5.00 per share,
totaling $50.0 million. The transaction was funded and the
associated shares were issued in April 2000. In connection
with the private placement of series F preferred stock to BTI,
which closed on August 5, 1999, and the related exercise of
options in March 2000, Lehman Brothers, Inc., Birch's
placement agent, earned compensation which included 400,000
shares of series D preferred stock, totaling $1.8 million,
issued in March 2000 and an additional 246,316 shares of
series D preferred stock, totaling $1.2 million, issued in
April 2000; and
o Richard Jalkut, a member of Birch's board of directors, agreed
to purchase 47,867 shares of common stock for $200,000, and
Mory Ejabat, a member of Birch's board of directors, agreed to
purchase 119,667 shares of common stock for $500,000.
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5. LONG-TERM DEBT
In February 2000, Birch increased its $75.0 million senior credit
facility to $125.0 million. The credit facility provides for a $25.0 million
reducing revolver and $100.0 million in multi-draw term loans. The revolver is
available for general corporate purposes of Birch's subsidiaries and the term
loans are to be used to finance telecommunications equipment, inventory, network
assets and back office systems.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
REVENUE. Revenue increased 123.8% to $23.8 million for the 2000 period
compared to $10.6 million for the 1999 period. The increase in revenue was
principally a result of new customer sales in new and existing markets and
partially due to a full quarter of revenue for Capital Communications
Corporation (acquired in March 1999) in the 2000 period. As a percentage of
total revenue, communications services were 89.4% for the 2000 period and 87.5%
for the 1999 period, and equipment sales were 10.6% for the 2000 period and
12.5% for the 1999 period.
COST OF SERVICES. Cost of services increased 118.8% to $17.3 million
for the 2000 period compared to $7.9 million for the 1999 period. The increase
in cost of services was primarily the result of associated revenue increases.
Gross margins increased 138.7% to $6.5 million (27.2% of revenue) for 2000
compared to $2.7 million (25.5% of revenue) for 1999. The increase in gross
margin as a percentage of revenue was primarily the result of a greater
percentage of revenue being derived from higher margin facility-based local
services as compared to resold services in the 1999 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 155.6% to $21.2 million for the 2000 period
compared to $8.3 million for the 1999 period. The increase in expense was
primarily a result of supporting and attracting customers in new and existing
markets, market launches in Texas and having a full quarter of expense in the
2000 period for Capital Communications Corporation, which affected wages, rent
and other expenses. Additionally, we had 1,130 employees at March 31, 2000
compared to 506 employees at March 31, 1999. EBITDA, a commonly used measure by
securities analysts of earnings before deducting interest, taxes, depreciation
and amortization, decreased 163.8% to a loss of $14.7 million for the 2000
period compared to a loss of $5.6 million for the 1999 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
189.0% to $4.5 million for the 2000 period compared to $1.5 million for the 1999
period. The increase in depreciation and amortization was primarily attributable
to the depreciation of a larger base of network assets, the amortization of
intangible assets related to acquisitions and the amortization of financing
costs related to our senior debt facility.
INTEREST. Interest expense increased 23.8% to $4.6 million for the 2000
period compared to $3.7 million for the 1999 period. The increase in interest
expense was primarily a result of borrowings on our senior credit facility,
which began December 1999. Interest income decreased 50.8% to $446,000 for the
2000 period compared to $907,000 for the 1999 period. The decrease in interest
income is primarily a result of the maturity and sale of $16.1 million of
pledged securities for the payment of interest on the 14% senior notes.
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NET LOSS. Net loss increased 134.9% to $23.3 million for the 2000
period compared to $9.9 million for the 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets increased to $166.1 million at March 31, 2000 from
$147.0 million at December 31, 1999. This increase was primarily the result of
capital outlays for expansion of our local and data networks and development of
operations support systems and automated back office systems. At March 31, 2000,
our current assets of $44.0 million exceeded current liabilities of $26.3
million, resulting in working capital of $17.7 million and a $3.0 million
increase compared to working capital of $14.7 million at December 31, 1999. At
December 31, 1999, our current assets of $40.1 million exceeded current
liabilities of $25.4 million. The increase in working capital was primarily
attributable to proceeds received from borrowings on our senior credit facility
to fund capital purchases. Pledged securities to satisfy interest payments on
our senior notes amounted to $23.7 million at March 31, 2000 and $23.4 million
at December 31, 1999.
OPERATING ACTIVITIES. Net cash used in operating activities was $21.0
million for the 2000 period compared to $5.7 million for the 1999 period. Net
cash used in operating activities was primarily used to fund our net losses of
$23.3 million for the 2000 period and $9.9 million for the 1999 period.
INVESTING ACTIVITIES. Net cash used in investing activities was $14.3
million for the 2000 period compared to $11.8 million for the 1999 period. Net
cash used in investing activities was primarily used for the purchase of
property and equipment related to the expansion of our networks, support systems
and back office systems, totaling $14.0 million in the 2000 period and $7.0
million in the 1999 period. Additionally, $4.4 million was spent on acquisitions
in the 1999 period.
FINANCING ACTIVITIES. Net cash provided by financing activities was
$38.3 million for the 2000 period compared to net cash used in financing
activities of $974,000 for the 1999 period. In the 2000 period, net cash
provided by financing activities was primarily a result of $40.0 million in
proceeds from borrowings on our senior credit facility. In the 1999 period, net
cash used in financing activities was used for the repayment of debt.
In February 2000, we increased the capacity of our $75.0 million senior
credit facility to $125.0 million. This credit facility provides for a $25.0
million reducing revolver and $100.0 million in multi-draw term loans. The
revolver is available for general corporate purposes of our subsidiaries and the
term loans are to be used to finance telecommunications equipment, inventory,
network assets and back office systems. The senior credit facility is secured by
a perfected first priority security interest in substantially all of our assets
and capital stock of our subsidiaries and contains a number of financial and
operational covenants with which we must comply. Among other things, the
covenants require us to maintain specified levels of revenue, EBITDA, ratio
levels and access lines and restrict our ability to incur additional
indebtedness, pay dividends, enter into related party transactions or sell our
assets. We were in compliance with all covenants at March 31, 2000.
In March 2000, an affiliate of KKR exercised its options to purchase an
additional $50.0 million of our series F preferred stock. The transaction was
funded and the associated shares were issued in April 2000.
The development and expansion of our business will continue to require
significant capital to fund capital expenditures, working capital and debt
service and will generate negative operating cash flows. Our principal capital
expenditure requirements will include:
o the purchase, installation, and expansion of switches and
transmission equipment for our local and data networks; and
o the further development of operations support systems and
automated back office systems.
We do not believe that the growth of our long distance and customer
premises equipment business will require significant capital expenditures.
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Our business plan calls for us to offer our services in additional
markets. We expect to expand our operations in Texas and into Oklahoma in the
second quarter of this year and to commence service in the regions served by
Ameritech and BellSouth in 2001. We will need additional cash to fund our
working capital needs, debt service requirements and operating losses. Until we
begin to generate positive cash flow from operations, these liquidity
requirements will need to be financed with additional debt and equity capital.
During the second quarter 2000, we will begin to re-negotiate the terms
of our existing senior credit facility and make corresponding changes to the
financial covenants. We believe that our current resources, including
availability under our senior credit facility, will be sufficient to satisfy
our liquidity needs for the next 12 months. If our plans or assumptions change,
if our assumptions prove to be inaccurate, or if we experience unexpected
costs or competitive pricing pressures, we will be required to seek
additional capital sooner than we currently expect. In particular, if we
elect to pursue acquisition opportunities or open additional markets, our
cash needs may increase substantially. We cannot assure you that our current
projection of cash flow and losses from operations, which will depend upon
numerous future factors and conditions, many of which are outside of our
control, will be accurate. Actual results will almost certainly vary
materially from our current projections. The cost of expanding our network
services and sales efforts, funding other strategic initiatives and operating
our business will depend on a variety of factors, including, among other
things:
o the number of subscribers and the services for which they
subscribe;
o the nature and penetration of services that we may offer;
o regulatory and legislative developments; and
o the response of our competitors to their loss of customers to
us and to changes in technology.
We intend to seek additional debt and equity financing to fund our
future liquidity needs. We cannot assure you that we will be able to raise
additional capital on satisfactory terms or at all. If we decide to raise
additional funds through the incurrence of debt, our interest obligations will
increase and we may become subject to additional or more restrictive financial
covenants. In addition, the terms of our senior credit facility and our senior
notes each restrict our ability to obtain additional debt financing. If we
decide to raise additional funds through the issuance of equity, the ownership
interests represented by the common stock will be diluted. In the event that we
are unable to obtain additional capital or to obtain it on acceptable terms or
in sufficient amounts, we may be required to delay the development of our
network and business plans or take other actions that could materially and
adversely affect our business, operating results and financial condition.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from computer programs being written using
two digits rather than four to define the year. Any of our computer programs or
systems, or those of our suppliers, that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. We have
assessed the potential impact of Year 2000 issues and modified, upgraded and
replaced our systems as necessary. We did not experience any problems on January
1, 2000 and to-date, we have not experienced, nor are we aware of, any material
Year 2000 issues with any of our internal systems or our services. Although we
do not anticipate experiencing any Year 2000 related issues in the future, we
will continue to monitor the situation and implement contingency plans if
needed. Our total cost to-date to proactively address our Year 2000 issues has
not been material. The cost of addressing Year 2000 issues is reported as a
general and administrative expense.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 is effective for our consolidated financial statements
beginning in the second quarter 2000. We do not expect the impact of SAB No. 101
to have a material effect in relation to our consolidated financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation: An Interpretation of Accounting Principles Board (APB) Opinion No.
25" (the FASB Interpretation). The FASB Interpretation poses and answers 20
separate questions dealing with APB No. 25, "Accounting for Stock Issued to
Employees," implementation practice issues. The FASB Interpretation will be
effective beginning July 1, 2000, and we are currently determining its impact in
relation to our consolidated financial statements.
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, expansion strategy and an intended public stock offering. The
forward-looking statements are subject to risks, uncertainties and assumptions,
and actual results may differ materially from anticipated results described in
these forward-looking statements. The factors that could cause actual results to
differ materially include, but are not limited to, revision of expansion plans,
availability of financing, changes in laws and regulations, the number of
potential customers in a target market, the existence of strategic alliances or
relationships, technological or other developments in our business, changes in
the competitive climate in which we operate, overall economic trends including
interest rate and foreign currency trends, stock market activity, litigation and
the emergence of future opportunities. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in our exposure to certain market risks have
occurred from the discussion contained in Item 7A, "Qualitative Disclosures
About Market Risk," filed as part of our annual report on Form 10-K for the year
ended December 31, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in claims or litigation that
arise in the normal course of business. We are not a party to any legal
proceedings which, if decided adversely, would have a material adverse effect on
our business or financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since December 31, 1999, we have issued and sold unregistered
securities as follows:
o In March 2000, BTI, an affiliate of KKR, our largest
stockholder, exercised its options to purchase an additional
5,263,158 shares of series F preferred stock at $4.75 per
share and 5,000,000 shares of series F preferred stock at
$5.00 per share, totaling $50.0 million. The transaction was
funded and the associated shares were issued in April 2000. In
connection with the private placement of series F preferred
stock to BTI, which closed on August 5, 1999, and the related
exercise of options in March 2000, Lehman Brothers, Inc., our
placement agent, earned compensation which included 400,000
shares of series D preferred stock, totaling $1.8 million,
issued in March 2000 and an additional 246,316 shares of
series D preferred stock, totaling $1.2 million, issued in
April 2000;
o In March 2000, Richard Jalkut, a member of our board of
directors, agreed to purchase 47,867 shares of our common
stock for $200,000, and Mory Ejabat, a member of our board of
directors, agreed to purchase 119,667 shares of our common
stock for $500,000; and
o In March 2000, our board of directors approved a 1.795-for-1
split of our common stock.
All sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to us that the shares were being acquired for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the first quarter of 2000, the following matters were submitted
to a vote of our securities holders:
o On March 8, 2000, in connection with compensation earned by
Lehman Brothers, Inc., our placement agent, for the private
placement of our series F preferred stock with BTI, we
obtained the written consent of our stockholders with respect
to the reservation and issuance of 646,316 shares of series D
preferred stock, the amendment of our Certificate of
Incorporation to designate 3,000,000 shares of our authorized
preferred stock as series D preferred stock and the amendment
of our Amended and Restated Purchasers Rights Agreement. Our
stockholders also approved an increase of common stock
available for issuance of options under our 1998 Stock Option
Plan.
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For: 62,752,611
Against: 0
Withheld: 226,626
o On March 30, 2000, in connection with the proposed initial
public offering of our common stock, we obtained the written
consent of our stockholders with respect to the amendment of
our Certificate of Incorporation to reclassify our common
stock, increase the amount of our authorized stock and
increase the size of our board of directors. Our stockholders
approved our 2000 Equity Participation Plan and our 2000
Employee Stock Purchase Plan and approved the reservation of
shares of common stock for issuance under each of those plans.
The stockholders also approved an amendment to our Amended and
Restated Purchasers Rights Agreement.
For: 53,437,468
Against: 0
Withheld: 10,259,769
The number of stockholder votes stated above reflects the 1.795-for-1
common stock split and the adjusted preferred stock conversion ratio.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herein:
3.1 Certificate of amendment of restated certificate of
incorporation of Birch Telecom, Inc.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
On March 23, 2000 we filed Form 8-K with respect to a registration
statement filing with the SEC as part of a proposed initial public offering of
common stock. We attached a copy of our press release issued that same day.
12
<PAGE>
SIGNATURE
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.
(REGISTRANT)
DATE: MAY 15, 2000
BY: /S/ BRADLEY A. MOLINE
--------------------------
BRADLEY A. MOLINE, SENIOR VICE
PRESIDENT - CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
13
<PAGE>
EXHIBIT 3.1
BIRCH TELECOM, INC.
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
(Pursuant to Section 242 of the General
Corporation Law of the State of Delaware)
Birch Telecom, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation") does hereby
certify as follows:
A. This Amendment amends the provisions of the Restated Certificate of
Incorporation of the Corporation set forth below and was duly adopted in
accordance with Section 242 of the General Corporation Law of the State of
Delaware by the directors and stockholders of the Corporation.
B. The text of the Restated Certificate of Incorporation is amended as
set forth below:
1. Article 4(A) is amended to read in its entirety as follows:
A. The total number of shares that the Corporation shall have
the authority to issue is 208,403,275 shares. The total number
of shares of common stock that the Corporation shall have
authority to issue is 150,000,000 shares (the "Common Stock"),
and the par value of each share of Common Stock is $0.001. The
total number of shares of preferred stock that the Corporation
shall have the authority to issue is 58,403,275 shares (the
"Preferred Stock"), and the par value of each share of
Preferred Stock is $0.001.
Effective upon filing of this Amendment to the
Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware (the "Effective Date"), each
share of Common Stock outstanding on the Effective Date, par
value $.001 per share (the "Old Common Stock"), shall
automatically and without any action on the part of the holder
thereof be reclassified as and changed into 1.795 shares of
the Corporation's Common Stock, par value $.001 per share (the
"New Common Stock"), subject to the treatment of
<PAGE>
fractional share interests as described below. Each holder of
a certificate or certificates that, immediately prior to the
Effective Date represented outstanding shares of Old Common
Stock (the "Old Certificates," whether one or more) shall be
entitled to receive upon surrender of such Old Certificates to
UMB Bank, n.a. (the "Transfer Agent") for cancellation, a
certificate or certificates (the "New Certificates," whether
one or more) representing the number of whole shares of the
New Common Stock formerly represented by such Old Certificates
so surrendered and reclassified under the terms hereof. From
and after the Effective Date, Old Certificates shall represent
only the right to receive New Certificates (and, where
applicable, cash in lieu of fractional shares, as provided
below) pursuant to the provisions hereof. No certificates or
scrip representing fractional share interests in New Common
Stock will be issued, and no such fractional share interest
will entitle the holder thereof to vote, or to any rights of a
stockholder of the Corporation. In lieu of any fraction of a
share, the Corporation shall pay to the Transfer Agent or its
nominee as soon as practicable after the Effective Date, as
agent for the accounts of all holders of Common Stock
otherwise entitled to have a fraction of a share issued to
them in connection with the stock split, the amount equal to
the fair market value of the aggregate of all fractional
shares otherwise issuable (rounded, if necessary, to the next
highest whole share) (the "Fractional Share Amount"). The fair
market value of the fractional shares shall be determined in
accordance with Article 4(C)(2)(i) of the Restated Certificate
of Incorporation.
After the Effective Date and the receipt of payment
by the Corporation of the Fractional Share Amount, the
Transfer Agent shall pay to the stockholders entitled to a
fraction of a share their pro rata share of the Fractional
Share Amount upon surrender of their Old Certificates. If more
than one Old Certificate shall be surrendered at one time for
the account of the same stockholder, the number of full shares
of New Common Stock for which New Certificates shall be issued
shall be computed on the basis of the aggregate number of
shares represented by the Old Certificates surrendered. In the
event that a holder surrenders Old Certificates after the
Effective Date but prior to the date on which the Fractional
Share Amount is determined and paid to the Transfer Agent, the
Transfer Agent shall carry forward any fractional share of
such holder until the Fractional Share Amount is paid to the
Transfer Agent. In the event that the Corporation's Transfer
Agent determines that a holder of Old Certificates has not
tendered all of his certificates for exchange, the Transfer
Agent shall carry
<PAGE>
forward any fractional share until all certificates of that
holder have been presented for exchange so that the payment
for fractional shares to any one person shall not exceed the
value of one share. If any New Certificate is to be issued in
a name other than that in which the Old Certificates
surrendered for exchange are issued, the Old Certificates so
surrendered shall be properly endorsed and otherwise in proper
form for transfer, and the person or persons requesting such
exchange shall affix any requisite stock transfer stamps to
the Old Certificate surrendered, or provide funds for their
purchase, or establish to the satisfaction of the Transfer
Agent that such taxes are not payable. From and after the
Effective Date, the amount of capital represented by the
shares of New Common Stock into which and for which the shares
of the Old Common Stock are reclassified under the terms
hereof shall be the same as the amount of capital represented
by the shares of Old Common Stock so reclassified, until
thereafter reduced or increased in accordance with applicable
law.
2. Article 5 is amended to read in its entirety as follows:
FIFTH: The Board of Directors shall have that number of
Directors set out in the Bylaws of the Corporation as adopted or as set
from time to time by a duly adopted amendment thereto by the Directors
or stockholders of the Corporation, and, notwithstanding any other
provision of this Amended and Restated Certificate of Incorporation,
the authorized number of Directors may be changed only by a resolution
of the Board of Directors. Vacancies on the Board of Directors
resulting from death, resignation, removal or otherwise and newly
created directorships resulting from any increase in the number of
directors may be filled only by a majority of the directors then in
office (although less than a quorum) or by the sole remaining director,
and each director so elected shall hold office until the next annual
meeting of the stockholders.
3. Article 6 is amended to read in its entirety as follows:
SIXTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to
adopt, repeal, alter, amend and rescind Bylaws of the Corporation.
Notwithstanding the foregoing, the bylaws may be rescinded, altered,
amended or repealed in any respect by the affirmative vote of the
holders of at least a majority of the outstanding voting stock of the
corporation, voting together as a single class.
4. Article 7 is amended to read in its entirety as follows:
<PAGE>
SEVENTH: The Board of Directors shall be and is divided into
three classes, Class I, Class II and Class III. The number of directors
in each class shall be the whole number contained in the quotient
arrived at by dividing the number of directors by three, and if a
fraction is also contained in such quotient then if such fraction is
one-third (1/3), the extra director shall be a member of Class III and
if the fraction is two-thirds (2/3), one of the extra directors shall
be a member of Class III and the other shall be a member of Class II.
Each director shall serve for a term ending on the date of the third
annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors of the Corporation on
the date of this Amendment to the Restated Certificate of Incorporation
shall each be assigned to a class at the time of this Amendment, and
the directors assigned to Class I shall serve for a term ending on the
date of the first annual meeting next following April 6, 2000, the
directors assigned to Class II shall serve for a term ending on the
date of the second annual meeting next following April 6, 2000, and the
directors assigned to Class III shall serve for a term ending on the
date of the third annual meeting next following April 6, 2000.
In the event of any increase or decrease in the number of directors,
(a) each director then serving as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of
his current term, or his prior death, retirement, resignation or
removal, and (b) the newly created or eliminated directorships
resulting from such increase or decrease shall be apportioned by the
Board of Directors to such class or classes as shall, so far as
possible, bring the number of directors in the respective classes into
conformity with the formula in this Article, as applied to the new
number of directors.
Notwithstanding any of the foregoing provisions of this Article, each
director shall serve until his successor is elected and qualified or
until his death, retirement, resignation or removal. Should a vacancy
occur or be created, the remaining directors (even though less than a
quorum) may fill the vacancy for the full term of the class in which
the vacancy occurs or is created.
The Board of Directors as existing on the date of this Amendment to the
Restated Certificate of Incorporation is as follows:
Adam H. Clammer Class I
Mory Ejabat Class I
Thomas R. Palmer Class I
Henry H. Bradley Class II
Henry R. Kravis Class II
George R. Roberts Class II
James H. Greene, Jr. Class III
Richard A. Jalkut Class III
Alexander Navab, Jr. Class III
David E. Scott Class III
<PAGE>
5. Article 8 is amended to read in its entirety as follows:
EIGHTH: Elections of directors at an annual or special meeting
of stockholders need not be by written ballot unless the Bylaws of the
Corporation shall so provide.
6. The following Articles are added to the Restated
Certificate of Incorporation and shall immediately follow Article 9
thereof:
TENTH: A director shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that this Article shall not
eliminate or limit the liability of a director (i) for any breach of
his duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law, (iii) under Section 174
of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derives an improper personal benefit.
If the Delaware General Corporation Law is hereafter amended
to authorize corporate action further limiting or eliminating the
personal liability of directors, then the liability of the director to
the Corporation shall be limited or eliminated to the fullest extent
permitted by the Delaware General Corporation Law, as so amended from
time to time. Any repeal or modification of this Article by the
stockholders of the Corporation shall be prospective only, and shall
not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or
modification.
ELEVENTH: No action shall be taken by the stockholders except
at an annual or special meeting of stockholders, except if such action
is taken by unanimous written consent.
TWELFTH: Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time only
by the Chairman of the Board of Directors, the Chief Executive Officer
of the Corporation, the President of the Corporation, or a majority of
the members of the Board of Directors, and such special meetings may
not be called by any other person or persons; provided, however, that
if and to the extent that any special meeting of stockholders may be
called by any other person or persons specified in any provisions of
this Amended and Restated Certificate of Incorporation or any amendment
hereto or any certificate filed under Section 151(g) of the Delaware
General Corporation Law, then such special meeting may also be called
by the person or persons, in the manner, at the times and for the
purposes so specified.
THIRTEENTH: The Corporation reserves the right to amend,
alter, change or repeal any provision contained in this Restated
Certificate of Incorporation, in the
<PAGE>
manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation;
provided, however, that no amendment, alteration, change or repeal may
be made to Article VI, VII, XI or XIII without the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66-2/3%) of
the outstanding voting stock of the Corporation, voting together as a
single class.
FOURTEENTH: Each reference in this Amended and Restated
Certificate of Incorporation to any provision of the Delaware General
Corporation Law refers to the specified provision of the General
Corporation Law of the State of Delaware, as the same now exists or as
it may hereafter be amended or superseded.
2. Such Amendment of the Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware. The Board of Directors of the
Corporation adopted a resolution by unanimous written consent approving this
Amendment on March 30, 2000, declaring its advisability and calling for
submission of such Amendment to the holders of the Corporation's Common Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series F Preferred Stock. The holders of the Corporation's Common Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
F Preferred Stock approved such Amendment by the written consent by the required
number of such holders dated March 30, 2000. The capital of the Corporation will
not be reduced under or by reason of such Amendment.
IN WITNESS THEREOF, this Amendment to the Restated Certificate of
Incorporation has been executed on behalf of the Corporation this 6th day of
April, 2000.
BIRCH TELECOM, INC.
/s/ Gregory C. Lawhon
Gregory C. Lawhon,
Senior Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BIRCH TELECOM, INC. AS OF, AND
FOR THE QUARTER ENDING MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,078
<SECURITIES> 16,153
<RECEIVABLES> 13,770
<ALLOWANCES> 868
<INVENTORY> 3,530
<CURRENT-ASSETS> 43,962
<PP&E> 84,151
<DEPRECIATION> 11,482
<TOTAL-ASSETS> 166,096
<CURRENT-LIABILITIES> 26,258
<BONDS> 165,756
65,800
17
<COMMON> 5
<OTHER-SE> (91,740)
<TOTAL-LIABILITY-AND-EQUITY> 166,096
<SALES> 23,808
<TOTAL-REVENUES> 23,808
<CGS> 17,336
<TOTAL-COSTS> 17,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 677
<INTEREST-EXPENSE> 4,598
<INCOME-PRETAX> (23,343)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,343)
<EPS-BASIC> (3.06)<F1>
<EPS-DILUTED> (3.06)<F1>
<FN>
<F1>INCLUDED IN THE CALCULATION IS A 1.795-FOR-1 COMMON STOCK SPLIT APPROVED IN
MARCH 2000. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THE
RECAPITALIZATION.
</FN>
</TABLE>
