<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
REGISTRATION NO. 333-33156
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BIRCH TELECOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 43-1766929
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
------------------------
2020 BALTIMORE AVENUE
KANSAS CITY, MISSOURI 64108
(816) 300-3000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
BRADLEY A. MOLINE
CHIEF FINANCIAL OFFICER
BIRCH TELECOM, INC.
2020 BALTIMORE AVENUE
KANSAS CITY, MISSOURI 64108
(816) 300-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
KIRK A. DAVENPORT, ESQ. RISE B. NORMAN, ESQ.
LATHAM & WATKINS SIMPSON THACHER & BARTLETT
885 THIRD AVENUE 425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 906-1200 (212) 455-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
12,500,000 SHARES
[LOGO]
COMMON STOCK
- ------------------------------------------------------------
This is our initial public offering of shares of common stock. No public market
currently exists for our shares. We are offering 12,500,000 shares. We have made
application to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "BRCH." We anticipate the public offering price
to be between $15.00 and $17.00 per share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C>
PER SHARE TOTAL
Public offering price $ $
Underwriting discount $ $
Proceeds to Birch Telecom $ $
</TABLE>
We have granted the underwriters the right to purchase up to 1,875,000
additional shares within 30 days to cover any over-allotments.
Bear, Stearns & Co. Inc., on behalf of the underwriters, expects to deliver the
shares on or about , 2000.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
J.P. MORGAN & CO.
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL
FINANCIAL SERVICES
CORPORATION
<PAGE>
, 2000
<PAGE>
[INSIDE FRONT COVER]
[Map of United States showing current markets and expansion regions]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use Of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Consolidated Financial and
Operating Data...................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Regulation............................ 44
Management............................ 54
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Certain Relationships and Related
Transactions........................ 64
Security Ownership of Certain
Beneficial Owners and Management.... 67
Description of Certain Indebtedness... 69
Description of Capital Stock.......... 70
Shares Eligible For Future Sale....... 73
Certain United States Federal Tax
Considerations for Non-United States
Holders............................. 75
Underwriting.......................... 77
Legal Matters......................... 80
Experts............................... 80
Where You Can Find More Information... 80
Index to Financial Statements......... F-1
</TABLE>
ABOUT THIS PROSPECTUS
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the shares of common stock
offered by this prospectus. This prospectus, which is a part of the registration
statement, does not contain all of the information set forth in the registration
statement. For further information about us and our common stock, you should
refer to the registration statement. This prospectus summarizes material
provisions of contracts and other documents to which we refer you. Since the
prospectus may not contain all of the information that you may find important,
you should review the full text of these documents. We have included copies of
these documents as exhibits to our registration statement.
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING US AND OUR COMMON STOCK BEING SOLD IN THE OFFERING AND OUR
FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE SPECIFICALLY STATED, INFORMATION IN THIS
PROSPECTUS GIVES PRO FORMA EFFECT TO:
- THE EXERCISE BY AN AFFILIATE OF KOHLBERG KRAVIS ROBERTS & CO. ON
MARCH 23, 2000 OF ITS OPTIONS TO INVEST AN ADDITIONAL $50.0 MILLION IN OUR
COMPANY;
- THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK INTO
SHARES OF COMMON STOCK, WHICH WILL OCCUR AUTOMATICALLY UPON COMPLETION OF
THE OFFERING; AND
- A 1.795-FOR-1 SPLIT OF OUR COMMON STOCK, WHICH WILL OCCUR PRIOR TO
COMPLETION OF THE OFFERING.
IN ADDITION, UNLESS OTHERWISE SPECIFICALLY STATED, INFORMATION IN THIS
PROSPECTUS ASSUMES THE UNDERWRITERS DO NOT EXERCISE THEIR OPTION TO PURCHASE
ADDITIONAL SHARES IN THE OFFERING.
OUR COMPANY
We are a rapidly growing integrated communications provider. We seek to
become the leading provider of telecommunications services for small and
mid-sized businesses in each of the cities we serve. We offer state-of-the-art
telecommunications services to our customers, who today are located throughout
Missouri, Kansas and Texas. These voice and data service offerings include local
and long distance telephone service, Internet access, web hosting, integrated
voice and data transmission over broadband lines and customer premises equipment
sales and services. We offer these services to our customers through a
combination of leased and owned network facilities. We are currently deploying
collocations and transmission equipment throughout our markets to deliver
digital subscriber line service, which will support dedicated high-speed
Internet access and eventually voice services. We expect to have over 130
collocations operational by the end of this year. Our revenue for the year ended
December 31, 1999 was $60.5 million, a 132% increase over 1998.
We have increased our local access lines in service to over 135,000 and now
serve over 20,000 business customers, making us one of the largest integrated
communications providers in the territory served by Southwestern Bell. We intend
to continue to grow our customer base rapidly. We currently serve 17 markets
that have populations ranging in size from 95,000 to 4.5 million. We average
6,000 lines in each of those markets. We intend to offer our services in an
additional 20 markets before the end of 2001. 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 have
developed systems and network capabilities and have an experienced sales force
and customer service team that position us to rapidly penetrate new markets and
serve a growing number of customers. We believe that our success to date is
largely attributable to our customer-focused philosophy and our aggressive
marketing strategy.
We have developed a capital-efficient network platform to deliver voice
services to our customers. In most of our markets, we lease substantially all of
the network elements from the incumbent telephone company and use our advanced
back-office systems to combine these elements into integrated Birch-branded
voice services. This network delivery method, which we call the unbundled
network element platform, or UNE-P, has allowed us to offer voice services to
customers located virtually anywhere in our markets and achieve high gross
margins and superior returns on incremental capital invested. UNE-P allows us to
minimize current capital expenditures and maintain design flexibility for the
next generation of telecommunications technology.
We currently operate 26 data switches and a high-speed network
interconnecting these switches to carry data traffic across our region. We
intend to be one of the first carriers in our markets to deliver broadband
facilities directly to our small and mid-sized business customers. By
implementing digital subscriber line technology to transmit both data and voice
traffic over a single line, we expect to
1
<PAGE>
significantly reduce the per-line costs of providing and leasing telephone
lines. These savings should allow us to offer a more attractive package of data
and voice services to our customers and improve our gross margins. We are
beta-testing technologies provided by third-party vendors that we expect will
allow us to provide voice services over digital subscriber lines.
We offer our customers simplified packages of voice and high-speed data
services designed for small and mid-sized businesses, which are conveniently
billed on a single invoice. In each of our markets, we deploy a locally based
sales force that consults with our customers to assist them in selecting an
appropriate service package that will meet their needs. Our 170-person direct
sales force is supported by aggressive multi-media advertising campaigns
designed to enhance awareness of the Birch name. We believe that our
customer-oriented approach to small and mid-sized businesses provides us with an
advantage over incumbent telephone companies, who are not focused on these
customers.
OUR STRATEGY
We believe that our business is poised for rapid expansion and that our
experienced management team is well prepared to execute our focused business
strategy. The key elements of our strategy include:
- FOCUSING ON SMALL AND MID-SIZED BUSINESS CUSTOMERS;
- PROVIDING COMPLETE SERVICE PACKAGES THAT ARE TAILORED TO OUR CUSTOMERS;
- CREATING A STRONG BRAND PRESENCE;
- DEPLOYING A DIRECT SALES FORCE IN EACH OF OUR MARKETS;
- INVESTING IN INDUSTRY-LEADING, SCALABLE BACK OFFICE SYSTEMS;
- MAINTAINING MAXIMUM NETWORK FLEXIBILITY;
- EXPANDING OUR GEOGRAPHIC REACH; AND
- GROWING THROUGH ACQUISITIONS.
RECENT EVENTS
In August 1999, an affiliate of KKR purchased $60.0 million of our preferred
stock and, on March 23, 2000, exercised options to invest an additional
$50.0 million in our company. KKR's investment will be converted into common
stock at the closing of the offering. KKR is our largest stockholder and, after
giving effect to this exercise, KKR's investment would have represented a 51.2%
equity interest as of March 23, 2000. Upon closing of the offering, KKR will
beneficially own approximately 44.5% of our outstanding common stock.
In December 1999, we obtained a $75.0 million senior credit facility, which
was increased to $125.0 million in February 2000. 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.
------------------------
PRINCIPAL OFFICES
We were incorporated in Delaware on December 23, 1996, and our principal
executive offices are located at 2020 Baltimore Avenue, Kansas City, Missouri
64108. Our telephone number is (816) 300-3000. Our website address is
www.birch.com. Information on our website does not constitute part of this
prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 12,500,000 shares
Over-allotment option........................ 1,875,000 shares
Common stock to be outstanding after the
offering, not including the over-allotment
option..................................... 95,229,209 shares
Use of proceeds.............................. We estimate that our net proceeds from the
offering will be approximately $184.0
million, based on an assumed initial public
offering price of $16.00 per share, or $211.9
million if the underwriters exercise their
over-allotment option. We plan to use the net
proceeds from the offering to fund capital
expenditures and operating losses and for
general corporate purposes, including
possible future investments, acquisitions or
strategic alliances.
Proposed Nasdaq National Market symbol....... BRCH
</TABLE>
The calculation of the number of shares outstanding after the offering is
based on:
- the number of shares outstanding on March 23, 2000;
- conversion of our preferred stock into 74,147,134 shares of common stock,
which will occur automatically upon completion of the offering; and
- the 1.795-for-1 split of our common stock, which will occur prior to
completion of the offering.
Other than the shares issued upon exercise by KKR of its options, this total
does not reflect:
- shares that may be issued upon the exercise of outstanding options and
warrants; or
- shares that are reserved for future issuance pursuant to our employee and
director stock plans.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table summarizes the consolidated financial and operating data
of our business for the periods presented. Our statement of operations data and
other financial data for the years ended December 31, 1997, 1998 and 1999 and
our actual balance sheet data as of December 31, 1999, as well as the statement
of operations data, other financial data and balance sheet data for the
predecessor company as of and for the year ended December 31, 1997 have been
derived from, and is qualified by reference to, our consolidated financial
statements included elsewhere in this prospectus, which Ernst & Young LLP, our
independent auditors, have audited. The per share data presented below gives
effect to the 1.795-for-1 split of our common stock, which will occur prior to
completion of the offering. The pro forma balance sheet data presented below
give effect to (1) the exercise by an affiliate of KKR of its options, (2) the
conversion of all outstanding shares of our preferred stock into common stock,
which will occur automatically upon completion of the offering and (3) the
1.795-for-1 split of our common stock as if these events had occurred on
December 31, 1999. The pro forma as adjusted balance sheet data presented below
give effect to the pro forma items listed above and reflect the sale of
12,500,000 shares of common stock in the offering at an assumed initial public
offering price of $16.00 per share as if they had occurred on December 31, 1999.
The pro forma net loss per share calculation gives effect to all of the pro
forma items listed above as if they had occurred on January 1, 1999. You should
read the information set forth below in conjunction with "Selected Consolidated
Financial and Operating Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and their related notes included elsewhere in this prospectus.
EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. EBITDA is used by
management and some investors as an indicator of a company's historical ability
to service debt. Management believes that an increase in EBITDA is an indicator
of improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. We have presented EBITDA
to enhance your understanding of our operating results. You should not construe
it as an alternative to operating income, as an indicator of our operating
performance nor as an alternative to cash flows from operating activities as a
measure of liquidity determined in accordance with generally accepted accounting
principles, or GAAP. We may calculate EBITDA differently from other companies.
For further information, see our consolidated financial statements and the
related notes elsewhere in this prospectus.
The predecessor company is Valu-Line Companies, Inc., which merged with us
in February 1998. Prior to February 1998, Birch had no revenues and was a
development stage company.
We acquired Boulevard Phone Company, Telesource Communications, Inc. and
TFSnet, Inc. in 1998 and American Local Telecommunications, LLC and Capital
Communications Corporation in 1999. The statement of operations data, other
financial data and operating data in the table include the operations of these
companies beginning on the dates they were acquired. These acquisitions affect
the comparability of the financial data for the periods presented.
4
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
THE PREDECESSOR BIRCH
------------------------------ ------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $12,226 $13,217 $16,801 $ -- $ 26,087 $ 60,538
Gross margin................................ 3,942 4,468 4,959 -- 7,201 14,180
Income (loss) from operations............... 233 596 551 (1,803) (10,876) (49,693)
Net income (loss)........................... 94 289 268 (1,789) (16,208) (61,804)
Net loss applicable to common stock......... (1,789) (17,933) (65,646)
Shares used in per share calculation........ 2,217 6,837 8,896
Net loss per common share--basic and
diluted................................... (0.81) (2.62) (7.38)
Shares used in pro forma per share
calculation............................... 95,543
Pro forma net loss per common share--basic
and diluted............................... (0.65)
OTHER FINANCIAL DATA:
Cash flows from operating activities........ $ (267) $ 834 $ 488 $(1,551) $(10,643) $(53,225)
Cash flows from investing activities........ (230) (513) (243) (128) (67,093) (31,796)
Cash flows from financing activities........ 259 (257) (145) 1,889 117,271 50,329
EBITDA...................................... 422 907 892 (1,776) (8,568) (38,865)
Capital expenditures........................ 230 513 243 128 21,550 41,360
OPERATING DATA:
Local customers served at end of period..... -- 14,735 38,487
Access lines in service at end of period.... -- 39,323 112,518
Circuit switches in service at end of
period.................................... -- 1 4
Data switches in service at end of period... -- 1 19
Employees at end of period.................. 14 345 935
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,053 $ 52,503 $236,503
Pledged securities.......................................... 23,420 23,420 23,420
Property and equipment...................................... 70,192 70,192 70,192
Total assets................................................ 146,971 187,723 371,723
Long-term debt and capital lease obligations................ 125,785 125,785 125,785
Redeemable preferred stock.................................. 63,550 -- --
Total stockholders' equity (deficit)........................ (67,757) 39,545 223,545
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AS WELL AS THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE INVESTING IN SHARES OF OUR
COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS COULD
BE HARMED. IN THAT CASE, THE TRADING PRICE OF THE COMMON STOCK COULD DECLINE AND
YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED HISTORY UPON WHICH YOU CAN BASE YOUR INVESTMENT DECISION.
We commenced operations in February 1998, and since that time we have grown
rapidly. As a result of our limited operating history, you have limited
operating and financial data about us upon which to base an evaluation of our
performance and an investment in our common stock. Our ability to provide an
integrated package of bundled telecommunications services on a widespread basis
and to generate operating profits and positive operating cash flow will depend
upon our ability, among other things, to:
- develop our operational support and other back office systems;
- obtain state authorizations to operate as a competitive local exchange
carrier and any other required governmental authorizations;
- increase awareness of our brand and attract and retain an adequate
customer base;
- raise additional capital;
- attract and retain qualified personnel;
- enter into and implement interconnection agreements with established
telephone companies on satisfactory terms; and
- enter into new markets and successfully compete for business in different
environments.
We cannot assure you that we will be able to achieve any of these
objectives, generate sufficient revenues to achieve or sustain profitability,
meet our working capital and debt service requirements or compete successfully
in the telecommunications industry.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY NOT BE PROFITABLE IN THE
FUTURE.
We have incurred significant losses since we began operations as a
competitive telecommunications provider and expect to continue to incur losses
in the future as we build our network. For the year ended December 31, 1999, we
had operating losses of $49.7 million and a net loss of $61.8 million. As of
December 31, 1999, we had an accumulated deficit of $79.8 million. We expect to
experience losses during our network and service deployment, which will continue
for the foreseeable future. Prolonged effects of generating losses without
additional funding may restrict our ability to pursue our business strategy.
Unless our business plan is successful, your investment in our common stock may
result in a complete loss of your invested capital.
If we cannot achieve profitability from operating activities, we may not be
able to meet:
- our capital expenditure requirements;
- our debt service obligations; or
- our working capital needs.
6
<PAGE>
OUR HIGHLY LEVERAGED CAPITAL STRUCTURE LIMITS OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING AND COULD ADVERSELY AFFECT OUR BUSINESS IN SEVERAL OTHER WAYS.
The level of our outstanding debt greatly exceeds the level of our revenue
and stockholders' equity. As of March 31, 2000, we had $165.8 million of
long-term indebtedness outstanding, including $50.0 million outstanding under
our senior credit facility and $114.7 million of senior notes outstanding. At
March 31, 2000, we had $75.0 million available for borrowing under our senior
credit facility. We may, and are also permitted under the terms of our debt
instruments to, incur substantial indebtedness in the future. We are currently
renegotiating the terms of the senior credit facility, including increasing the
size of the facility.
Our large amount of indebtedness could significantly impact our business for
the following reasons:
- it limits our ability to obtain additional financing to complete our
roll-out plan, to develop new services or to otherwise respond to
unanticipated competitive pressures;
- it means that we will need to dedicate a substantial portion of our
operating cash flow to fund interest expense on our senior credit facility
and our senior notes, thereby reducing funds available for working
capital, capital expenditures or other purposes;
- it makes us vulnerable to interest rate fluctuations because our senior
credit facility loans bear interest at variable rates;
- it limits our ability to compete with companies who are not as highly
leveraged, especially those who may be able to price their service
offerings at levels below those we can or are willing to match; and
- it limits our ability to expand into new markets and to react to changing
market conditions, changes in our industry and economic downturns.
OUR EXISTING DEBT INCLUDES RESTRICTIVE AND FINANCIAL COVENANTS THAT LIMIT OUR
OPERATING FLEXIBILITY.
Our senior credit facility and the indenture relating to our senior notes
contain covenants that, among other things, restrict our ability to take
specific actions, even if we believe them to be in our best interest. These
include restrictions on our ability to:
- incur additional debt;
- pay dividends or distributions on, or redeem or repurchase, capital stock;
- create liens or negative pledges with respect to our assets;
- make investments, loans or advances;
- issue, sell or allow distributions on capital stock of specified
subsidiaries;
- enter into sale and leaseback transactions;
- prepay or defease specified indebtedness;
- enter into transactions with affiliates;
- enter into specified hedging arrangements;
- merge, consolidate or sell our assets; or
- engage in any business other than telecommunications.
The senior notes also require us to offer to purchase these notes from the
holders at 101% if we undergo a change of control. In addition, the senior
credit facility imposes financial covenants that require us to comply with
specified financial ratios and tests, including minimum revenues, minimum
7
<PAGE>
EBITDA/maximum EBITDA losses, minimum access lines, senior secured debt to total
capitalization, maximum capital expenditures, maximum leverage ratios, minimum
interest coverage ratios and pro forma debt service coverage ratios. We cannot
assure you that we will be able to meet these requirements or satisfy these
covenants in the future. If we fail to do so, our debts could become immediately
payable at a time when we are unable to pay them. This could adversely affect
our ability to carry out our business plan and would have a negative effect on
our financial condition.
WE EXPECT TO GROW AND CANNOT GUARANTEE THAT WE WILL BE ABLE TO EFFECTIVELY
MANAGE OUR FUTURE GROWTH.
If we successfully implement our business plan, our operations will expand
rapidly, and we will be providing packaged telecommunications services on a
widespread basis. This could place a significant strain on our management,
operational, financial and other resources and increase demands on our systems
and controls. Failure to manage our future growth effectively could adversely
affect the expansion of our customer base and service offerings. We cannot
assure you that we will successfully implement and maintain efficient
operational and financial systems, procedures and controls or successfully
obtain, integrate and manage the employees and management, operational,
financial and other resources necessary to manage a developing and expanding
business in our evolving, highly regulated and increasingly competitive
industry.
TO EXPAND AND DEVELOP OUR BUSINESS WE WILL NEED A SIGNIFICANT AMOUNT OF CASH,
WHICH WE MAY BE UNABLE TO OBTAIN.
The expansion and development of our business and the deployment of our
networks, services and systems will require significant capital expenditures,
working capital and debt service and generate negative operating cash flows.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of, among other things, the demand for
our services and regulatory, technological and competitive developments,
including additional market developments and new opportunities, in our industry.
Our revenue and costs may also be dependent upon factors that are not within our
control, including regulatory and legislative developments, the response of our
competitors to their loss of customers to us and to changes in technology, the
nature and penetration of services that we may offer and the number of
subscribers and the services for which they subscribe. Due to the uncertainty of
these factors, actual revenues and costs may vary from expected amounts,
possibly to a material degree, and these variations are likely to affect our
future capital requirements.
We also expect that we will require additional financing or may require
financing sooner than anticipated to complete our roll-out plan or if our
development plans change or prove to be inaccurate. We may also require
additional financing in order to develop new services or to otherwise respond to
changing business conditions or unanticipated competitive pressures. Sources of
additional financing may include commercial bank borrowings, vendor financing,
or the private or public sale of equity or debt securities. 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, which could impair our ability to develop our business. If
we decide to raise additional funds through the issuance of equity, the
ownership interests represented by the common stock will be diluted. We cannot
assure you that we will be successful in raising sufficient additional capital
on favorable terms or at all. Failure to raise sufficient funds may require us
to modify, delay or abandon some of our future expansion or expenditure plans.
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RESISTANCE BY POTENTIAL CUSTOMERS TO ACCEPT US AS A NEW PROVIDER OF
TELECOMMUNICATIONS SERVICES MAY REDUCE OUR ABILITY TO INCREASE OUR REVENUE.
The success of our service offerings will depend upon, among other things,
the willingness of additional customers to accept us as a new provider of
integrated communications services. We cannot assure you that we will be
successful in overcoming the resistance of potential customers to change their
service provider, particularly those that purchase services from the traditional
telephone companies, or that customers will buy our services. Any lack of
customer acceptance would reduce our ability to increase our revenue.
IF WE ARE UNABLE TO DEVELOP OR INTEGRATE OUR SYSTEMS OR PROPERLY MAINTAIN AND
UPGRADE THEM, WE MAY NOT BE ABLE TO BILL OUR CUSTOMERS EFFECTIVELY OR PROVIDE
ADEQUATE CUSTOMER SERVICE.
Sophisticated back office information and processing systems are vital to
our growth and our ability to monitor costs, bill customers, provision customer
orders, achieve operating efficiencies and maintain our operating margins. Our
plans for the development and implementation of these systems rely, for the most
part, on choosing products and services offered by third party vendors and
integrating these products and services in-house to produce efficient
operational solutions. We cannot assure you that we will successfully implement
these systems on a timely basis or that we will implement them at all. We also
cannot assure you that, once implemented, these systems will perform as we
expect. Risks to our business associated with our systems include:
- failure by these vendors to deliver their products and services in a
timely and effective manner and at acceptable costs;
- failure by us to identify all of our information and processing needs
adequately;
- failure of our related processing or information systems; or
- failure by us to effectively integrate new products or services.
Furthermore, as our suppliers revise and upgrade their hardware, software
and equipment technology, we could encounter difficulties in integrating this
new technology into our business or the new systems may not be appropriate for
our business. In addition, our right to use these systems depends upon license
agreements with third party vendors. Vendors may cancel or elect not to renew
some of these agreements, which may adversely affect us.
WE MAY NEED TO RELY ON THE ESTABLISHED LOCAL TELEPHONE COMPANIES TO IMPLEMENT
OUR SERVICES SUCCESSFULLY. THEIR FAILURE TO COOPERATE WITH US COULD ADVERSELY
AFFECT THE SERVICES WE OFFER.
We are a recent entrant into the local telecommunications services industry.
The local exchange services market in most states was only recently opened to
competition. There are numerous operating complexities associated with providing
these services. We will be required to develop new products, services and
systems and will need to develop new marketing initiatives to sell these
services. We cannot assure you that we will be able to develop these products
and services.
We plan to deploy high capacity voice and data switches in most of the
markets we serve. We initially intend to rely on the networks of established
telephone companies or those of new market entrants for some aspects of
transmission. Federal law requires most of the traditional local telephone
companies to lease or "unbundle" elements of their networks and permit us to
purchase the elements we need, thereby decreasing our operating expenses. We
cannot assure you that this unbundling will continue to occur in a timely manner
or that the prices for these elements will be favorable to us. Our current
strategy depends in large part on our ability to provide service to our
customers by leasing all of the network elements necessary to provide local
telephone service from the incumbent telephone company rather than through the
use of our own equipment and facilities. UNE-P allows us to
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minimize capital expenditures and permits us to enter new markets quickly, while
allowing us to maintain significant gross margins. If the incumbent local
telephone companies do not cooperate in making UNE-P available, our ability to
provide service to customers could be materially adversely affected.
In addition, our ability to implement successfully our services will require
the negotiation of interconnection and collocation agreements with established
telephone companies and other new market entrants, which can take considerable
time, effort and expense and is subject to federal, state and local regulation.
Interconnection agreements are agreements between local telecommunications
services providers that set forth the terms and conditions governing how those
providers will interconnect their networks and/or purchase or lease network
facilities and services.
Our interconnection agreements with Southwestern Bell provide that our
connection and maintenance orders will receive the same attention as
Southwestern Bell's end-user customers and that Southwestern Bell will provide
capacity at key telecommunications intersections to keep call blockage within
industry standards. Accordingly, we depend and will continue to depend on
Southwestern Bell and, as we expand our network, we will depend on other
traditional telephone companies to assure uninterrupted service and competitive
services. Blocked calls result in customer dissatisfaction and risk the loss of
business. Interconnection agreements, such as our agreements with Southwestern
Bell, typically have short terms, requiring us to renegotiate frequently. Some
of our agreements with Southwestern Bell have one year or less remaining before
we will have to renegotiate them. We cannot assure you that we will be able to
renegotiate these interconnection agreements in our existing markets, or
negotiate new interconnection agreements in new markets, on favorable terms. In
addition, the prices set forth in our interconnection agreements may be subject
to significant rate increases at the discretion of the regulatory authority in
each state in which we operate. Our profitability partially depends on these
state-regulated rate structures. We cannot assure you that the rates charged to
us under the interconnection agreements will allow us to offer low enough usage
rates to attract a sufficient number of customers and to operate our business
profitably or at favorable gross margins.
Many new carriers have experienced difficulties in working with the
established telephone companies with respect to ordering, interconnecting,
leasing premises and implementing the systems used by these new carriers to
order and receive unbundled network elements and wholesale services. We cannot
assure you that established telephone companies will be accommodating to us. If
we are unable to obtain the cooperation of an established telephone company in a
region, our ability to offer local services in this region on a timely and
cost-effective basis would be adversely affected. In addition, both proposed and
recently completed mergers involving regional Bell operating companies and other
competitors could facilitate a combined entity's ability to provide many of the
services we offer, thereby making it more difficult to compete against them.
DIGITAL SUBSCRIBER LINE TECHNOLOGY MAY NOT OPERATE AS EXPECTED ON INCUMBENT
LOCAL CARRIER NETWORKS AND MAY INTERFERE WITH OR BE AFFECTED BY OTHER TRANSPORT
TECHNOLOGIES.
Our ability to provide digital subscriber line services to potential
customers depends on the quality, physical condition, availability and
maintenance of telephone lines within the control of the incumbent carriers. If
the telephone lines are not adequate, we may not be able to provide digital
subscriber line services to many of our target customers, and this will diminish
our expected revenue. We believe the current condition of telephone lines in
many cases may be inadequate to permit us to fully implement these services. We
also believe that the incumbent carriers may not maintain or improve the
telephone lines in a condition that will allow us to implement our digital
subscriber line services effectively. Further, the incumbent carriers may claim
their lines are not of sufficient quality to allow us to fully implement or
operate our digital subscriber line services. In addition, some customers use
technologies other than copper lines to provide telephone services, and as a
result, digital subscriber line services might not be available to these
customers.
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All transport technologies using copper telephone lines have the potential
to interfere with, or to be interfered with by, other traffic on adjacent copper
telephone lines. This interference could degrade the performance of our services
or make us unable to provide service on selected lines. In addition, incumbent
carriers may claim that the potential for interference by digital subscriber
line technology permits them to restrict or delay our deployment of this
technology. The telecommunications industry and regulatory agencies are still
developing procedures to resolve interference issues between telecommunications
providers, and these procedures may not be effective. We may be unable to
successfully negotiate interference resolution procedures with incumbent
carriers. Interference, or claims of interference, if widespread, would
adversely affect our speed of deployment, reputation, brand image, service
quality and customer retention and satisfaction.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY NOT
BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
We believe that our future success will be due, in part, to our experienced
management team, including Messrs. Scott, Goldman, Hollingsworth, Lawhon,
Moline, Shackelford and Vranicar, each of whom is party to an employment
agreement. Losing the services of one or more members of our management team
could adversely affect our business and our expansion efforts and possibly
prevent us from:
- further deploying and improving our operational, financial and information
systems and controls;
- hiring and retaining qualified sales, marketing, administrative, operating
and technical personnel; and
- training and managing new personnel.
In addition, competition for qualified employees has intensified in recent
years and may become even more intense in the future. Our ability to implement
our business plan depends on our ability to hire and retain a large number of
new employees each year. Inability to hire sufficient qualified personnel could
impair our ability to increase revenue, and customers could experience delays in
installation of service or experience lower levels of customer care.
WE MAY NOT HAVE THE ABILITY TO DEVELOP STRATEGIC ALLIANCES OR TO MAKE OR
SUCCESSFULLY INTEGRATE ACQUISITIONS NEEDED TO COMPLEMENT OUR EXISTING BUSINESS.
As part of our growth strategy, we seek to develop strategic alliances and
to make investments or acquire assets or other businesses. We regularly engage
in discussions relating to potential acquisitions. We are unable to predict
whether or when any prospective acquisitions or strategic alliances will occur
or the likelihood of a material transaction being completed on favorable terms
and conditions. Our ability to finance acquisitions and strategic alliances may
be constrained by our degree of leverage at the time of the acquisition. In
addition, our senior credit facility and senior notes may significantly limit
our ability to make acquisitions or enter into strategic alliances and to incur
indebtedness in connection with acquisitions and strategic alliances.
In addition, if we were to proceed with one or more significant strategic
alliances, acquisitions or investments in which the consideration consists of
cash, we could use a substantial portion of our available cash, including
proceeds of the offering, to consummate the strategic alliances, acquisitions or
investments. The financial impact of acquisitions, investments and strategic
alliances could cause substantial fluctuations in our quarterly and yearly
operating results. Furthermore, if we use our common stock as consideration for
acquisitions, our stockholders would experience dilution of their existing
shares.
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The integration of any future acquisitions or strategic alliances would be
accompanied by the risks commonly encountered in these transactions. These risks
include, among others:
- the difficulty of assimilating the acquired operations and personnel;
- the potential disruption of our ongoing business and diversion of
resources and management time;
- the inability of management to maximize our financial and strategic
position by the successful incorporation of licensed or acquired
technology and rights into our service offerings;
- the possible inability of management to maintain uniform standards,
controls, procedures and policies;
- the risks of entering markets in which we have little or no direct prior
experience; and
- the potential impairment of relationships with employees or customers as a
result of changes in management or otherwise arising out of these
transactions.
We cannot assure you that we will be able to integrate acquired businesses or
assets successfully.
A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE, WHICH COULD
CAUSE US TO LOSE CUSTOMERS.
Our success will require that our networks provide competitive reliability,
capacity and security. Some of the risks to our networks and infrastructure
include:
- physical damage to access lines;
- power surges or outages;
- capacity limitations;
- software defects;
- lack of redundancy; and
- disruptions beyond our control.
These disruptions may cause interruptions in service or reduced capacity for
customers, any of which could cause us to lose customers.
ALL YEAR 2000 PROBLEMS MAY NOT HAVE BEEN ADDRESSED BY OUR SUPPLIERS, AND ANY
SERVICE INTERRUPTION WE EXPERIENCE AS A RESULT OF THESE PROBLEMS MAY CAUSE US TO
LOSE CUSTOMERS.
The Year 2000 issue generally describes the various problems that may result
from the improper processing of dates and date-sensitive transactions by
computers and other equipment as a result of computer hardware and software
using two digits, rather than four digits, to identify the year in a date. Any
computer programs or systems of our suppliers that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
While we have experienced no Year 2000 issues to date, and we are not aware of
any material issues for our suppliers, we are continuing to evaluate and
determine whether our significant suppliers are in compliance or have
appropriate plans to remedy Year 2000 issues when their systems interact with
our systems. We do not expect that this will have a material impact on our
operations. However, we cannot assure you that the systems of other companies on
which we rely are Year 2000 compliant, that another company's failure to
successfully convert, or that another company's conversion to a system
incompatible with our systems, would not have an impact on our operations. The
failure of our principal suppliers to be Year 2000 compliant could result in
delays in service deliveries from those suppliers and materially impact our
ability to do business.
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RISKS RELATED TO OUR INDUSTRY
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OTHER COMPANIES.
The telecommunications industry is highly competitive and is affected by the
introduction of new services by, and the market activities of, major industry
participants. Several of our competitors are substantially larger and have
greater financial, technical and marketing resources than we do. We have not
achieved, and do not expect to achieve, a significant market share for any of
the broadband telecommunications services we offer in our target markets. In
particular, larger competitors have advantages over us that could cause us to
lose customers and impede our ability to attract new customers, including:
- long-standing relationships and brand recognition with customers;
- financial, technical, marketing, personnel and other resources
substantially greater than ours;
- more funds to deploy telecommunications services;
- potential to lower prices of competitive telecommunications services; and
- fully deployed networks.
We face competition from other current and potential market entrants,
including:
- domestic and international long distance providers seeking to enter,
re-enter or expand entry into the local telecommunications marketplace;
and
- other domestic and international telecommunications providers, resellers,
cable television companies, electric utilities and Internet companies.
A continuing trend toward combinations and strategic alliances in the
telecommunications industry could give rise to significant new competitors. This
could cause us to lose customers and impede our ability to attract new
customers.
FEDERAL COMMUNICATIONS COMMISSION AND STATE REGULATIONS MAY LIMIT THE SERVICES
WE CAN OFFER OR IMPACT OUR ABILITY TO CONDUCT OUR BUSINESS.
Our networks and the provision of telecommunications services are
extensively regulated at the federal, state and local levels. Existing and
future governmental regulations may greatly influence how we operate our
business, our business strategy and ultimately, our viability. The costs of
complying with federal, state and local regulations and the delays in receiving
required regulatory approvals or the enactment of new adverse regulation or
regulatory requirements may be greater than we anticipate and divert our
resources from implementing our business plan. We cannot predict the future
regulatory framework for our business.
Our provision of telecommunications services may be subject to the
requirement that we obtain proper authorizations from the FCC or state
commissions. We cannot assure you that the FCC or state commissions will grant
the required authority or refrain from taking action against us if we are found
to have provided services without obtaining the necessary authorizations. If we
do not fully comply with the rules of the FCC or state regulatory agencies,
third parties or regulators could challenge our authority to do business. These
challenges could cause us to incur substantial legal and administrative
expenses.
Federal law governing the telecommunications industry remains in a state of
flux. The Telecommunications Act remains subject to judicial review and
additional FCC rulemaking, and thus it is difficult to predict what effect the
legislation or these FCC rules will have on us and our operations. There are
currently many regulatory actions underway and being contemplated by federal and
state authorities regarding interconnection pricing, universal service support,
access charge reform, and other
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issues that could result in significant changes to the business conditions in
the telecommunications industry.
Our current business strategy depends in large part on our ability to
provide service to our customers through UNE-P. Our ability to provide service
to customers through UNE-P depends in turn on FCC and state commission rulings
requiring incumbent local telephone companies to lease us the necessary network
elements. If those rules are changed by the FCC or state commissions, or are
struck down by the courts, our ability to provide service to our customers
through UNE-P could be materially adversely affected. For example, the FCC could
remove one or more of the necessary elements from the list of elements that the
incumbent telephone companies are required to provide to us. The FCC could also
expand the scope of an existing exception in its rules that permits incumbent
telephone companies to opt not to make UNE-P available in the highest density
geographic areas within the largest 50 metropolitan statistical areas if they
meet certain conditions. If the FCC acts to expand the scope of the geographic
exception to include our target markets, our business could be materially
adversely affected. Some states in our current operating region, including Texas
and Missouri, have gone beyond the FCC's minimum requirements and independently
ordered Southwestern Bell to make UNE-P available throughout those states under
terms more favorable to new telecommunications service providers than those
required by the FCC. We cannot assure you that those favorable state rulings
will remain in place. If UNE-P does not continue to be available on the
favorable terms ordered by the states, our business could be materially
adversely affected.
The United States Court of Appeals for the Eighth Circuit is currently
considering challenges to the pricing methodology established by the FCC for
setting the rates paid by telecommunications service providers to incumbent
telephone companies for access to network elements. If the court strikes down
some or all of the FCCs's pricing methodology and that methodology is ultimately
replaced with a methodology that imposes higher rates for network elements, we
could be materially adversely affected.
Federal universal service support mechanisms could increase the costs of
providing service to our customers. We derive revenue from the provision of
interstate and international telecommunications services to end users that may
be subject to the requirement that we contribute to the FCC's Universal Service
Fund based on a percentage of this revenue. The assessment for the first quarter
of 2000 is 5.8995%, and the assessment for the second quarter of 2000 is 5.7101%
of interstate and international end user telecommunications revenue. The
contribution factor varies quarterly at a rate set by the FCC. To the extent the
contribution factor increases, our costs of providing service will increase.
Our Internet operations are not currently regulated directly by the FCC or
any other governmental agency, other than regulations applicable to businesses
generally. However, the FCC has recently indicated that the regulatory status of
some services offered over the Internet may have to be re-examined. New laws or
regulations relating to Internet services, or existing laws found to apply to
them, may adversely affect our Internet operations.
WE MAY BE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGE.
The telecommunications industry is subject to rapid and significant changes
in technology, including continuing developments in digital subscriber line
technology. This technology does not presently have widely accepted standards,
and alternative technologies for providing high speed data transport and
networking may develop. The absence of widely accepted standards may delay or
increase the cost of our market entry due to changes in equipment specifications
and customer needs and expectations. We may also rely on a third party for
access to new technologies. In addition, if we acquire new technologies, we may
not be able to implement them as effectively as other companies with more
experience with those technologies and in their markets.
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WE MAY FAIL TO ACHIEVE ACCEPTABLE PROFITS ON OUR LONG DISTANCE BUSINESS DUE TO
DECLINING PRICES, LOW CUSTOMER RETENTION RATES AND OUR CONTRACTUAL OBLIGATIONS.
Prices in the long distance business have declined substantially in recent
years and are expected to continue to decline. In addition, the long distance
industry has a low customer retention rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. We will rely on other carriers to provide us with a
major portion of our long distance transmission network. Agreements with these
carriers typically provide for the resale of long distance services on a
per-minute basis and may contain minimum volume commitments. The 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 our
future customers. In the event that we fail to meet these minimum volume
commitments, we may have to pay underutilization charges, and, in the event we
underestimate our need for transmission capacity, we may have to obtain capacity
through more expensive means.
AS A NEW DATA TRANSMISSION ENTRANT IN A MARKET, WE MAY INITIALLY GENERATE LOW OR
NEGATIVE GROSS MARGINS.
As a new entrant in the data transmission business, we expect to generate
low or negative gross margins and substantial start-up expenses as we begin to
offer data transmission services. The success of our data transmission business
will depend upon, among other things, the effectiveness of our sales personnel
in the promotion and sale of our data transmission services, the acceptance of
these services by potential customers, and our ability to hire and train
qualified personnel and further enhance our services in response to future
technological changes. We cannot assure you that we will be successful in these
endeavors.
RISKS RELATED TO THIS OFFERING
YOU MIGHT NOT BE ABLE TO SELL YOUR STOCK IF NO MARKET DEVELOPS FOR OUR STOCK.
Prior to the offering, you could not buy or sell our common stock publicly.
We have filed an application for the quotation of our common stock on The Nasdaq
National Market. However, an active public market for our common stock may not
develop or be sustained after the offering. If a market does not develop or is
not sustained, it may be difficult for you to sell your shares of common stock
at a price that is attractive to you or at all. The initial public offering
price of the common stock will be determined through negotiations between the
representatives of the underwriters and us and may not be representative of the
price that will prevail in the open market.
PROVISIONS IN OUR CHARTER DOCUMENTS MIGHT DETER ACQUISITION BIDS FOR US.
We intend to amend and restate our certificate of incorporation prior to the
closing of the offering. This amended and restated certificate of incorporation
will provide for, among other things:
- a classified board of directors;
- the inability of our stockholders to call special meetings of
stockholders, to act by written consent unless the consent is unanimous,
to remove any director or the entire board of directors without cause, or
to fill any vacancy on the board of directors; and
- advance notice requirements for stockholder proposals.
Our board of directors will also be permitted to authorize the issuance of
preferred stock without any vote or further action by the stockholders. These
provisions and other provisions under Delaware law could make it more difficult
for a third party to acquire us, even if doing so would benefit our
stockholders.
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KKR WILL BENEFICIALLY OWN A SIGNIFICANT INTEREST IN OUR VOTING SECURITIES AFTER
THE OFFERING.
KKR will beneficially own 44.5% of our outstanding shares of common stock
following the completion of the offering and 43.6% if the underwriters'
overallotment option is exercised in full. As a result, KKR will exercise
significant control over all matters requiring stockholder approval. Under the
terms of a purchasers' rights agreement, KKR is currently entitled to designate
a total of five out of the eleven members of the board of directors and two
members of the compensation committee of the board. The concentrated holdings of
KKR and the presence of its designees on the board of directors may result in a
delay or the deterrence of possible changes in our control, which may reduce the
market price of our common stock. In addition, KKR and its affiliates have the
right to veto many actions that we may take, including any change in our capital
stock, any payments of dividends, any change in the composition of our board,
any affiliate transactions, any consolidation, reorganization, merger or similar
transaction, any change in our governing documents or any voting or similar
agreement concerning our capital stock, as well as specified operating decision,
including, but not limited to, incremental indebtedness, investments and our
business plan.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN APPLYING THE NET PROCEEDS OF THIS
OFFERING.
At an initial offering price of $16.00 and after deducting the underwriting
discount and other expenses of the offering, we will receive net proceeds of
approximately $184.0 million. We have not yet determined the specific dollar
amount of net proceeds to be allocated to any of the possible uses indicated in
"Use of Proceeds." Accordingly, our management will have broad discretion in
applying the net proceeds of the offering. Management's allocation of the net
proceeds will affect how our business evolves. We cannot assure you that
management will choose to spend these proceeds in areas that benefit our
business. In addition, we cannot assure you that management will choose to
allocate proceeds to further our current business strategy.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD AFFECT OUR STOCK PRICE.
If our existing stockholders sell substantial amounts of our common stock in
the public market following the offering, the market price of our common stock
could decline. Based on shares outstanding as of March 23, 2000, upon completion
of the offering we will have outstanding 95,229,209 shares of common stock,
assuming no exercise of the underwriters' over-allotment option. Of these
shares, the 12,500,000 shares of common stock sold in the offering will be
freely tradeable, without restriction, in the public market, and 2,824,257
additional shares (including shares issuable upon the exercise of outstanding
warrants) will be eligible for sale in the public market immediately upon
completion of the offering. After the lockup agreements pertaining to the
offering expire 180 days from the date of this prospectus, subject to some
exceptions, an additional 79,904,952 shares will be eligible for sale in the
public market. In addition, the 13,651,348 shares subject to outstanding or
early exercised options and 12,565,000 shares reserved for future issuance under
our stock option and purchase plans will be available for sale after 180 days
from the date of this prospectus. Following the offering, we intend to file a
registration statement on Form S-8 under the Securities Act covering
approximately 27,100,000 shares of common stock issued or issuable upon the
exercise of stock options, subject to outstanding options or reserved for
issuance under our employee and director stock plans.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the pro forma
net book value per share of the outstanding common stock. As a result, investors
purchasing common stock in the offering will incur immediate substantial
dilution in the amount of $13.96 per share. In addition, we have issued options
and warrants to acquire common stock at prices significantly below the initial
public offering price. To the extent these outstanding options and warrants are
exercised, there will be further dilution to investors in this offering.
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OUR STOCK DOES NOT HAVE A TRADING HISTORY AND MAY BE EXTREMELY VOLATILE BECAUSE
WE OPERATE IN A RAPIDLY CHANGING INDUSTRY.
The trading price of our common stock is likely to be volatile. The stock
market has experienced extreme volatility, and this volatility has often been
unrelated to the operating performance of particular companies. We cannot be
sure that an active public market for our common stock will develop or continue
after the offering. Investors may not be able to sell their common stock at or
above our initial public offering price or at all. Prices for the common stock
will be determined in the marketplace and may be influenced by many factors,
including variations in our financial results, changes in earnings estimates by
industry research analysts, investors' perceptions of us and general economic,
industry and market conditions.
OUR OFFICERS AND DIRECTORS EXERT SUBSTANTIAL INFLUENCE OVER US.
Our executive officers, directors and entities affiliated with them together
beneficially own a substantial percentage of our outstanding common stock. As a
result, these stockholders are able to exercise substantial influence over all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in our
control.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT MAY NOT BE ACCURATE
INDICATORS OF OUR FUTURE PERFORMANCE.
This prospectus contains forward-looking statements within the meaning of
the federal securities laws. Discussions containing forward-looking statements
may be found in the material set forth in this section and under "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in the prospectus generally.
The words "believe," "estimate," "expect," "intend," "anticipate," "plan," and
similar expressions and variations of these expressions identify some of these
forward-looking statements that speak only as of the dates on which they were
made. We caution you that these forward-looking statements are not guarantees of
future performance and involve risks and uncertainties. Actual events or results
may differ materially from those discussed in the forward-looking statements as
a result of various factors, including, without limitation, the risk factors set
forth above and the matters set forth in this prospectus generally. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this document. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 12,500,000 shares of
common stock will be approximately $184.0 million, or $211.9 million if the
underwriters exercise their over-allotment option in full, after deducting the
estimated underwriting discount and estimated offering expenses payable by us.
We expect to use the net proceeds from the offering and borrowings under our
senior credit facility to fund capital expenditures for network facilities and
back office systems, to fund operating losses and for general corporate
purposes, including possible future investments, acquisitions or strategic
alliances. Pending these uses, we plan to invest the net proceeds in investment
grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock and do
not anticipate paying cash dividends in the foreseeable future. We currently
intend to retain all future earnings, if any, for use in the operation of our
business and to fund future growth. The terms of our senior credit facility and
our senior notes indenture restrict our ability to declare and pay dividends on
our common stock.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to (a) the exercise by an affiliate of
KKR of its options to invest an additional $50.0 million (net proceeds of
$47.5 million) in our company, (b) the conversion of all outstanding
shares of our preferred stock into common stock, which will occur
automatically upon completion of the offering and (c) the 1.795-for-1
split of our common stock, which will occur prior to completion of the
offering;
- on a pro forma as adjusted basis to give effect to the pro forma items
listed above and reflect the application of the net proceeds from the sale
of 12,500,000 shares of common stock in the offering at an assumed
offering price of $16.00 per share.
You should read this table in conjunction with our consolidated financial
statements and the related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds" included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents(1)................................ $ 28,473 $ 75,923 $259,923
======== ======== ========
Long-term debt:
Credit facility(2)........................................ $ 10,000 $ 10,000 $ 10,000
14% senior notes.......................................... 114,715 114,715 114,715
Other..................................................... 1,070 1,070 1,070
-------- -------- --------
125,785 125,785 125,785
Series F redeemable preferred stock......................... 63,550 -- --
Stockholders' equity:
Series B preferred stock.................................. 8 -- --
Series C preferred stock.................................. 6 -- --
Series D preferred stock.................................. 2 -- --
Common stock.............................................. 5 82 95
Warrants.................................................. 337 337 337
Additional paid-in capital................................ 11,686 118,927 302,914
Accumulated deficit....................................... (79,801) (79,801) (79,801)
-------- -------- --------
Total stockholders' (deficit) equity.................... (67,757) 39,545 223,545
-------- -------- --------
Total capitalization.................................. $121,578 $165,330 $349,330
======== ======== ========
</TABLE>
- ------------------------
(1) Includes $23.4 million of pledged securities securing interest payments on
our senior notes through June 2001.
(2) The $125 million senior credit facility provides for a $25.0 million
reducing revolver and $100.0 million in multi-draw term loans. As of
March 31, 2000, we had borrowed $50.0 million under the senior credit
facility and had $25.0 million available under the revolver and
$50.0 million available under the term portion of the senior credit
facility.
19
<PAGE>
DILUTION
Dilution is the amount by which the offering price paid by the purchasers of
the common stock to be sold in the offering will exceed the net tangible book
value per share of common stock after the offering. Net tangible book value per
share is determined at any date by subtracting our total liabilities from the
total book value of our tangible assets and dividing the difference by the
number of shares of common stock deemed to be outstanding at that date.
Our net tangible book value as of December 31, 1999, after giving pro forma
effect to (1) the exercise by an affiliate of KKR of its options to invest an
additional $50.0 million in our company, (2) the conversion of all outstanding
shares of our preferred stock into common stock, which will occur automatically
upon completion of the offering and (3) the 1.795-for-1 split of our common
stock, which will occur prior to completion of the offering, would have been
$10.0 million or $0.12 per share. After giving effect to the receipt of
approximately $184.0 million of estimated net proceeds from the sale of
12,500,000 shares of common stock in the offering at an assumed offering price
of $16.00 per share, our pro forma net tangible book value at December 31, 1999
would have been approximately $194.0 million or $2.04 per share. This represents
an immediate increase in pro forma net tangible book value of $1.92 per share to
existing stockholders and an immediate dilution of $13.96 per share to investors
purchasing shares of common stock in the offering. The following table
illustrates the substantial and immediate per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
Pro forma net tangible book value before the offering..... $0.12
Increase per share attributable to investors in the
offering................................................ 1.92
Pro forma net tangible book value after the offering........ 2.04
------
Dilution per share to new investors......................... $13.96
======
</TABLE>
The following table summarizes on a pro forma as adjusted basis as of
December 31, 1999 the difference among existing stockholders and new investors
with respect to the number of shares of common stock purchased from us, the
total consideration paid and the average price paid per share at the offering
price of $16.00 per share (before deducting the estimated underwriting discount
and offering expenses payable by us):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Investors in the offering.......... 12,500,000 13.1% $200,000,000 61.0% $16.00
Existing investors (assuming the
exercise by KKR's affiliate of
its option)...................... 82,561,677 86.9% 127,900,000 39.0% 1.55
---------- ------ ------------ ------
Total.......................... 95,061,677 100.0% $327,900,000 100.0% 3.45
========== ====== ============ ======
</TABLE>
The table above assumes no exercise of stock options or warrants outstanding
as of December 31, 1999. As of December 31, 1999, there were options outstanding
to purchase a total of 3,645,375 shares of common stock at a weighted average
exercise price of $2.00 per share. We have granted 2,569,857 additional options
since that date and expect to grant approximately 2,250,000 options exercisable
at the offering price on the closing date of the offering. As of December 31,
1999, there were warrants outstanding to purchase a total of 2,530,473 shares of
common stock at an exercise price of $0.006 per share. To the extent any of
these options and warrants are exercised, there may be further dilution to new
investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth our selected consolidated financial and
operating data for the periods indicated. Our statement of operations data and
other financial data for the years ended December 31, 1997, 1998 and 1999 and
our balance sheet data as of December 31, 1998 and 1999, as well as the
statement of operations data, other financial data and balance sheet data for
the predecessor company as of and for the year ended December 31, 1997, have
been derived from, and is qualified by reference to, consolidated financial
statements included elsewhere in this prospectus, which Ernst & Young LLP, our
independent auditors, have audited. The share and per share data presented below
gives effect to the 1.795-for-1 split of our common stock, which will occur
prior to the completion of the offering.
EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. EBITDA is used by
management and some investors as an indicator of a company's historical ability
to service debt. Management believes that an increase in EBITDA is an indicator
of improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. We have presented EBITDA
to enhance your understanding of our operating results. You should not construe
it as an alternative to operating income, as an indicator of our operating
performance nor as an alternative to cash flows from operating activities as a
measure of liquidity determined in accordance with GAAP. We may calculate EBITDA
differently from other companies. For further information, see our consolidated
financial statements and the related notes elsewhere in this prospectus.
The predecessor company is Valu-Line, which merged with us in
February 1998. Prior to February 1998, Birch had no revenues and was a
development stage company.
We acquired Boulevard, Telesource and TFSnet in 1998 and American Local and
Capital in 1999. The statement of operations data, other financial data and
operating data in the table include the operations of these companies beginning
on the dates they were acquired. These acquisitions affect the comparability of
the financial data for the periods presented.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
THE PREDECESSOR THE COMPANY
------------------------------ ------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $12,226 $13,217 $16,801 $ -- $ 26,087 $ 60,538
Cost of services............................ 8,284 8,749 11,842 -- 18,886 46,358
------- ------- ------- ------- -------- --------
Gross margin................................ 3,942 4,468 4,959 -- 7,201 14,180
Selling, general and administrative......... 3,520 3,561 4,067 1,776 15,769 53,045
Depreciation and amortization............... 189 311 341 27 2,308 10,828
------- ------- ------- ------- -------- --------
Income (loss) from operations............... 233 596 551 (1,803) (10,876) (49,693)
Interest income (expense), net.............. (58) (102) (97) 14 (5,332) (12,111)
------- ------- ------- ------- -------- --------
Income (loss) before income taxes........... 175 494 454 (1,789) (16,208) (61,804)
Provision for income taxes.................. 81 205 186 -- -- --
------- ------- ------- ------- -------- --------
Net income (loss)........................... $ 94 $ 289 $ 268 (1,789) (16,208) (61,804)
======= ======= =======
Preferred stock dividends................... -- (1,696) (3,550)
Amortization of preferred stock issuance
costs..................................... -- (29) (292)
------- -------- --------
Loss applicable to common stock............. $(1,789) $(17,933) $(65,646)
======= ======== ========
Weighted average shares outstanding
--basic and diluted....................... 2,217 6,837 8,896
Loss per common share--basic and diluted.... $ (0.81) $ (2.62) $ (7.38)
OTHER FINANCIAL DATA:
Cash flows from operating activities........ $ (267) $ 834 $ 488 $(1,551) $(10,643) $(53,225)
Cash flows from investing activities........ (230) (513) (243) (128) (67,093) (31,796)
Cash flows from financing activities........ 259 (257) (145) 1,889 117,271 50,329
EBITDA...................................... 422 907 892 (1,776) (8,568) (38,865)
Capital expenditures........................ 230 513 243 128 21,550 41,360
OPERATING DATA:
Local customers at end of period............ -- 14,735 38,487
Access lines in service at end of period.... -- 39,323 112,518
Average lines per business customer......... -- 4.73 4.48
Average lines per residential customer...... -- 1.25 1.22
Circuit switches in service at end of
period.................................... -- 1 4
Data switches in service at end of period... -- 1 19
Employees at end of period.................. 14 345 935
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
THE PREDECESSOR THE COMPANY
------------------------------ ------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 96 $ 158 $ 258 $210 $ 39,745 $ 5,053
Pledged securities............................... -- -- -- -- 37,785 23,420
Property and equipment........................... 2,265 2,721 2,964 128 26,900 70,192
Total assets..................................... 3,971 3,868 4,802 534 134,149 146,971
Long-term debt and capital lease obligations..... 1,431 792 681 -- 115,791 125,785
Redeemable preferred stock....................... -- -- -- -- 14,063 63,550
Total stockholders' equity (deficit)............. 1,108 1,397 1,665 29 (7,099) (67,757)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE FINANCIAL STATEMENTS AND RELATED NOTES
THAT ARE INCLUDED LATER IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" OR IN OTHER PARTS OF THIS PROSPECTUS.
OVERVIEW
We were organized on December 23, 1996 to become a leading provider of
telecommunications services for small and mid-sized businesses in our target
markets. From that date until the February 1998 acquisition of Valu-Line, our
predecessor, we were 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 our
telephone networks, acquiring equipment and facilities, negotiating resale and
interconnection agreements and pursuing acquisition opportunities. We had no
assets, liabilities or financial activity prior to January 1, 1997.
The following is a summary of our major transactions and events.
<TABLE>
<CAPTION>
DATE EVENT
- ---- ------------------------------------------------------------
<S> <C>
February 1998 Merged with Valu-Line, a provider of switched long distance,
resold services and customer premises equipment sales and
service in Kansas.
February/March 1998 Raised $13.0 million from the issuance of series B preferred
stock and convertible notes used to pay the cash portion of
the consideration in the Valu-Line merger, to repay debt and
for general corporate purposes.
March 1998 Launched St. Joseph, Missouri market.
May 1998 Acquired Boulevard, a provider of shared tenant service in
the Kansas City, Missouri metropolitan area.
May 1998 Acquired Telesource, a customer equipment sales and service
provider in the Kansas City, Missouri metropolitan area.
May 1998 Launched St. Louis and Kansas City, Missouri and Wichita and
Topeka, Kansas markets.
June 1998 Completed a $115.0 million private offering of 14% senior
notes due June 2008 and 115,000 warrants to purchase
2,530,473 shares of common stock.
September 1998 Acquired TFSnet, a provider of Internet service in the
Kansas City, Missouri metropolitan area.
February 1999 Acquired American Local, a communications provider based in
the Dallas, Texas metropolitan area.
March 1999 Acquired Capital, a customer equipment sales and service
provider based in the St. Louis, Missouri metropolitan area.
May 1999-August 1999 Launched 11 Texas markets.
July 1999/August 1999 Sold $60.0 million of series F preferred stock to an
affiliate of KKR, granted options to purchase an additional
$50.0 million of series F preferred stock, sold $10.0
million of series D preferred stock and redeemed $10.0
million of series C preferred stock and $8.6 million of
series E preferred stock.
December 1999/February 2000 Obtained a $75.0 million debt facility for general corporate
purposes of our subsidiaries and to finance
telecommunications equipment, inventory, network assets and
back office systems. The facility was increased to $125.0
million during syndication in February 2000.
March 2000 An affiliate of KKR exercised its options to purchase an
additional $50.0 million series F preferred stock.
</TABLE>
23
<PAGE>
FACTORS AFFECTING OPERATIONS
REVENUE. We generate most of our revenue from the sale of our voice and
data products, including local and long distance telephone service, Internet
access and customer premises equipment to small and mid-sized business customers
in various markets in Missouri, Kansas and Texas. Revenue from local services
consists of charges for basic local service and custom calling features. We
offer local telephone service at a discount to the competing incumbent provider
of telecommunications services and offer long distance service at flat
per-minute rates. We offer customer premises equipment and related services at
negotiated rates generally consistent with other competitors. We also offer data
services in select markets primarily at flat monthly rates. We expect that over
the near term these services will continue to be the principal components of our
revenue.
Our revenue consists of monthly recurring charges and usage charges. Monthly
recurring charges include the fees paid by our customers for lines in service,
additional features on those lines and collocation space. Usage charges consist
of fees paid for each call made generally measured by the minute but also
measured by the call. Additionally, revenue from customer premises equipment
sales is recognized upon project completion.
OPERATING EXPENSES. Our primary operating expenses are cost of services and
selling, general and administrative expenses.
COST OF SERVICES. Our cost of services includes the cost of leasing
unbundled network elements from the incumbent telephone company for combination
into Birch-branded voice services and purchasing the complete "bundle" of
traditional incumbent telephone company services for resale to our local service
subscribers. We lease local telephone network components to provide service for
our customers under an interconnection agreement with the incumbent telephone
company in our target markets. In markets where we have a local circuit switch,
we can avoid leasing the switch and related features from the incumbent
telephone company, which improves our gross margins.
Incumbent telephone companies typically charge both a start-up fee as well
as a monthly recurring fee for use of their central offices for collocation of
transmission equipment. Physically collocating our transmission equipment in or
near existing incumbent telephone company switching offices allows us to combine
leased digital subscriber lines with our data transmission switches to provide
high speed data services and, eventually, voice and data services over a single
digital subscriber line. We also invest in transmission and distribution
electronics equipment associated with our switches. All of these costs are
reflected in our cost of services.
Our primary long distance expenses are expenses associated with network
access and our leased long distance network. We purchase long distance capacity
from third party providers for all calls terminating outside of our network.
Our primary expense associated with providing data services to our customers
is the cost of leasing transmission facilities. Our primary expense associated
with customer premises equipment is the cost of purchasing equipment from
manufacturers and labor for service and equipment installation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses include selling and marketing costs and customer
service, billing, corporate administration, personnel and network maintenance
expenses.
We employ a direct sales force in each of our target markets. To attract and
retain a highly qualified sales force, we offer our sales personnel a
compensation package that emphasizes commissions. We expect to incur significant
selling and marketing costs as we expand our operations.
We have implemented and continue 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
24
<PAGE>
and testing of service. Along with the development costs of these systems, we
also incur ongoing expenses for customer service and billing systems. As our
strategy stresses the importance of personalized customer service, we expect
that our customer service department will become a larger part of our ongoing
administrative expenses. We also expect billing costs to increase as the number
of our customers and the call volume increase. We incur other costs and
expenses, including the costs associated with maintenance of our network,
administrative overhead, office leases and bad debt. We expect that these costs
will grow significantly as we expand our operations and that administrative
overhead will be a large portion of these expenses during the expansion phase of
our business. However, we expect these expenses to become a smaller percentage
of our revenue as we build our customer base.
We have experienced operating losses since inception as a result of efforts
to build our customer base, develop and construct network infrastructure, build
internal staffing, develop systems and expand into new markets. We expect to
continue to focus on increasing our customer base and geographic coverage.
Accordingly, we expect that cost of services, 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 for at least the next several years as we develop and construct our
voice and data networks. We may also be forced to change our pricing policies to
respond to a changing competitive environment, and we cannot assure you that we
will be able to maintain our gross and operating margins. We cannot assure you
that growth in our revenue or customer base will continue or that we will be
able to achieve or sustain profitability or positive cash flows.
RESULTS OF OPERATIONS
BIRCH TELECOM, INC.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Revenue increased 132.1% to $60.5 million for 1999 compared to
$26.1 million for 1998. The increase in revenue was principally a result of new
customer sales in new and existing markets and the acquisitions of Capital in
March 1999 and American Local in February 1999. As a percentage of total
revenue, communications services were 87.5% for 1999 and 83.5% for 1998, and
equipment sales were 12.5% for 1999 and 16.5% for 1998.
COST OF SERVICES. Cost of services increased 145.5% to $46.4 million for
1999 compared to $18.9 million for 1998. The increase in cost of services was
primarily the result of associated revenue increases. Gross margins increased
96.9% to $14.2 million (23.4% of revenue) for 1999 compared to $7.2 million
(27.6% of revenue) for 1998. The decline in gross margin as a percentage of
revenue was principally the result of a greater percentage of revenue being
derived from resold local service during 1999 compared to 1998. Additionally,
long distance margins declined as a result of competitive pricing pressures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 236.4% to $53.0 million for 1999 compared to
$15.8 million for 1998. The increase in expense was primarily a result of
supporting and attracting customers in new and existing markets, market launches
in Texas and the acquisitions of Capital and American Local each of which
affected wages, rent and advertising expense. Additionally, we had 935 employees
at December 31, 1999 compared to 345 employees at December 31, 1998. EBITDA, a
commonly used measure by securities analysts of earnings before deducting
interest, taxes, depreciation and amortization, decreased 353.6% to a loss of
$38.9 million for 1999 compared to a loss of $8.6 million for 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
369.2% to $10.8 million for 1999 compared to $2.3 million for 1998. The increase
in depreciation and amortization was
25
<PAGE>
primarily attributable to the depreciation of network assets added in our
markets and the amortization of intangible assets related to acquisitions.
INTEREST. Interest expense increased 82.2% to $15.0 million for 1999
compared to $8.3 million for 1998. The increase in interest expense was
primarily a result of a full year of interest charges on our senior notes sold
in June 1998. Interest income remained virtually unchanged at $2.9 million in
1999 and 1998. Interest income is primarily derived from pledged securities
purchased in connection with our senior notes.
NET LOSS. Net loss increased 281.3% to $61.8 million for 1999 compared to
$16.2 million for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue was $26.1 million for 1998, resulting from the
acquisitions of Valu-Line, Boulevard, Telesource and TFSnet and new customer
sales from new markets. There was no revenue for 1997 because we were in the
developmental stage. In addition to revenue generated as a result of
acquisitions in 1998, revenue was generated from the sale of local telephone
services to new customers.
COST OF SERVICES. Cost of services and gross margin totaled $18.9 million
and $7.2 million, respectively, for 1998 as a result of the associated revenue
increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $14.0 million to $15.8 million for 1998
compared to $1.8 million for 1997. The increase in expense was primarily a
result of the Valu-Line, Boulevard, Telesource and TFSnet acquisitions and
opening five new markets in 1998. Additionally, we expanded our engineering and
operations staff in preparation for switch deployment. EBITDA decreased 382.4%
to a loss of $8.6 million for 1998 compared to a loss of $1.8 million for 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$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 $8.3 million for 1998 primarily from
interest charges on the senior notes. There was no interest expense in 1997.
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.
VALU-LINE COMPANIES, INC. (PREDECESSOR COMPANY)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue increased 27.1% to $16.8 million for 1997 compared to
$13.2 million for 1996. The increase was primarily a result of entering the
local service market in March 1997 and long distance volumes increasing faster
than the decline in long distance pricing. Customer premises equipment sales
were 18% of revenue, or $3.0 million, for 1997 compared to 19.1% of revenue, or
$2.5 million, for 1996.
COST OF SERVICES. Cost of services increased 35.4% to $11.8 million for
1997 compared to $8.7 million for 1996. The increase was primarily a result of
associated revenue increases. Gross margin increased 11.0% to $5.0 million, or
29.5% of revenue, for 1997 compared to $4.5 million, or 33.8% of revenue, for
1996. The decrease in gross margin as a percentage of revenue was primarily a
result of low margins on resold local service, which started in March 1997.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 14.2% to $4.1 million for 1997 compared to
$3.6 million for 1996. The increase in expense was primarily 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 1997 compared to $907,000 for 1996. The decrease in EBITDA
was primarily 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 1997 compared to $311,000 for 1996.
INTEREST EXPENSE. Interest expense was $97,000 for 1997 compared to
$102,000 for 1996.
INCOME TAXES. Income taxes decreased 9.3% to $186,000 for 1997 compared to
$205,000 for 1996.
NET INCOME. Net income was $268,000 for 1997 compared to $289,000 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets increased to $147.0 million at December 31, 1999 from
$134.1 million at December 31, 1998. 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, partially offset
by the use of cash to fund operations. At December 31, 1999, our current assets
of $38.8 million exceeded current liabilities of $25.4 million, resulting in
working capital of $13.4 million, representing a decrease of $36.3 million
compared to working capital of $49.7 million at December 31, 1998. At
December 31, 1998, our current assets of $61.1 million exceeded current
liabilities of $11.4 million. The decrease in working capital was primarily
attributable to the use of cash to fund operations and capital outlays for
expansion of our network, support systems and back office systems. Pledged
securities to satisfy interest payments on our senior notes amounted to
$23.4 million at December 31, 1999 and $37.8 million at December 31, 1998.
OPERATING ACTIVITIES. Net cash used in operating activities was
$53.2 million for the year ended December 31, 1999 compared to $10.6 million for
the year ended December 31, 1998. Net cash used in operating activities was
primarily used to fund our net losses of $61.8 million in 1999 and
$16.2 million in 1998.
INVESTING ACTIVITIES. Net cash used in investing activities was
$31.8 million for the year ended December 31, 1999 compared to $67.1 million for
the year ended December 31, 1998. In 1999, 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 of
$41.4 million and acquisitions of $4.8 million, partially offset by net proceeds
from the sale of pledged securities of $16.1 million for the semi-annual
interest payments on the senior notes. In 1998, net cash used in investing
activities was primarily used for the purchase of pledged securities related to
our senior notes of $44.2 million, acquisitions of $7.8 million and purchases of
property and equipment related to the expansion of the network, support systems
and back office systems of $21.6 million, partially offset by net proceeds from
the sale of pledged securities of $7.7 million.
FINANCING ACTIVITIES. Net cash provided by financing activities was
$50.3 million for the year ended December 31, 1999 compared to $117.3 million
for the year ended December 31, 1998. In 1999, net cash provided by financing
activities was primarily a result of $70.0 million in proceeds from the sale of
series D and series F preferred stock and borrowings of $10.0 million under our
senior credit facility, partially offset by the redemption of series C and
series E preferred stock of $18.6 million and the payment of financing costs
related to the series D and series F preferred stock and on our senior credit
facility of $8.8 million.
27
<PAGE>
In 1998, net cash provided by financing activities was primarily a result of
proceeds of $114.7 million from the private offering of our senior notes. These
senior notes bear interest at a fixed rate of 14% per annum and are due in
June 2008. Subject to limitations, we may redeem a portion of these senior notes
prior to their maturity date if we pay a designated premium. The indenture with
respect to the senior notes contains a number of restrictive financial and
operational covenants with which we must comply.
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.
In March 2000, an affiliate of KKR exercised its options to purchase an
additional $50.0 million of our series F preferred stock.
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:
- the purchase, installation, and expansion of switches and transmission
equipment for our local and data networks; and
- 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.
Our business plan calls for us to offer our services in an additional 20
markets before the end of 2001. 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 currently estimate that
the cash required to fund these capital expenditures will be approximately
$225.0 million over the next two years. 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.
We are currently renegotiating the terms of our existing senior credit
facility, including increasing the size of the facility and making corresponding
changes to the financial covenants. In the event that the terms are
renegotiated, we believe that our current resources, including current
availability under our senior credit facility, together with the net proceeds
from the offering, will be sufficient to satisfy our liquidity needs for at
least the next 12 months. If we fail to renegotiate the existing terms of our
senior credit facility, we believe our current resources will be sufficient to
satisfy our liquidity needs associated with our significant expansion plan for
the next nine months. In addition, depending on prevailing capital market
conditions, we may choose to repurchase all or a portion of our senior notes.
Thereafter, we will need substantial additional capital to finance our
business plan. 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
28
<PAGE>
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:
- the number of subscribers and the services for which they subscribe;
- the nature and penetration of services that we may offer;
- regulatory and legislative developments; and
- 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. This
could result in a system failure or miscalculation causing the disruption of
operations, including among other things:
- a temporary inability to process transactions;
- a temporary inability to send invoices;
- a temporary inability to engage in normal business activities; and
- interruptions of customer care.
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, and we do not anticipate experiencing any
issues in the future. Further, we are unaware of any issues with our vendors,
suppliers or customers that will materially affect us.
We believe that we have identified all major computers, software
applications and related equipment used in connection with our internal
operations that will need to be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. We have completed
assessing the potential impact of Year 2000 issues on these computers, equipment
and applications and have modified, upgraded and replaced major systems that we
believe have Year 2000 issues.
In addition to computers and related information, operation, and network
systems, the operation of office systems, facilities and equipment, such as fax
machines, security systems and other common office devices, may have Year 2000
issues that have not yet surfaced. We will continue to monitor the performance
of these office systems, equipment and facilities.
We expect that we will be able to resolve any significant Year 2000 issues
we have identified with third party suppliers of components of
telecommunications services and our key subcontractors.
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<PAGE>
However, because we have no control over the actions of these parties, they may
not remediate any or all of the Year 2000 issues identified. Any failure of any
of these third parties to timely resolve Year 2000 issues with either their
products sold to us, or their systems could have a material adverse effect on
our business, operating results and financial condition. In addition, the
delivery of our services also depends on the operation of the networks of many
local exchange carriers and long distance carriers with whom we must interact as
part of our normal business operations, but with whom we do not have formal
contractual arrangements. Consequently, failure of these carriers' networks to
fully operate as a result of Year 2000 issues could also affect our operations.
To our knowledge, none of these networks experienced any problems on or since
January 1, 2000.
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.
We believe we identified and resolved all Year 2000 issues that could
materially and adversely affect our business operations. However, for the
reasons discussed above, we believe that it is not possible to determine with
complete certainty that all Year 2000 issues affecting us have been identified
or corrected and we may not know that this is true for several months. As a
result, we believe that the following consequences are possible:
- operational inconveniences and inefficiencies for us that will divert our
management's time and attention and our financial and human resources from
ordinary business activities;
- business disputes and claims for pricing adjustments or penalties by our
customers due to Year 2000 issues, which we believe will be resolved in
the ordinary course of business; and
- business disputes alleging that we failed to comply with the terms and
conditions of contracts or industry standards of performance that result
in litigation or contract termination.
We developed contingency plans to be implemented if our efforts to identify
and correct Year 2000 issues affecting our internal systems were ineffective. We
have adopted the Year 2000 contingency plans as our standard operational
contingency plans. Our contingency plans are designed to minimize the
disruptions or other adverse effects. Our plans include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software;
- increased work hours for our personnel; and
- use of contract personnel to correct on an accelerated schedule any Year
2000 issues that arise or to provide manual workarounds for information
systems.
Our implementation of any of these contingency plans could require us to
expend additional funds and could have a material adverse effect on our
business, operating results and financial condition. Our efforts in this regard,
if necessary, will be to minimize expense associated with the implementation and
use of any contingency planning with our objective to employ the least costly
plan necessary to address the relevant operational issues.
IMPACT OF INFLATION
We do not believe that inflation has had a significant impact on our
consolidated operations.
SEASONALITY
Our business is not considered to be seasonal.
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<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency fluctuations,
nor do we use derivative financial instruments in our operations or investment
portfolio. Our earnings are affected by changes in interest rates as our
long-term debt under our senior credit facility has variable interest rates
based on either the prime rate or LIBOR. Our exposure to variable interest rate
risk during 1999 was insignificant due to our level of floating rate borrowings.
However, if interest rates for our long-term debt under our senior credit
facility had averaged 10% more and the full amount available under our senior
credit facility had been outstanding for the entire year, our interest expense
would have increased, and loss before taxes would have increased by
$12.5 million for the year ended December 31, 1999. These amounts are determined
by considering the impact of the hypothetical interest rates on our borrowing
cost and outstanding debt balances. These analyses do not consider the effects
of the reduced level of overall economic activity that could existing in this
environment. Further, in the event of a change of this magnitude, management
would likely take actions to further mitigate our exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, the sensitivity analysis assumes no changes in our
financial structure. We had $114.7 million of senior notes outstanding as of
December 31, 1999. These notes bear interest at a fixed rate of 14% and are not
subject to risk from interest rate fluctuations.
RECENTLY ISSUED ACCOUNTING STANDARDS
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
some 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 our consolidated financial statements for
the year ending December 31, 2001. We do not expect the impact of SFAS No. 133
to be material in relation to our consolidated financial statements.
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<PAGE>
BUSINESS
OVERVIEW
We are a rapidly growing integrated communications provider. We seek to
become the leading provider of telecommunications services for small and
mid-sized businesses in each of the cities we serve. We offer state-of-the-art
telecommunications services to our customers, who today are located throughout
Missouri, Kansas and Texas. These voice and data service offerings include local
and long distance telephone service, Internet access, web hosting, integrated
voice and data transmission over broadband lines and customer premises equipment
sales and services. We offer these services to our customers through a
combination of leased and owned network facilities. We are currently deploying
collocations and transmission equipment throughout our markets to deliver
digital subscriber line service, which will support dedicated high-speed
Internet access and eventually voice services. We expect to have over 130
collocations operational by the end of this year. Our revenue for the year ended
December 31, 1999 was $60.5 million, a 132% increase over 1998.
BUSINESS STRATEGY
We believe that our business is poised for rapid expansion and that our
experienced management team is well prepared to execute our focused business
strategy. The key elements of our strategy include:
FOCUSING ON SMALL AND MID-SIZED BUSINESS CUSTOMERS
We focus on meeting the needs of small and mid-sized businesses in each of
the cities we serve. Our tailored service offerings, direct sales model, and
proactive customer service approach allow us to differentiate ourselves and
achieve significant penetration into this very large, established customer
base. We believe small and mid-sized businesses have not received a
satisfying level of attention from the incumbent telephone companies, are
unaware of their telecommunications network options and value our
consultative, direct sales approach.
PROVIDING COMPLETE SERVICE PACKAGES THAT ARE TAILORED TO OUR CUSTOMERS
Our service offerings are specifically designed for the needs of our target
customers. We provide simplified, feature-rich packages of services,
superior value and a single source for all of our customers' networking
requirements, all conveniently billed on a single invoice. Our service
offerings include features offered in packages that we believe are not
generally available from other providers. Our packages are priced to offer
savings of 10% to 40% from comparable services provided by the incumbent
telephone company. Our direct sales representatives consult with our
customers in person and assist them in selecting service packages
appropriate for their needs.
CREATING A STRONG BRAND PRESENCE
We have quickly achieved a high level of brand awareness in our markets
through an aggressive multi-media advertising campaign targeted at the
incumbent telephone company. Our marketing efforts include billboard, radio
and print advertising, as well as sponsorship of major local events,
affiliations with local organizations and direct mailings. We believe we
have been able to achieve a higher level of brand awareness in our markets
than any other new market entrants. We plan to use our proven marketing and
advertising strategy to help us achieve rapid and deep penetration in each
new market we enter.
DEPLOYING A DIRECT SALES FORCE IN EACH OF OUR MARKETS
We deploy a large locally-based sales force focused on achieving a
significant market share in each of our markets. We believe that our
extensively marketed brand name, visible local presence, readily available
services and emphasis on personal customer service have enabled our
170-person sales force to achieve high levels of productivity and quickly
penetrate new markets.
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<PAGE>
INVESTING IN INDUSTRY-LEADING, SCALABLE BACK OFFICE SYSTEMS
We believe our state-of-the-art billing and operating systems are capable of
supporting a significant number of lines. These systems, which include
Saville Convergent Billing Platform-TM-, MetaSolv Telecom Business
Solution-TM- and Harris Network Management-TM-, have already withstood the
test of high volumes and rapid growth within our operation. Over the past
year, we have expanded our provisioning capacity from 3,000 lines per month
to nearly 15,000 lines per month and believe that our existing
infrastructure can support continued capacity increases.
MAINTAINING MAXIMUM NETWORK FLEXIBILITY
- INTEGRATING DATA AND VOICE NETWORK SERVICES. By integrating both data and
voice services, we believe we will be able to deliver a broadband digital
subscriber line connection to a significant percentage of our customers.
We believe this integration will yield bandwidth flexibility to our
customers and the strategic advantage of an improved product with reduced
monthly costs.
- CAPITALIZING ON OUR UNBUNDLED NETWORK ELEMENT PLATFORM. We provide service
to a majority of our customers by leasing substantially all of the
unbundled network elements from the incumbent telephone company and using
our advanced back office systems to combine these elements into integrated
Birch-branded voice services. This platform has allowed us to offer voice
services to customers located virtually anywhere in our markets and
achieve high gross margins and superior returns on incremental capital
invested. UNE-P allows us to minimize current capital expenditures and
maintain design flexibility for the next generation of telecommunications
technology.
- POSITIONING FOR MASS DEPLOYMENT OF BROADBAND. Our network objective is to
mass-deploy broadband facilities (primarily digital subscriber lines) that
support both voice and data over a single line. We are implementing
collocations at central offices of the incumbent telephone company
throughout our markets and intend to deploy packet switches that can
handle voice and data over a single line as soon as they become available.
EXPANDING OUR GEOGRAPHIC REACH
We currently serve 17 markets that have populations ranging in size from
95,000 to 4.5 million, and we intend to offer our services in 20 additional
markets before the end of 2001. 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 have developed
systems, network capabilities and an experienced sales force and customer
service team that position us to rapidly penetrate these new markets and
regions.
GROWING THROUGH ACQUISITIONS
We have completed six acquisitions since our inception in December 1996 for
total consideration of $27.7 million. From time to time, we consider making
additional acquisitions to further complement our service capabilities or
expand our geographic scope. We believe we have been highly successful in
integrating our acquisitions. With our diverse sources of capital and highly
sophisticated stockholders and board members, we believe we are well
positioned to continue to evaluate a variety of these opportunities and make
selected acquisitions where appropriate.
TELECOMMUNICATIONS SERVICES
OFFERED SERVICES
We design our voice and data services to appeal to small and mid-sized
businesses that value simple integrated communications service packages from a
single provider. We believe that the key to attracting and retaining our target
customers is to offer a comprehensive set of services. These services include
voice offerings of local lines, features and long distance at flat per-minute
rates, and data
33
<PAGE>
offerings including dedicated digital subscriber line and dial-up Internet
access, web hosting and other data services.
We divide our service offerings generally into three broad categories:
voice, Internet and web hosting. The chart below sets forth the different
service packages and options provided within each of these categories.
SERVICE PACKAGES
<TABLE>
<CAPTION>
VOICE
<S>
- ------------------------------------
BIRCH BASIC
A standard line
BIRCH BELLS
Birch Basic with any three non-
premium customer-selected features
BIRCH BELLS AND WHISTLES
Birch Basic with any seven
customer-selected features
VOICE MAIL
Call answering, messaging and
message waiting indicator
Optional features include fax
mail, pager notification and
extension mailboxes
LINEBACKER
Inside wire protection plan
MIGHTY MOUTH
A two-way dedicated connection to
us, a trunk level one digital
transmission link, direct inward
dialing and number identification
for inbound calls
<CAPTION>
INTERNET
- ------------------------------------
DIAL
<S>
Unlimited Internet access, two
email boxes per account, remote
access to email via the Web and
five megabytes of storage space
plus any customer-selected
features
DIAL COMPLETE
Dial plus Birch Basic phone line
plus extended period of inactivity
before disconnect and three
additional email addresses
ISDN COMPLETE
A dedicated integrated services
digital network, an on-premise
integrated service digital network
router, up to 25 email boxes,
dedicated Internet protocol
addresses for public applications,
network address translation,
custom domain services, plus any
customer-selected features
DSL COMPLETE
A symmetric digital subscriber
line service, an on-premise
router, up to 100 email boxes,
Internet protocol addresses for
public applications, network
address translation, custom domain
services, plus any customer-
selected features
T1 COMPLETE
A two-way dedicated connection to
us, an on-premise router, up to
100 email boxes, Internet protocol
addresses for public applications,
network address translation,
custom domain services, plus any
customer-selected features
THE INTEGRATOR
A two-way dedicated connection to
us, an on-premise integrated
router for voice and data,
customer selection of voice and
data channels to a maximum of 48,
selected voice features, up to 50
email boxes, Internet protocol
addresses for public applications,
network address translation,
custom domain services, plus any
customer-selected features
<CAPTION>
WEB HOSTING
- ------------------------------------
SPACE GENIE
<S>
Space Genie web-building tool, 10
megabytes of storage, 1,000
megabytes of monthly traffic,
online account status report, site
submission to major search
engines, custom domain services,
five email addresses,
autoresponders, autoforwarders and
web-based management of email
tools plus any customer-selected
features
SPACE CADET
Space Genie plus 20 additional
megabytes of storage, 1,000
additional megabytes of monthly
traffic, common gateway interface
binary access, and script library,
web-based management of common
gateway interface script
auto-install and statistics plus
any customer-selected features
Additional optional features
include encryption services
support for real audio/video and
support for Microsoft FrontPage
extensions
SPACE HOG
Space Cadet plus an additional 45
megabytes of storage, 3,000
megabytes of monthly traffic, 10
email addresses, autoresponders
and autoforwarders and support for
real audio/video
</TABLE>
34
<PAGE>
DELIVERY OF SERVICES
UNE-P
We lease all of the unbundled network elements necessary to provide service
from the incumbent local exchange carriers. We believe that our UNE-P strategy
allows us to enter into new markets more quickly than if we had initially
deployed our own network facilities. This strategy also reduces initial capital
requirements in each market, allowing us to focus our capital resources
initially on the critical areas of sales, marketing and operations support
systems. In addition, we believe UNE-P will allow us to avoid further deploying
circuit switches and maintain design flexibility for the next generation of
telecommunications technology.
BROADBAND
We intend to install digital subscriber line equipment at our collocation
sites, at our switch sites and at our customers' locations. We believe this
equipment will allow us to deliver multiple voice calls and data traffic over a
single, standard telephone line and is expected to provide us with substantial
cost savings. Using DSL technology, we believe we will increase the amount of
information we carry on a standard telephone line, which we refer to as
bandwidth, to up to 1.5 million bits per second. The bandwidth is the equivalent
of 24 regular voice telephone lines. Our digital subscriber line equipment will
be programmed to allocate the available bandwidth.
We believe this technology will reduce our costs since we will lease a
reduced number of standard telephone lines per customer from the incumbent
carrier. For example, if a customer today has eight voice lines, we must order
from and provision through the incumbent carrier eight individual standard
telephone lines. If the same customer were to buy our service which uses digital
subscriber line technology, we would only order and provision one standard
telephone line from the incumbent carrier. Also, we expect that future products
and services designed to take advantage of the increased bandwidth provided by
digital subscriber line technology will allow us to generate incremental revenue
with attractive margins.
CUSTOMER PREMISES EQUIPMENT
We offer our customers equipment they need to run their internal phone
systems, including data routers and wiring, telephone equipment and integrated
access devices. We also sell and service standard key systems, private branch
exchanges and voice-mail systems, and provide inside-wire services for
commercial accounts, including wiring for data networking, in Kansas and
Missouri. We are an authorized equipment distributor for Northern
Telecom, Inc., Toshiba America Information Systems, Inc., NEC America, Inc.,
Executone Information Systems, Inc. and Tadiran Electronic Industries, Inc.
SALES AND MARKETING
SALES
As of March 23, 2000, we had a direct sales force of 170 representatives
operating from 23 offices throughout Missouri, Kansas and Texas. Of these
representatives, 28 were primarily selling customer premises equipment and the
remaining 142 were selling local, long-distance, data and Internet services. The
sales representatives are supported by sales managers. Over the next 12 months,
we plan to increase our sales staff in existing markets and open additional
sales offices in Texas and Oklahoma and in Ameritech's and BellSouth's regions.
We supplement our sales efforts through brand awareness efforts including local
and regional advertising, public relations and local sponsorships.
We seek to convert small to mid-sized business customers from the incumbent
provider of telecommunications services in their market and to establish a
solid, long-term relationship with them.
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Our sales representatives meet with prospective customers to gain a thorough
understanding of their business and telecommunications requirements. Sales
representatives then suggest alternatives for operation enhancements and cost
savings based on our service packages.
We compensate our sales representatives with a competitive base salary,
stock options and commissions based on sales results. We use a revenue-based
commission structure that enables us to attract productive sales people
experienced in disciplined, activity-based sales. This commission structure is
based on incremental revenue and is not subject to a cap.
We do not actively market to residential customers. Nonetheless, we have
found that our sales and promotional efforts attract residential customers, many
of whom are owners or employees of businesses using our telecommunication
services. Residential customers call our customer service center to receive
forms to apply for service. We do not pay sales commissions for residential
sales.
ADVERTISING AND PROMOTION
We conduct extensive marketing campaigns in our local markets. We make use
of advertising and public relations to attract small to mid-sized business
customers and contrast our service attributes with Southwestern Bell's. Our
marketing campaign includes billboard, radio and print advertising, as well as
sponsorship of major local events, affiliations with local organizations and
direct mailings focusing on public relations. We also believe that our
willingness to serve residential customers--unlike many other competitive local
exchange carriers--creates greater interest in our development among the news
media and general public. In the past, our market launches have attracted
extensive local media coverage.
In keeping with our philosophy of being accessible to our customers, we
establish local sales and customer service offices in most of the cities and
towns that we serve. In many of these cities and towns, we are the only provider
of local telephone service that maintains an office. Our offices are open to
walk-in traffic and often are located in high-profile areas.
Because we are able to deliver a comprehensive set of products to our target
customers, we believe we have strong customer loyalty. Our customer churn rates
have generally been less than 1.5% per month.
PRICING
We do not intend to position ourselves as the cheapest provider of services,
especially long distance services. We target customers who value the convenience
of our service offerings and personalized customer service. Customers who have
the highest price sensitivity are likely to move frequently among providers,
driving up churn rates. However, we do set our pricing so that our local
business customers can generally save from 10% to 40% on the incumbent
provider's rates. Internet, long distance and customer premises equipment are
generally priced at rates competitive with that of other service providers.
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<PAGE>
OUR MARKETS
The following chart sets forth the markets in which we provide service or
expect to provide service by May 2000.
<TABLE>
<CAPTION>
BIRCH LINES IN SERVICE
AS OF FEBRUARY 29,
MARKET ESTIMATED POPULATION* MARKET LAUNCH DATE 2000
- ------ --------------------- ------------------ ----------------------
<S> <C> <C> <C>
St. Joseph, Missouri.................... 97,111 March 1998 2,402
Topeka, Kansas.......................... 164,932 May 1998 9,720
Wichita, Kansas......................... 530,508 May 1998 9,098
Kansas City, Missouri................... 1,709,273 May 1998 25,176
St. Louis, Missouri..................... 2,557,806 May 1998 17,125
Beaumont, Texas......................... 374,991 May 1999 3,824
Fort Worth, Texas....................... 1,404,904 May 1999 8,202
Longview/Marshall, Texas................ 208,250 May 1999 742
Tyler, Texas............................ 166,723 May 1999 2,017
Waco, Texas............................. 202,983 May 1999 3,565
Houston, Texas.......................... 4,320,041 June 1999 7,985
Austin, Texas........................... 1,071,023 July 1999 4,520
Corpus Christi, Texas................... 387,100 July 1999 2,888
Lubbock, Texas.......................... 230,672 August 1999 2,705
Dallas, Texas........................... 3,278,109 February 2000 1,834
San Antonio, Texas...................... 1,511,386 February 2000 341
Amarillo, Texas......................... 208,165 March 2000 125
Midland/Odessa, Texas................... 243,389 April 2000 258
Wichita Falls, Texas.................... 137,103 April 2000 19
Abilene, Texas.......................... 121,456 May 2000 54
El Paso, Texas.......................... 701,576 May 2000 31
Oklahoma City, Oklahoma................. 1,030,504 May 2000 0
Tulsa, Oklahoma......................... 764,396 May 2000 0
Other................................... N/A N/A 32,374
</TABLE>
- ------------------------
* Population data derived from the United States Bureau of the Census, State
and Metropolitan Areas datebook 1997 to 1998.
BACK OFFICE SYSTEMS
Back office systems refer to the hardware and software systems that support
the primary functions of our operations, including:
- order entry and provisioning;
- billing;
- data center;
- trouble management; and
- sales support.
Our goal is to have a back office that allows us to convert our customers'
service from their current local providers to our networks easily and quickly.
Over time, we strive to have "flow through"
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<PAGE>
provisioning capabilities, allowing services to be implemented through a single
systems interface that updates all ordering, inventory, billing and monitoring
systems.
We have implemented the primary elements of our back office, including order
entry, provisioning, billing and network management. We believe we have selected
the best application for each function. The following table describes our key
back office systems that provide crucial operational functionality, their
purpose and timeline for implementation.
<TABLE>
<CAPTION>
SYSTEM PURPOSE IN-SERVICE DATE
- --------------------- ---------------------------------------- --------------------
<S> <C> <C>
Southwestern Bell electronic direct ordering Q1 1998
Toolbar and provisioning for
local telephone service
Saville CBP(TM) billing Q1 1999
MetaSolv TBS(TM) order management Q2 1999
inventory
provisioning
trouble management
customer service
Harris HNM(TM) network management Q4 1998
DSET(TM) electronic bonding gateway to incumbent Q2 2000 (est.)
telephone company
HNC ATACS(TM) fraud management Q2 2000 (est.)
TBD enhanced call record mediation Q3 2000 (est.)
TBD application integration middleware Q4 2000 (est.)
TBD customer care Q4 2000 (est.)
sales force automation
</TABLE>
ORDER ENTRY AND PROVISIONING
Order entry involves the initial loading of customer data into our
information systems. Currently, our sales executives take orders and our
customer care and provisioning representatives load the initial customer
information into our Saville billing system and our MetaSolv provisioning
system. We intend to increase the efficiency and data accuracy of these
provisioning activities by implementing a sales force automation system to be
combined with Saville CBP and MetaSolv TBS through application integration
middleware. This system will facilitate entry of sales orders from the sales
offices and transmit relevant account and order information to Saville CBP and
MetaSolv TBS. Implementing this system will eliminate several manual steps in
the provisioning process.
We use the MetaSolv TBS system to manage and track the timely completion of
each step in the provisioning process. When MetaSolv is coupled with
capabilities of the DSET electronic bonding system, we believe we will be able
to submit orders to external business partners, including Southwestern Bell,
electronically, thereby minimizing implementation time, coordination
complexities and installation costs. Currently, we provision orders
electronically through Southwestern Bell's electronic provisioning system, or
Toolbar.
In addition to the cost benefits associated with the electronic installation
of access lines and inventory management system, the MetaSolv system improves
our internal processes in various other ways, including:
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- directing electronic customer orders to the appropriate employee,
prompting them to complete required provisioning tasks, including network
component assignments and management of outside vendor activities; and
- tracking order progress and alerting operations personnel of steps
required to fulfill orders within standard work intervals.
The MetaSolv TBS system enables a customer care coordinator to keep an
installation on schedule and notify the customer of any potential delays. Once
an order has been completed, we update our billing system to initiate billing of
installed services.
BILLING
The Saville billing system provides our customers with a consolidated
invoice for all of our services. Customer calls generate billing records that
are transmitted from the call records to the Saville billing system. These
records are then processed by the billing software, which calculates usage
costs, integrates fixed monthly charges, calculates taxation and provides the
data necessary to create a simple customer invoice. We provide invoice
information to a third party printer, which prepares and distributes bills to
our customers. Our customers pay us directly.
This Saville system allows us to add advanced features such as special
discounts based on call volume, or number of services used, complex local
taxation and discrete billing options by type of service ordered. We believe
these features are exceptionally important given our sophisticated client base.
TROUBLE MANAGEMENT
We use MetaSolv TBS, a customer care and trouble management system, to
provide high quality customer service. Our trouble management system is
integrated into the operational support system. It enables our customer care
personnel to track customer problems proactively, assign repair work to the
appropriate technical teams and provide employees and management access to
comprehensive reports on the status of service activity.
NETWORK MANAGEMENT
We use the Harris Network Management system to continuously monitor and
operate our switch networks. The information provided by the Harris system
allows our network operations staff to quickly repair problems in the networks,
thereby eliminating or minimizing impacts to our customers.
SOUTHWESTERN BELL TOOLBAR
Toolbar is the Southwestern Bell end-user interface system that allows our
customer service, trouble management and service provisioning representatives to
access the Southwestern Bell operating systems. Toolbar allows us to send local
service requests to receive order commitments back from, reserve new telephone
numbers with, view an order's status at, and test or report customer problems to
Southwestern Bell.
DATA CENTER
During the second quarter 2000, we plan to occupy an 8,000 square foot data
center in Kansas City, Missouri. We believe this center has sufficient space to
support significant increases in our access lines, customers and employees.
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NETWORK FACILITIES
LEASED FACILITIES
During 1999, we began to lease substantially all of the network elements
from Southwestern Bell and combine these elements into integrated Birch-branded
voice services without deploying a switch. By using UNE-P, we are able to offer
our services to a broader geographical area than we can by using our own
switches. Many of our competitors are limited to serving customers that are
located near their facilities. UNE-P allows us to serve many customers in
disparate geographic areas.
Where we have installed switches, we lease transmission facilities from
Southwestern Bell to connect our switches to our collocated equipment in
Southwestern Bell's central offices and to unbundled loops. Given the current
capacity of existing local networks, we do not anticipate having to build local
transmission facilities in the future. Similarly, we believe that the capacity
of existing long-distance networks renders direct ownership of long distance
transmission facilities unnecessary.
Leasing, rather than building, facilities supports our strategy of rapid
local market development because our sales activity is not constrained by
network expenditures. Moreover, by leasing transmission facilities, we can offer
our services throughout a metropolitan area and we are not constrained by the
limited number of locations in which we could build transmission facilities.
OWNED FACILITIES
We deploy data transmission packet switches in most of our markets. We use
these packet switches to transmit data over our leased transmission lines and
plan to use these packet switches to transmit our long distance voice traffic
once our conversion plan is implemented.
We currently operate local/long distance circuit switches in Kansas City and
St. Louis, Missouri and Wichita, Kansas. We do not intend to deploy more circuit
switches because we believe voice-capable packet switches will be more
economical to operate in the future. Additionally, we collocate our electronic
equipment at Southwestern Bell's central offices to support future digital
subscriber line services and existing circuit switches. Collocation allows us to
connect to transmission lines we lease from Southwestern Bell.
At the customer's premises, we connect unbundled loops directly to
customer-owned equipment. We may also deploy electronic equipment (intelligent
channel banks or access servers) that concentrate data and voice traffic. This
enables us to obtain higher capacity from the transmission line of the incumbent
local exchange carrier.
OPERATIONS
EMPORIA AND KANSAS CITY SERVICE CENTERS
Our service centers in Emporia, Kansas and Kansas City, Missouri are
critical to our ability to offer excellent service and to support growth. These
service centers process orders, interface with Southwestern Bell's operational
support systems and provide customer service, trouble resolution, billing and
collection services for our customers. These service centers provide rapid,
human assistance rather than the automated, cumbersome customer interface
currently used by many telecommunications providers.
FIELD TECHNICAL OPERATIONS
Our field technicians service our facilities and customer-owned facilities.
These technicians install, repair and maintain digital switches, transmission
equipment, private branch exchanges, key systems, data equipment and inside
wiring, including wiring for data networking. We believe field technicians are
often the most respected source of telecommunications advice for small and
mid-sized business customers. We believe that having a skilled, in-demand group
of technicians supports our customer base, provides expertise for data
deployment and strengthens customer loyalty.
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COMPETITION
The telecommunications industry is highly competitive. We believe we compete
principally on the basis of customer service, accurate billing, variety of
services and, to a lesser extent, pricing levels and less complex pricing
structures. Our ability to compete effectively depends upon our continued
ability to maintain high quality, market-driven services at prices generally
equal to or below those charged by competitors. To maintain our competitive
posture, we believe that we must be able to provide high quality integrated
communications services and be positioned to reduce our prices in response to
potential competition. Any of these reductions could adversely affect us. Many
of our current and potential competitors have financial, technical, marketing,
personnel and other resources, including brand name recognition, substantially
greater than ours, as well as other competitive advantages over us.
INCUMBENT TELEPHONE COMPANIES
In our existing markets, we compete principally with Southwestern Bell. As a
recent entrant in the telecommunications services industry, we may not achieve a
significant market share for any of our services in our markets. In particular,
Southwestern Bell and other local telephone companies have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours, have the potential to subsidize
competitive services with revenue from a variety of businesses and currently
benefit from existing regulations that favor these incumbent local exchange
carriers over us in some respects. While recent regulatory initiatives, which
allow competitive local exchange carriers such as us to interconnect with
incumbent local exchange carrier facilities, provide increased business
opportunities for us, these interconnection opportunities have been, and likely
will continue to be, accompanied by increased pricing flexibility for and
relaxation of regulatory oversight of the incumbent local exchange carriers.
Future regulatory decisions could grant incumbent local exchange carriers
increased pricing flexibility or other regulatory relief. These initiatives
could also have a material adverse effect on us.
COMPETITIVE LOCAL EXCHANGE CARRIERS/INTEREXCHANGE CARRIERS/OTHER MARKET
ENTRANTS
We also face competition from other current and potential market entrants.
These market entrants include long distance carriers that compete with our long
distance services and seek to enter, reenter or expand into the local exchange
market. AT&T, GTE, MCI WorldCom and Sprint are among these carriers. Competitive
local exchange carriers, resellers of local exchange services, competitive
access providers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators and private networks built by
large end users also compete with us. In addition, consolidation and strategic
alliances within the telecommunications industry, or the development of new
technologies could put us at a competitive disadvantage. Not only does the
Telecommunications Act impose regulatory requirements on all local
telecomunications service providers, but it also grants the FCC expanded
authority to reduce the level of regulation applicable to any telecommunications
service provider, including any incumbent telecommunications service providers.
The manner in which these provisions of the Telecommunications Act are
implemented and enforced could have a material adverse effect on our ability to
compete successfully against incumbent local exchange carriers and other
telecommunications service providers.
The changes in the Telecommunications Act radically altered the market
opportunity for new telecommunications service providers. Because the
Telecommunications Act requires local exchange carriers to unbundle their
networks, new telecommunications service providers are able to rapidly enter the
market by installing switches and leasing trunk and loop capacity. Newer
providers, like us and some competitors that we may encounter in some of our
markets, will not have to replicate existing facilities until traffic volume
justifies building them, and can be more opportunistic in designing and
implementing networks.
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In addition to the new telecommunications service providers, interexchange
carriers and other competitors listed above, we 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 entering the
telecommunications market by upgrading their networks with fiber optics and
installing facilities to provide fully interactive transmission of broadband
voice, video and data communications. Finally, wireless companies intend to
develop wireless technology for deployment in the United States as a broadband
substitute for traditional wireline local telephones. Some Internet companies
are also developing applications to deliver switched voice communications over
the Internet.
LONG DISTANCE SERVICES
The long distance telecommunications industry has numerous entities
competing for the same customers and a high churn rate, as customers frequently
change long distance providers in response to offerings 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. Our
primary competitors are the major interexchange carriers and resellers of long
distance services. We believe that pricing levels are a principal competitive
factor in providing long distance service; however, we seek to avoid direct
price competition by packaging long distance service, local service, customer
premises equipment and Internet access service together with a simple pricing
plan.
CUSTOMER PREMISES EQUIPMENT
We compete with numerous equipment vendors and installers and
telecommunications management companies for the sale of customer premises
equipment and related services. We generally offer our products at prices
consistent with other providers and differentiate our service through our
product packages.
DATA/INTERNET SERVICES
The Internet services market is highly competitive, and we expect that
competition will continue to intensify. Internet service, meaning both Internet
access and on-line content services, is provided by Internet service providers,
satellite-based companies, long distance carriers and cable television
companies. Many of these companies provide direct access to the Internet and a
variety of supporting services to businesses and individuals. In addition, many
of these companies, such as America Online, Inc., MSN, Prodigy Services Company
and WebTV Networks, offer on-line content services consisting of access to
closed, proprietary information networks. Long distance companies, among others,
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. 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, name-brand recognition and other resources than those
available to us.
EMPLOYEES
At December 31, 1999, we employed 935 persons. Additionally, we occasionally
hire temporary employees. We are not party to any collective bargaining
arrangements and believe that our relationship with our employees is good.
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PROPERTIES
We lease 43,783 square feet in office space in Kansas City, Missouri for our
corporate headquarters. This lease expires December 2006. Recently, we leased an
additional 64,546 square feet of office space in Kansas City to expand our
corporate headquarters. This lease expires February 2008. In Emporia, Kansas, we
own two buildings totaling 58,500 square feet for our customer care center and
provisioning divisions. In addition, we lease an aggregate of 21,175 square feet
to house our four circuit switches in Kansas City and St. Louis, Missouri and
Wichita, Kansas. These leases expire March 2003, November 2008, August 2005 and
June 2008, respectively. We also lease space in 27 buildings, totaling
approximately 110,823 square feet, in Missouri, Kansas, Texas and Oklahoma for
our sales offices and customer premises equipment sites. These leases are
generally leased on a month-to-month or annual basis.
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.
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REGULATION
REGULATORY OVERVIEW
We are subject to regulation by federal, state and local government
agencies. Historically, the FCC had jurisdiction over interstate long distance
services and international services, while state regulatory commissions had
jurisdiction over local and intrastate long distance services.
In 1996, Congress passed the Telecommunications Act of 1996, opening the
local market to competition and allowing the Bell operating companies to compete
for the first time in the long distance market within their local service
regions once specified conditions were met. The Telecommunications Act
fundamentally changed the way telecommunications is regulated in this country.
The FCC was given a major role in writing and enforcing the rules under which
new competitors could compete in the local marketplace. Those rules, coupled
with additional rules and decisions promulgated by the various state regulatory
commissions, form the core of the regulatory framework under which we operate in
providing local exchange service.
With a few limited exceptions, the FCC continues to retain exclusive
jurisdiction over our provision of interstate and international long distance
service, and the state regulatory commissions regulate our provision of
intrastate local and long distance service. Additionally, municipalities and
other local government agencies may regulate limited aspects of our business,
such as use of government-owned rights-of-way, and may require permits such as
zoning approvals and building permits.
In the aftermath of the Telecommunications Act, the regulation of the
telecommunications industry has been in a state of flux. The FCC and state
regulatory commissions have adopted many new rules to implement this legislation
and encourage competition, but that implementation is ongoing. The following
summary of regulatory developments does not purport to describe all current and
proposed federal, state and local regulations and legislation affecting the
telecommunications industry. Many of these are currently the subject of judicial
proceedings, legislative hearings and administrative proposals, any of which
could change, in varying degrees, the manner in which this industry operates. We
cannot predict at this time the outcome of these proceedings or their impact
upon the telecommunications industry or on us.
THE TELECOMMUNICATIONS ACT
THE TELECOMMUNICATIONS ACT'S LOCAL COMPETITION FRAMEWORK
One of the key goals of the Telecommunications Act is to encourage
competition in local telephone service. To do this, the Telecommunications Act
provides three means by which telecommunications service providers can enter the
local phone service marketplace. The three modes of entry are as follows:
- RESALE. Incumbent telephone companies are required to permit new
telecommunications service providers to purchase their services for resale
to the public at a wholesale rate that is less than the rate charged by
the incumbent telephone companies to their retail customers.
- ACCESS TO NETWORK ELEMENTS. Incumbent telephone companies are required to
lease to new telecommunications service providers the various elements in
their network that are used to provide local telephone service. The leased
parts of the incumbent telephone companies' networks are known as
unbundled network elements. The incumbent telephone companies must make
unbundled network elements available at rates that are based on their
forward-looking economic costs.
- CONSTRUCTION OF NEW FACILITIES. New telecommunications service providers
may also enter the local phone service market by building entirely new
facilities. The incumbent telephone companies are required to allow new
telecommunications service providers to interconnect their
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facilities with the incumbent telephone company's, so each carrier's
customers can reach the other's.
To facilitate new telecommunications service providers' entry into local
telephone markets using one or more or some combination of these three methods,
the Telecommunications Act imposes on incumbent telephone companies the
obligation to open their networks and markets to competition. When requested by
competitors, incumbent telephone companies are required to negotiate, in good
faith, agreements that lay out terms governing the interconnection of their
network, access to unbundled network elements and resale. Incumbent telephone
companies must also allow competing carriers to "collocate," or place their own
equipment in incumbents' central offices.
In addition, all local exchange carriers, including both incumbent and new
telecommunications service providers, are subject to the following requirements:
- INTERCONNECTION. All local telecommunications service providers must
permit their competitors to interconnect with their facilities either
directly or indirectly. Incumbent telephone companies are additionally
obligated to permit interconnection at any technically feasible point
within their networks, on nondiscriminatory terms, at prices based on cost
(which may include a reasonable profit);
- NUMBER PORTABILITY. All local telecommunications service providers must
implement number portability technology that allows a customer to retain
its existing phone number if it switches from one local exchange carrier
to a competitor. This technology primarily benefits new telecommunications
service providers, which can gather market share more easily if customers
can switch to these carriers without changing telephone numbers;
- RECIPROCAL COMPENSATION. All local telecommunications service providers
must complete local calls originated by other telecommunications service
providers under reciprocal compensation arrangements. That is, the local
provider terminating a local call is entitled to payment from the local
provider originating a call. Charges assessed by the incumbent telephone
company for terminating calls originated on a new telecommunications
service provider's network must be based on a reasonable approximation of
additional cost. The FCC recently determined that Internet service
provider-bound traffic is interstate in nature, not local, and is
therefore outside the scope of the Telecommunications Act's reciprocal
compensation provisions. The FCC has initiated a proceeding to determine
appropriate carrier-to-carrier compensation for Internet service
provider-bound traffic. At the same time, the FCC has declined to overturn
a multitude of state decisions requiring incumbent telephone companies to
pay new telecommunications service providers compensation for delivering
Internet traffic to Internet service providers that had selected a new
telecommunications service provider as their local service provider. The
FCC's decision is on appeal, and incumbent telephone companies are also
expected to ask states or federal courts to reverse the existing state
determinations;
- DIALING PARITY. Requires all local telecommunications service providers
to provide nondiscriminatory access to telephone numbers, operator
services, directory assistance and directory listing with no unreasonable
dialing delays. Local dialing parity ensures that customers on one local
exchange carrier do not have to dial extra digits to reach customers on a
different local or toll carrier's network; and
- ACCESS TO RIGHTS-OF-WAY. Requires all local telecommunications service
providers to permit competing providers access to poles, ducts, conduits
and rights-of-way at reasonable and nondiscriminatory rates, terms and
conditions. The FCC has opened a proceeding seeking to define in greater
detail the scope of the incumbent telephone company's obligation to
provide access to rights-of-way that it owns or controls, including those
within its own central offices and other buildings, and buildings owned by
private third parties.
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Executing an interconnection agreement does not guarantee a new
telecommunications service provider unfettered access to the incumbent telephone
company's market. Interconnection agreements between incumbent telephone
companies and new telecommunications service providers may have short terms,
requiring the new telecommunications service provider to renegotiate the
agreements on a regular basis. Incumbent telephone companies may not provide
timely provisioning or adequate service quality, thereby impairing a new
telecommunications service provider's reputation with customers who can easily
switch back to the incumbent telephone company. In addition, the prices set in
the agreements or through state regulatory commission arbitration proceedings
may be subject to changes mandated by state regulatory commissions as they
develop permanent rules governing interconnection and may not in all instances
be set at levels that allow new telecommunications service providers to compete
effectively.
THE FCC'S RULES IMPLEMENTING THE TELECOMMUNICATIONS ACT'S LOCAL COMPETITION
PROVISIONS
In August 1996, the FCC issued an order implementing the local competition
provisions of the Telecommunications Act. The FCC established rules about how
interconnection and collocation were to be provided, put forth a method that
state commissions should use to establish prices for interconnection and
unbundled network elements, and specified which parts of an incumbent's network
must be made available as unbundled network elements to competing carriers. The
FCC also held that incumbent telephone companies must provide new
telecommunications service providers with "combinations" of unbundled network
elements, making it possible for new telecommunications service providers, in
many instances, to provide service to customers by leasing all of the component
unbundled network elements from the incumbent telephone company. This method of
providing service is known as the unbundled network element platform, or UNE-P.
Specifically, among other rules, the FCC established a list of seven network
elements, comprising most of the significant facilities, features,
functionalities or capabilities of the network, that the incumbent telephone
companies must unbundle. In addition, the FCC mandated a particular
forward-looking pricing methodology for these network elements that produces
relatively low element prices that are favorable to competitors.
After the FCC released its rules, numerous parties challenged the rules
before the United States Court of Appeals for the Eighth Circuit. The Eighth
Circuit overturned many of the FCC's rules on the grounds that the agency had
exceeded its authority and misinterpreted the law.
On January 25, 1999, the United States Supreme Court largely reversed the
Eighth Circuit's decision, holding that the FCC has general jurisdiction to
implement the local competition provisions of the Telecommunications Act and
reestablishing the validity of many of the FCC's interconnection rules. In so
doing, the Supreme Court stated that the FCC has authority to set pricing
guidelines for unbundled network elements, to prevent incumbent telephone
companies from separating existing combinations of network elements, and to
establish "pick and choose" rules regarding interconnection agreements. "Pick
and choose" rules would permit a carrier seeking interconnection to pick and
choose among the terms of service from other interconnection agreements between
the incumbent and various new telecommunications service providers.
Although it upheld the FCC's jurisdiction to establish unbundled network
element pricing guidelines, the Supreme Court did not evaluate the specific
"forward-looking" pricing methodology adopted by the FCC, and the case has been
remanded to the Eighth Circuit for further consideration of that specific
pricing methodology. Some incumbent telephone companies have argued that this
pricing methodology does not allow adequate compensation for the provision of
unbundled network elements. The Eighth Circuit heard oral arguments on this
pricing issue on September 16, 1999, but has not yet issued a ruling. We cannot
predict the outcome of this proceeding. If the Eighth Circuit fails to uphold
the FCC's forward-looking pricing methodology, it may materially adversely
affect our business.
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Additionally, the Supreme Court vacated the FCC rules defining what network
elements must be unbundled and made available to the new telecommunications
service providers by the incumbents. The Supreme Court held that the FCC must
provide a stronger rationale to support the degree of unbundling ordered.
On November 5, 1999, in response to the Supreme Court's ruling, the FCC
released new rules specifying which portions of the incumbent telephone
companies' networks must be made available as unbundled network elements. The
FCC reaffirmed that incumbent telephone companies must provide unbundled access
to the following six network elements:
- loops, including loops used to provide high-capacity and advanced
telecommunications services such as digital subscriber lines;
- network interface devices;
- local circuit switching;
- dedicated and shared transport;
- signaling and call-related databases; and
- operations support systems.
The FCC removed from the list of unbundled network elements operator service
and directory assistance. The FCC concluded that the market has developed
sufficiently that new telecommunications service providers can and do
self-provide these services, or acquire them from alternative sources. The FCC
also noted that incumbent telephone companies remain obligated under the
non-discrimination requirements of the Communications Act of 1934 to comply with
the reasonable request of a new telecommunications service provider that
purchases these services from the incumbent telephone companies to rebrand or
unbrand those services, and to provide directory assistance listings and updates
in daily electronic batch files. In addition, the competitive checklist
contained in Section 271 of the Communications Act of 1934 requires Bell
operating companies to provide nondiscriminatory access to these services.
The FCC also modified the local switching unbundled network element,
concluding that incumbents need not provide access to unbundled local circuit
switching for customers with four or more lines that are located in the densest
parts of the top 50 metropolitan statistical areas so long as the incumbent
makes available an alternative arrangement for reaching customers, known as the
enhanced extended link. The enhanced extended link allows new telecommunications
service providers to gain access to customers without collocating in every
central office, because it combines the local loop with a multiplexer and
transport to the new telecommunications service provider's local existing
collocated facilities or switch. Notwithstanding the FCC's ruling, unrestricted
access to unbundled switching is available in Texas, where state rulings require
incumbent telephone companies to make switching available as an unbundled
network element.
In addition to these changes, the FCC also:
- Limited the scope of the shared transport unbundled network element,
holding that the incumbent must only offer shared transport as a unbundled
network element where unbundled local circuit switching is provided.
- Held that incumbents are not required to offer packet switching as a
unbundled network element in most cases.
- Held that both the loop and transport unbundled network elements include
access to "dark fiber." Dark fiber is distinguished from "lit fiber"
transmission capacity in that dark fiber is sold independently from the
electronics necessary to "light" the fiber and transmit information. The
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availability of dark fiber from incumbents as a unbundled network element
could create an additional source of dark fiber in the market.
- Ordered "sub-loop unbundling," which will allow new telecommunications
service providers to connect at any feasible point along the local loop,
and not just at the central office. In some incumbent networks, subloop
unbundling will make it easier for new telecommunications service
providers to use portions of the unbundled network element loop to offer
advanced services, such as digital subscriber lines. In a separate order,
the FCC also ordered the unbundling of the "high-frequency" portion of the
loop, which also makes it easier and less expensive for new
telecommunications service providers to use unbundled network elements to
offer advanced services, such as digital subscriber lines.
The FCC's decision regarding unbundled network elements is currently the
subject of petitions for reconsideration filed at the FCC by various parties,
including us. Some incumbent telephone companies have asked the FCC to expand
the limitation on switching by, among other things, extending its geographic
scope. We and other new telecommunications service providers have asked the FCC
to either do away with the limitation or make it applicable to only larger
customers. We cannot predict the outcome of this proceeding. If the FCC further
restricts the availability of unbundled switching, it could adversely affect our
ability to serve customers efficiently.
Another open question is whether incumbent telephone companies are required
to combine network elements not currently combined in their networks for
requesting new telecommunications service providers. The FCC's rules requiring
the incumbent telephone companies to do so were vacated by the Eighth Circuit,
but the FCC and the new telecommunications service provider industry have asked
that court to reinstate the rules in the wake of the Supreme Court's decision.
If the rules are reinstated, it will significantly expand the ability of new
telecommunications service providers to provide service to customers using
network elements purchased from the incumbent telephone companies. Also
unsettled is the scope of the FCC's rule requiring incumbent telephone companies
to provide requesting new telecommunications service providers with combinations
of network elements that are "currently combined" in the incumbent telephone
company's network. The new telecommunications service provider industry has
taken a broad view of this requirement, interpreting it to mean that new
telecommunications service providers are entitled to purchase network element
combinations so long as they are combined anywhere in the incumbent telephone
company's network. The incumbent telephone companies, by contrast, have taken a
much narrower view, arguing that the rule requires the incumbent telephone
companies only to provide combinations of network elements that are currently in
service to a particular customer. The ultimate resolution of this question could
expand or restrict our ability to provide service to our customers using network
elements purchased from the incumbent telephone company.
The Eighth Circuit is expected to rule on the pricing issue in the next
several months and may also rule on the incumbent telephone companies'
obligation to provide new network element combinations in the same decision. It
is not clear when the FCC or the courts will act to define the scope of
"currently combined." The possible impact of the resolution of these open issues
on existing interconnection agreements between incumbent telephone companies and
new telecommunications service providers or on agreements that may be negotiated
in the future cannot be determined at this time.
In addition to its rulings regarding interconnection and unbundled network
elements, the FCC has issued a series of orders on the ability of new
telecommunications service providers to provide digital subscriber lines and
other high-bandwidth services to their customers for, among other things,
Internet access. Those orders have made clear that new telecommunications
service providers are entitled to collocate the equipment necessary to provide
those services in incumbent telephone companies' central offices; that incumbent
telephone companies must, where technically feasible, provide new
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telecommunications service providers with high-quality loops capable of
supporting digital subscriber lines and that the incumbent telephone companies
must provide new telecommunications service providers with information
concerning the make-up of their networks to allow the new telecommunications
service provider to determine if a particular customer can be served with
digital subscriber line service. However, many of the details of the orders'
implementation are unsettled and we cannot assure you that the rules are
sufficient to ensure that the incumbent telephone companies meet their
obligations.
THE STATES' ROLE IN IMPLEMENTING THE LOCAL COMPETITION PROVISIONS
Although the FCC establishes nationwide guidelines governing entry by new
telecommunications service providers under the Telecommunications Act, state
regulatory commissions also have major roles in implementing the local
competition provisions of the act. Among other things, state regulatory
commissions must approve or reject interconnection agreements, and they have
chief responsibility for arbitrating and mediating these agreements if the
negotiating carriers cannot reach an understanding on the agreement's terms.
State regulatory commissions are also charged with developing and implementing
cost-based prices for interconnection and unbundled network elements, in
accordance with the Telecommunications Act and the forward-looking pricing
guidelines set by the FCC. State regulatory commissions are also permitted to
establish additional unbundled network elements consistent with federal law and
policy.
BELL OPERATING COMPANIES ENTRY INTO LONG DISTANCE
The Telecommunications Act also seeks to encourage local competition by
requiring the regional Bell operating companies to demonstrate on a
state-by-state basis that they have adequately opened their network and market
to competitors before they can provide long distance service to end users in
their own local service areas. Specifically, the Telecommunications Act lays out
a 14-point checklist which generally requires a regional Bell operating company
to prove to the FCC that it has complied with the interconnection and network
access obligations discussed above and that it faces effective competition in
the state where it seeks to provide long distance service. While the FCC has
ultimate responsibility for deciding whether the checklist conditions have been
met, the FCC is required to first consult with the appropriate state regulatory
commission.
Southwestern Bell is in the process of applying for authority to provide
long distance service in Texas. The FCC is expected to rule on Southwestern
Bell's application in April 2000. Southwestern Bell has also begun the process
of applying for long distance authority in Kansas by making a preliminary filing
with the Kansas state regulatory commission. If Southwestern Bell receives
approval from the FCC as described above, Southwestern Bell will be able to
provide in-region long distance services, which will enable it to provide
customers with a full range of local and long distance telecommunications
services. The ability of Southwestern Bell to provide long distance services is
expected to be an additional source of competition for us.
OTHER FEDERAL REGULATION
The FCC regulates our interstate and international service offerings. Those
services include our provision of interstate and international long distance
service and our provision of interstate access service. The FCC has established
different levels of regulation for dominant carriers and non-dominant carriers.
Incumbent telephone companies, such as the Bell operating companies and GTE, are
currently considered dominant carriers, and are subject to extensive rate and
operational regulation, while new telecommunications service providers such as
we are considered non-dominant carriers, and are subject to substantially less
regulation.
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INTERSTATE AND INTERNATIONAL LONG DISTANCE SERVICES
Interstate and international long distance services of non-dominant carriers
are subject to relatively little regulation by the FCC. Our provision of
international long distance services requires prior authorization by the FCC
under Section 214 of the Telecommunications Act, which we have obtained. We are
also required to file tariffs with the FCC for international long distance
service on an ongoing basis.
Under the FCC's streamlined regulation of non-dominant carriers, we may
install and operate facilities for the transmission of domestic interstate
communications without prior FCC authorization.
In addition, in October 1996, the FCC adopted an order in which it
eliminated the requirements that non-dominant interstate interexchange carriers
maintain tariffs on file with the FCC for domestic interstate services. The
order does not apply to the switched and special access services of the Bell
operating companies or other local exchange carriers. The FCC order was issued
under authority granted to the FCC in the 1996 Act to "forbear" from regulating
any telecommunications services provider under some circumstances. After a
nine-month transition period, relationships between interstate carriers and
their customers would be set by contract. At that point, long distance companies
would be prohibited from filing tariffs with the FCC for interstate, domestic,
interexchange services. Several parties filed notices for reconsideration of the
FCC order and other parties appealed the decision. On February 13, 1997, the
United States Court of Appeals for the District of Columbia Circuit stayed the
implementation of the FCC order pending its review of the order on its merits.
Currently, that stay remains in effect and interstate long distance telephone
companies are therefore still required to file tariffs.
The D.C. Circuit heard oral argument on the merits of the FCC's detariffing
order on March 14, 2000, but has not yet issued an order. If the stay is lifted
and the FCC order becomes effective, telecommunications carriers will no longer
be able to rely on the filing of tariffs with the FCC as a means of providing
notice to customers of prices, terms and conditions on which they offer their
interstate services. The FCC has required that non-dominant interexchange
carriers post their rates, terms and conditions for all their interstate,
domestic services on their Internet web sites if they have one; this rule is
effective once the FCC's mandatory detariffing order takes effect. This may
result in significant administrative expenses for us. The obligation to provide
non-discriminatory, just and reasonable prices remains unchanged under the
Communications Act of 1934. Tariffs also allow a carrier to limit its liability
to its customers, including in connection with service interruptions. If tariffs
are eliminated, we may become liable for costs that we would have been able to
limit through tariff filings, and we cannot assure you that the potential
liabilities will not have a material adverse effect on our results of operations
and financial condition.
ACCESS SERVICES
Unlike dominant carriers, which are subject to extensive rate regulation, we
and other non-dominant carriers are subject to relatively little regulation of
our interstate access services. The FCC has eliminated the requirement that
non-dominant carriers must file tariffs for their access services. While no
longer mandatory, carriers may continue to file access tariffs. We have chosen
to continue to do so.
In August 1999, the FCC granted incumbent telephone companies subject to
price cap rate regulation, including the regional Bell operating companies,
substantial pricing flexibility with regard to some interstate access services.
Among other things, the FCC's new rules permit incumbent telephone companies,
upon a showing that the services in question are subject to sufficient levels of
competition, to offer volume and term discounts and contract tariffs for
particular access services. The new rules also allow incumbent telephone
companies, upon meeting a higher competitive standard, to file tariffs for their
access services free from many rate structure requirements. To the extent these
regulatory
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initiatives enable or require incumbent telephone companies to offer selectively
reduced rates for some access services, the rates we may charge for these access
services will likely be constrained. In addition, the FCC has recently initiated
a proceeding to examine whether to regulate the rates that new
telecommunications service providers charge for their access services. While the
FCC has received considerable opposition from the new telecommunications service
provider industry and others to doing so, we cannot assure you that the FCC will
not adopt some form of regulation for new telecommunications service provider
access charges. The timing of the FCC's decision is uncertain.
In addition to the pricing flexibility described above, the FCC is currently
considering a joint proposal from AT&T, Bell Atlantic, BellSouth, GTE, SBC
Communications and Sprint to lower significantly and deleverage interstate
access charges for participating price cap local exchange carriers. The FCC
could issue an order on this proposal in the first half of 2000. If adopted,
these pricing reforms could increase competition among carriers offering local
exchange and exchange access service in our operating area.
ADDITIONAL FEDERAL ISSUES
ACCESS TO POLES, DUCTS, CONDUITS AND RIGHTS-OF-WAY. An area of the law that
remains in flux concerns the extent of a carrier's obligations to provide access
to poles, ducts, conduits and rights-of-way. We are obligated under Section 224
of the Communications Act to permit other carriers reasonable access to our
poles, ducts, conduits and rights-of-way and the FCC has adopted comprehensive
rules governing how access is to be provided. The FCC is also currently
considering additional rules, including whether access to rooftops and space
inside buildings, including buildings owned by utilities, should be mandated
under the Telecommunications Act.
EEO REPORT. The FCC requires us to file an annual employment report to
comply with the FCC's equal employment opportunity policies.
TRUTH IN BILLING. The FCC has adopted new rules designed to make it easier
for customers to understand the bills of telecommunications carriers. These new
rules establish requirements regarding the formatting of bills and the
information that must be included on bills. These rules have been appealed in
federal court.
ANTI-SLAMMING RULES. The FCC implemented the so-called "anti-slamming"
rules, which protect consumers whose pre-subscribed carriers have been switched
without their consent. Under the rules, a carrier found to have slammed a
customer is subject to substantial fines and must remove from the consumer's
bill all charges incurred within 30 days of the slamming. While we do not engage
in these practices, a slamming fine, if levied, could have a material impact on
our business in the future.
CUSTOMER PROPRIETARY NETWORK INFORMATION. In February 1998, the FCC adopted
rules implementing Section 222 of the Communications Act of 1934, which governs
the use of customer proprietary network information by telecommunications
carriers. Customer proprietary network information generally includes any
information regarding a subscriber's use of a telecommunications service, where
it is obtained by a carrier solely by virtue of the carrier-customer
relationship. The FCC has clarified that customer proprietary network
information does not include a subscriber's name, telephone number, and address,
as this information is generally not derived from the carrier's provision of a
telecommunications service to a customer. Under the FCC's rules, a carrier may
only use a customer's proprietary network information to market services that
are "necessary to, or used in," the provision of a service that the carrier
already provides to the customer, unless it receives the customer's prior oral
or written consent to use that information to market other services. In
December 1999, the United States Court of Appeals for the Tenth Circuit vacated
the FCC's original and modified customer proprietary network information rules
on the grounds that they violate the First Amendment. However, Section 222 of
the Communications Act remains the law and that section, in addition to the
FCC's
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now-vacated rules, provides some guidance on the use of customer proprietary
network information rules. Uncertainty regarding restrictions on the use of
customer proprietary network information rules may impede our ability to market
integrated packages of services effectively and to expand existing customers'
use of our services.
UNIVERSAL SERVICE. On May 8, 1997, the FCC released an order establishing a
significantly expanded federal universal service subsidy regime under the
Telecommunications Act. The universal service program provides support to
carriers serving low-income customers and customers who live in areas where the
cost of providing telecommunications services is high. In addition, the FCC
established new subsidies for telecommunications and some information services
provided to qualifying schools and libraries and for services provided to rural
health care providers. Providers of interstate telecommunications services, as
well as other entities, such as private carriers offering excess capacity to end
user customers, must pay for these programs. Our contribution to the federal
support funds would be calculated based on a percentage of our gross end-user
interstate and international telecommunications revenues. The assessment rate
for the second quarter of 2000 is 5.7101% of interstate and international
end-user telecommunications revenues. The contribution factor issued by the FCC
varies quarterly. The amounts contributed may be billed to customers. Currently,
the FCC is calculating assessments based on the prior year's revenues. Assuming
that the FCC continues to calculate contributions based on the prior year's
revenues, we believe that we will not be liable to contribute any material
amount to these programs during 2000 because we had limited interstate and
international end user revenues in 1999. The threshold before we are required to
contribute is a $10,000 contribution, which translates into roughly $175,000 in
interstate end user telecommunications revenues. With respect to subsequent
years, however, we are currently unable to quantify the amount of any
contributions that we will be required to make or the effect that these required
contributions will have on our financial condition.
The FCC has recently adopted the cost model which it will use to determine
the support needed in high-cost areas and the inputs for the model. The new
high-cost support mechanism, which went into effect on January 1, 2000 for
non-rural carriers, substantially increases the amount of high-cost support
provided to non-rural carriers. The United States Court of Appeals for the Fifth
Circuit recently issued an order upholding in part, and reversing in part, the
May 8(th) FCC order implementing these funds. Numerous FCC orders revising these
funds are subject to petitions for reconsideration and further petitions for
appeal. The outcome of these proceedings or their effect cannot be predicted.
In addition to the universal service mechanisms described above, the FCC is
currently considering a joint proposal from Bell Atlantic, BellSouth, GTE, SBC
Communications, AT&T, and Sprint to create a $650 million fund to provide
universal service support for interstate access charges. If adopted, this
proposal could significantly increase the contribution obligations of other
telecommunications carriers.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT ACT. Under this act,
telecommunications carriers are required to: (1) provide law enforcement
officials with call content and call identifying information under a valid
electronic surveillance warrant, and (2) reserve a sufficient number of circuits
for use by law enforcement officials in executing court authorized electronic
surveillance. If we provide facilities-based services, we may incur costs in
meeting both of these requirements. In particular, regarding the requirements
related to call content and identification, except in very limited circumstances
the government is required to compensate carriers only for the costs of making
equipment installed or deployed before January 1, 1995 compliant with this act.
While the telecommunications industry is attempting to negotiate legislative and
administrative changes to this reimbursement cut-off date, as it stands today,
we will be financially responsible for ensuring that our post-1995 equipment is
in compliance. Regarding the circuit capacity requirements, the government will
finance any necessary increases in capacity for equipment that we have
specifically identified as installed or deployed prior to September 8, 1998, and
we are responsible for paying only for any necessary increases in capacity for
equipment installed or deployed after that date.
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STATE AND LOCAL REGULATION
In general, state regulatory commissions have regulatory jurisdiction over
us when our facilities and services are used to provide local and other
intrastate services. Under the Telecommunications Act, state commissions
continue to set the requirements for providers of local and intrastate services,
including quality of services criteria. State regulatory commissions also can
regulate the rates charged by new telecommunications service providers for
intrastate and local services and can set prices for interconnection by new
telecommunications service providers with the incumbent telephone company
networks, in accordance with guidelines set by the FCC. In addition, state
regulatory commissions in many instances have authority under state law to adopt
additional regulations governing local competition, so long as the state's
actions are not inconsistent with federal law or regulation.
Most state regulatory commissions require companies that wish to provide
intrastate common carrier services to register or be certified to provide these
services. These certifications generally require a showing that the carrier has
adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. In most states, we are
also required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate, and to update or amend our tariffs
as rates change or new products are added. We may also be subject to various
reporting and record-keeping requirements.
We are currently certified by the Missouri Public Service Commission, the
Kansas Corporation Commission, the Texas Public Utilities Commission and the
Oklahoma Corporation Commission to provide both local and intrastate long
distance service in those states. We have tariffs on file in each of these
states.
If we choose to install our own transmission facilities, we may be required,
in some cities, to obtain street opening and construction permits, permission to
use rights-of-way, zoning variances and other approvals from municipal
authorities. We also may be required to obtain a franchise to place facilities
in public rights of way. In some areas, we may be required to pay license or
franchise fees for these approvals. We cannot assure you that fees will remain
at current levels, or that our competitors will face the same expenses, although
the Telecommunications Act requires that any fees charged by municipalities be
reasonable and non-discriminatory as among telecommunications carriers.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth information concerning our directors,
executive officers and other key personnel, including their ages as of the date
of this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Richard A. Jalkut...................... 56 Chairman of the Board
David E. Scott......................... 40 President, Chief Executive Officer and Director
Donald H. Goldman...................... 40 Executive Vice President and Chief Operating Officer
David M. Hollingsworth................. 35 Senior Vice President of Financial Operations
Gregory C. Lawhon...................... 40 Senior Vice President of Public Policy and General
Counsel
Bradley A. Moline...................... 33 Senior Vice President of Finance and Chief Financial
Officer
Jeffrey D. Shackelford................. 39 Senior Vice President of Sales
David W. Vranicar...................... 41 Senior Vice President and Chief Information Officer
Henry H. Bradley....................... 54 Director
Adam H. Clammer........................ 29 Director
Mory Ejabat............................ 50 Director
James H. Greene, Jr.................... 49 Director
Henry R. Kravis........................ 55 Director
Alexander Navab, Jr.................... 34 Director
Thomas R. Palmer....................... 33 Director
George R. Roberts...................... 56 Director
</TABLE>
RICHARD A. JALKUT is our chairman of the board and has been a director since
March 2000. Since 1997, he has been president and chief executive officer of
Pathnet, a privately held telecom company. From 1994 to 1997, Mr. Jalkut was the
president, chief executive officer and chairman of the board of Nynex
Telecommunications Group. From 1991 to 1994, he was the president, chief
executive officer and chairman of the board of New York Telephone Company, and
from 1990 to 1991, he was the executive vice president and chief operating
officer. He is also a director of IKON Office Solutions, Inc., HSBC USA Inc.,
and Digex, Incorporated.
DAVID E. SCOTT, a co-founder and director, is also our president and chief
executive officer. Mr. Scott has 17 years of managerial experience in the
telecommunications industry. Prior to joining us, Mr. Scott was president and
general manager of Kansas City FiberNet, a competitive local exchange carrier
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 BizSpace, Inc., an Internet
publishing and E-commerce company he co-founded with Donald H. Goldman.
BizSpace, Inc. produces web sites that serve as on-line trade publications.
Their first website, clec.com, serves the competitive local exchange carrier
industry. Mr. Scott holds a Bachelor of Science degree in electrical
engineering, SUMMA CUM LAUDE, from the University of Missouri and a Master of
Business Administration degree from the University of Chicago.
DONALD H. GOLDMAN joined us in March 1998 as senior vice president of
Internet services and is currently our executive vice president and chief
operating officer. Mr. Goldman has over 15 years of managerial experience in the
telecommunications industry. Prior to joining us, Mr. Goldman served as
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vice president, corporate development at Sprint where he developed strategy and
managed the acquisition of companies in the areas of systems integration,
Internet telephony, and wireless (PCS) services among others. While at Sprint,
Mr. Goldman led the team that founded Sprint PCS. Mr. Goldman also serves as
chairman of the board of BizSpace, Inc. Mr. Goldman holds a Bachelor of Arts
degree, with honors, from Johns Hopkins University and a Master of Business
Administration degree from the University of Chicago.
DAVID M. HOLLINGSWORTH joined us in February 2000 as senior vice president
of financial operations. Prior to joining us, from 1998 to February 2000,
Mr. Hollingsworth was the vice president of finance and corporate development
for GST Telecommunications. From 1997 to 1998, Mr. Hollingsworth was a
telecommunications analyst at George K. Baum and Company. From 1993 through
1996, Mr. Hollingsworth served as director of finance and administration for
Kansas City FiberNet. Before FiberNet, Mr. Hollingworth was a mergers and
acquisitions manager for Sprint Corporation. Mr. Hollingsworth holds a Bachelor
of Arts in Business Administration, CUM LAUDE, from Washington State University.
GREGORY C. LAWHON joined us in January 1997 as senior vice president of
public policy and general counsel. Prior to joining us, 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. Mr. Lawhon holds a Bachelor of Arts degree in Economics, MAGNA CUM
LAUDE, from Vanderbilt University, and a law degree from Columbia University,
where he was a Harlan Fiske Stone Scholar.
BRADLEY A. MOLINE joined us in July 1997 as 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 customer
services in the auditing and consulting areas. Mr. Moline holds a Bachelor of
Administration degree in Business Administration, with distinction, from the
University of Nebraska and is a certified public accountant.
JEFFREY D. SHACKELFORD, a co-founder, is senior vice president of sales.
Mr. Shackelford has 13 years of experience in the telecommunications industry.
Prior to joining us, 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
customers. 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. Mr. Shackelford holds a Bachelor of Science degree in Computer
Science from the University of Kansas.
DAVID W. VRANICAR joined us in March 1997 and serves as senior vice
president and chief information officer. Prior to joining us, Mr. Vranicar was
vice president, international business development, at Sprint. Before joining
Sprint in 1992, Mr. Vranicar was vice president, Asia/Pacific operations, at
MPSI Systems Private Ltd., based in Singapore. MPSI is a software and
information services company that develops and markets decisions-support
software and databases to major retail companies. Mr. Vranicar was the company's
senior executive in the Asia/Pacific division, directing a staff of
approximately 80 engaged in software development, computer graphics, and
customer technical support. Mr. Vranicar holds a Bachelor of Business degree in
Marketing, with honors, from the University of Texas at Austin, and a Master of
Business Administration degree, with distinction, from the University of
Michigan at Ann Arbor.
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HENRY H. BRADLEY has been a director since January 1997. He is the chairman
of the board of News-Press & Gazette Company, or NPG, one of our co-founders.
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. Mr. Bradley holds a Bachelor's degree from the University
of Missouri.
ADAM H. CLAMMER has been a director since August 1999. Prior to joining KKR
in 1995, he was with Morgan Stanley & Co. in its mergers and acquisitions
department. At KKR, Mr. Clammer has been involved in investments in Intermedia
Communications, Inc., CAIS Internet, Inc., Zhone Technologies, RELTEC and
Borden. He is also a director of AEP Industries, Inc. and a number of private
companies.
MORY EJABAT has been a director since March 2000. Since September 1999,
Mr. Ejabat has been the chairman and chief executive officer of Zhone
Technologies, Inc. Prior to joining Zhone, Mr. Ejabat served as the president
and chief executive officer of Ascend Communications, Inc. from June 1995 to
June 1999. Before becoming the president and chief executive officer of Ascend
in 1995, Mr. Ejabat had served as vice president, operations from 1990 to 1992
and as executive vice president from 1992 to 1995.
JAMES H. GREENE, JR. has been a director since August 1999 and is a member
of the limited liability company which serves as the general partner of KKR and
a general partner of KKR Associates. He is also a director of Accuride
Corporation, CAIS Internet, Inc., Intermedia Communications, Inc., Owens-
Illinois, Inc., Safeway Inc., Shoppers Drug Mart, Inc. and Zhone Technologies.
HENRY R. KRAVIS has been a director since March 2000. He is a founding
partner of KKR and since January 1996 a managing member of the executive
committee of the limited liability company that serves as the general partner of
Kohlberg Kravis Roberts & Co., L.P. He is also a director of Accuride
Corporation, Borden, Inc., The Boyds Collection, Ltd., Evenflo Company Inc., The
Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL
Recreation Group, Inc., Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas,
Inc., Safeway, Inc., Sotheby's Holdings, Inc., Spalding Holdings Corporation,
and TI Group plc. Messrs. Kravis and Roberts are first cousins.
ALEXANDER NAVAB, JR. has been a director since August 1999. He has been a
director of KKR since 1999, and an executive of KKR and a limited partner of KKR
Associates since 1993. He is also a director of Borden, Inc., CAIS Internet,
Inc., Intermedia Communications, Inc., KSL Recreation Group, Inc., Regal
Cinemas, Inc. and Zhone Technologies.
THOMAS R. PALMER has been a director since April 1999. Since June 1997,
Mr. Palmer has been a general partner at Kansas City Equity Partners, and
focuses on investments in the telecommunications and information technology
sector. He joined the firm in August 1995. Prior to joining Kansas City Equity
Partners, he held positions at Ameritech and Trans National Group. Mr. Palmer
also serves on the boards of Net Sales, Vroom and several other private
companies. Mr. Palmer is a graduate of Dartmouth College and the Kellogg School
of Management at Northwestern University.
GEORGE R. ROBERTS has been a director since March 2000. He is a founding
partner of KKR and since January 1996 a managing member of the executive
committee of the limited liability company that serves as the general partner of
Kohlberg Kravis Roberts & Co., L.P. He is also a director of Accuride
Corporation, Borden, Inc., The Boyds Collection, Ltd., Evenflo Company Inc.,
IDEX Corporation, KinderCare Learning Center, Inc., KSL Recreation Group, Inc.,
Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., Safeway, Inc. and
Spalding Holdings Corporation. Messrs. Kravis and Roberts are first cousins.
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BOARD COMPOSITION
The number of directors is set at 11. In accordance with the terms of our
certificate of incorporation, as amended and restated prior to the closing of
this offering, the terms of the office of the board of directors will be divided
into three classes, with each class holding office for staggered three year
terms:
- Class I directors' terms will expire at the annual meeting of stockholders
to be held in 2001;
- Class II directors' term will expire at the annual meeting of stockholders
to be held in 2002; and
- Class III directors' term will expire at the annual meeting of
stockholders to be held in 2003.
The Class I directors will be Messrs. Clammer, Ejabat and Palmer. The
Class II directors will be Messrs. Bradley, Kravis and Roberts. The Class III
directors will be Messrs. Greene, Jalkut, Navab and Scott. Currently, there is
one vacancy on the board. When this vacancy is filled, we intend for the new
director to be a Class I director. At each annual meeting of stockholders after
the initial classification of the board of directors, the successors to
directors whose term will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly
possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in our control or management. Directors may be removed for
cause by the affirmative vote of the holders of a majority of the common stock.
BOARD COMMITTEES
AUDIT COMMITTEE. The audit committee is responsible for, among other
things, making recommendations concerning the engagement of our independent
public accountants, reviewing with the independent public accountants the plans
and results of the audit engagement, approving professional services provided by
the independent public accountants, reviewing the independence of the
independent public accountants, considering the range of audit and non-audit
fees and reviewing the adequacy of our internal accounting controls. Upon
completion of the offering, the audit committee will consist of
Messrs. Bradley, Ejabat and Jalkut.
COMPENSATION COMMITTEE. The compensation committee is responsible for
determining compensation for our executive officers and administering the 1998
Employee Stock Option Plan and the 2000 Equity Participation Plan. Since
August 1999, the compensation committee consists of Messrs. Navab, Bradley and
Greene.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee of the board of directors
is currently or has been, at any time since our formation, our officer or
employee.
DIRECTOR COMPENSATION
Directors who are also our executive officers do not receive any additional
compensation for serving as members of the board of directors or any of its
committees. Non-employee directors are expected to receive a cash stipend of
$5,000 payable annually and reimbursement of expenses for serving on the board
of directors and any committees of the board, as well as an annual option to
purchase 8,975 shares of common stock under the 2000 Equity Participation Plan.
Each non-employee director currently on the board will receive an option to
purchase 17,950 shares of common stock upon completion of the offering at the
offering price. These options will vest in equal annual installments over the
next four years. In addition, Messrs. Ejabat and Jalkut each received on
March 22, 2000 an
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<PAGE>
additional option to purchase 53,850 shares of common stock at an exercise price
of $4.18 per share. These options will vest in equal annual installments over
the next two years. Messrs. Bradley, Clammer, Greene, Kravis, Navab, Palmer and
Roberts each received on March 22, 2000 an additional option to purchase 17,950
shares of common stock at an exercise price of $4.18 per share. These options
will vest in equal annual installments over the next four years.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and non-cash compensation paid or
incurred on our behalf to our chief executive officer and each of the four other
most highly compensated executive officers that earned more than $100,000 during
1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------
-------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND OTHER ANNUAL OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) (#)(1) ($)(2)
- ------------------ -------- --------- -------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott................ 1999 203,846 -- -- 359,000 8,153
President and Chief 1998 175,000 -- -- 1,888,989 7,000
Executive Officer(3) 1997 164,904 -- -- -- --
Donald H. Goldman............. 1999 192,892 -- -- 359,000 7,716
Executive Vice President 1998 101,346 -- -- 473,431 --
and Chief 1997 -- -- -- -- --
Operating Officer(4)
Gregory C. Lawhon............. 1999 184,615 -- -- 134,625 7,385
Senior Vice President of 1998 175,000 -- -- 590,309 5,386
Public Policy and General 1997 164,904 -- -- -- --
Counsel(3)
David W. Vranicar............. 1999 177,331 -- -- 134,625 7,093
Senior Vice President 1998 150,000 -- -- 491,923 6,000
and Chief Information 1997 118,269 -- -- -- --
Officer(5)
Stephen L. Sauder............. 1999 216,561 -- -- -- 8,663
Vice President(6) 1998 226,471 -- -- -- --
1997 134,577 128,667 -- -- --
</TABLE>
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- ------------------------
(1) Includes options to purchase shares of our common stock, which were issued
under our 1998 employee stock option plan. Prior to the private placement of
our series B preferred stock, we were a party to various stock option
agreements with our employees, all of which were governed by our 1997 stock
option plan. In connection with the 1998 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
during 1998 were granted under our 1998 employee stock option plan and were
exercisable immediately on grant at an exercise price of $0.0006 per share.
The shares issued under these options vest over a four-year period, at a
rate of 6.25% per quarter. Options issued during 1999 were also granted
under our 1998 stock option plan and vest 25% at the first anniversary of
the grant, then 6.25% per quarter thereafter. All stock options have been
adjusted to reflect a stock dividend made on June 23, 1998. Holders of
exercised options have voting power with respect to all shares of common
stock underlying the options. Upon termination of employment, we have the
right to repurchase all options which have not vested as of that date,
subject to some exceptions.
(2) Reflects matching contributions made by us under our 401(k) plan.
(3) Reflects compensation paid to Messrs. Scott and Lawhon commencing in
January 1997.
(4) Mr. Goldman joined us in March 1998 as senior vice president of Internet
services. In August 1999 Mr. Goldman was named senior vice president of
operations and chief operating officer.
(5) Reflects compensation paid to Mr. Vranicar commencing in March 1997.
(6) Mr. Sauder joined us after the Valu-Line acquisition and currently serves as
vice president. Compensation listed was paid by Valu-Line from January 1997
to February 1998.
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<PAGE>
OPTIONS GRANTS
The following table sets forth summary information regarding option grants
made during 1999 to our chief executive officer and each of our four other
highly paid executive officers. The exercise price per share is equal to the
fair market value of our common stock on the date of grant as determined by our
board of directors:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF STOCK
--------------------------------------------------------- PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SHARE) DATE 5%($) 10%($)
- ---- ------------- -------------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott.................. 359,000 11.1% 2.51 10/7/09 566,005 1,434,368
Donald H. Goldman............... 89,750 2.8% 1.67 1/15/09 94,334 239,061
269,250 8.4% 2.51 10/7/09 424,504 1,075,776
Gregory C. Lawhon............... 134,625 4.2% 2.51 10/7/09 212,252 537,888
David W. Vranicar............... 134,625 4.2% 2.51 10/7/09 212,252 537,888
Stephen L. Sauder............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Options granted to purchase shares of our common stock were made under our
1998 employee stock option plan. In the event that a purchaser ceases to
provide service to us and our affiliates, we have the right to repurchase
any of that person's unvested shares of common stock at the original option
exercise price. Generally, these options vest 25% on the first anniversary
of the grant date and quarterly thereafter at a rate of 6.25%.
(2) The percentage of total options was calculated based on options to purchase
an aggregate of 3,221,666 shares of common stock granted to employees under
the 1998 stock option plan in 1999.
(3) The potential realizable value was calculated based on the ten-year term of
the options and assumed rates of stock appreciation of 5% and 10%,
compounded annually from the date the options were granted to their
expiration date based on the fair market value of the common stock on the
date of grant.
1998 EMPLOYEE STOCK OPTION PLAN
Under our 1998 employee stock option plan, as amended, options to purchase
shares of our common stock in the form of both incentive stock options and
nonqualified stock options were granted to our employees or employees of certain
of our subsidiaries. A total of 13,858,916 shares of our common stock were
reserved for issuance under this option plan. As of December 31, 1999, options
to acquire 3,645,375 shares were issued and outstanding with a weighted average
exercise price of $2.00 per share. These options generally vest 25% per year
over four years from the date of grant. Under a resolution of our board of
directors, no new options may be granted under this option plan.
2000 EQUITY PARTICIPATION PLAN
On March 30, 2000, we adopted the 2000 Equity Participation Plan, which we
also refer to as the Equity Plan. The principal purpose of the Equity Plan is to
attract, retain and motivate select officers, employees, consultants and
directors through the granting of stock-based compensation awards. The Equity
Plan will provide for a variety of these awards, including non-qualified stock
options, incentive stock options (within the meaning of Section 422 of the
Internal Revenue Code), stock appreciation rights, restricted stock, deferred
stock, dividend equivalents, performance awards, stock payments, and other
stock-related benefits. A total of 10,770,000 shares of common stock are
reserved for issuance
60
<PAGE>
under the Equity Plan. The maximum number of shares that may be subject to
awards granted under the Equity Plan to any individual in any calendar year
cannot exceed 1,795,000.
We expect to grant approximately 2,250,000 options exercisable at the
offering price under the Equity Plan on the closing date of the offering.
The Equity Plan will provide that the committee has the authority to select
the employees and consultants to whom awards are to be made, to determine the
number of shares to be subject to the Equity Plan and the terms and conditions
of the awards and the Equity Plan, and to make all other determinations and to
take all other actions necessary or advisable for the administration of the
Equity Plan for employees or consultants.
The Equity Plan also provides that at specified times our non-employee
directors will automatically be granted options to purchase shares of our common
stock. All options granted to our non-employee directors will have an exercise
price per share equal to the fair market value per share of our common stock as
of the date of grant and all of these options will become exercisable in equal
annual installments of 25% on each of the first four anniversaries of the date
of grant. Each individual who is a non-employee director at the time of the
offering will be granted an option to purchase 17,950 shares of our common stock
at the time of the offering. After the offering, each non-employee director who
becomes a member of the board will initially receive an option to purchase
17,950 shares of our common stock upon becoming a member. In addition, all
non-employee directors will be granted an option to purchase an additional 8,975
shares of our common stock at each annual meeting of our stockholders after the
offering at which he or she is reelected to our board of directors.
Each of the committee and the board will be authorized to adopt, amend and
rescind rules relating to the administration of the Equity Plan, and to amend,
suspend and terminate the Equity Plan. We have attempted to structure the Equity
Plan in a manner such that remuneration attributable to stock options and other
awards will not be subject to the deduction limitation contained in
Section 162(m) of the Internal Revenue Code.
2000 EMPLOYEE STOCK PURCHASE PLAN
On April 13, 2000, we adopted the 2000 Employee Stock Purchase Plan, as
amended, or the Purchase Plan. The Purchase Plan is intended to be an "employee
stock purchase plan" as described in Section 423 of the Code. The Purchase Plan
will be administered by the compensation committee of our board of directors.
Subject to the "evergreen" provision described below, a total of 1,795,000
shares of our common stock are reserved and available for purchase under the
Purchase Plan, plus an annual increase on the first day of each of our fiscal
years beginning in 2001 and ending in 2010, equal to the lesser of
(a) 1,795,000 shares, (b) 1.2% of the shares outstanding on the last day of the
immediately preceding fiscal year or (c) number of shares as is determined by
the board.
The Purchase Plan will permit eligible employee participants to purchase our
common stock through payroll deductions at a price per share which is equal to
the lesser of 85% of the fair market value of the common stock on the first or
the last day of an offering period. The Purchase Plan will provide for two
offering periods beginning each calendar year. The first is April 15 through
April 14 of the following year, and the second is October 15 through October 14
of the following year, except that the first offering period under the Purchase
Plan will begin on the closing of the offering and will end on April 14, 2001.
On the last day of each offering period, each participant's accrued payroll
deductions will be automatically applied to the purchase of common stock.
Employees eligible to participate in the Purchase Plan consist of all
persons employed by us or by the subsidiaries described in the Purchase Plan,
except that the Purchase Plan will exclude from participation any employee whose
customary employment is for less than 20 hours per week or who is employed for
less than five months during a calendar year and any employee who owns stock
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<PAGE>
representing 5% or more of the total combined voting power or value of all
classes of our stock or the stock of our subsidiaries. No participant will be
permitted to purchase shares of common stock in any calendar year under the
Purchase Plan with an aggregate fair market value (generally determined as of
the beginning of the plan year) in excess of $25,000.
401(K) PLAN
We have adopted a tax-qualified employee savings and retirement plan, or
401(k) plan, covering all of our full-time employees. Under the 401(k) plan,
employees may elect to reduce their current compensation up to the statutorily
prescribed annual limit and have the amount of the reduction contributed to the
401(k) plan. The 401(k) plan is intended to qualify under Section 401 of the
Code so that contributions by employees to the 401(k) plan and income earned on
plan contributions are not taxable to employees until withdrawn from the 401(k)
plan. The trustees under the 401(k) plan, at the direction of each participant,
invest the participant's assets in the 401(k) plan in selected investment
options.
1999 OPTION VALUES
The following table shows for the fiscal year ended December 31, 1999,
information regarding options granted to, exercised by, and held at year end by,
our chief executive officer and each of our four other most highly paid
executive officers during 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES VALUE UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS($)
ACQUIRED ON REALIZED ------------------------------ ---------------------------------
NAME EXERCISE(#)(1) ($)(2) EXERCISABLE UNEXERCISABLE(3) EXERCISABLE UNEXERCISABLE(2)(3)
- ---- -------------- --------- ----------- ---------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
David E. Scott................. 472,247 7,555,487 -- 1,421,557 -- 21,842,756
Donald H. Goldman.............. 118,358 1,893,607 22,438 602,868 964,588 7,892,797
Gregory C. Lawhon.............. 147,577 2,361,089 -- 466,674 -- 7,128,541
David W. Vranicar.............. 122,981 1,967,570 -- 411,332 -- 6,243,125
Stephen L. Sauder.............. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) 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.
(2) Amounts shown under the "Value Realized" and "Value of Unexercised
In-the-Money Options" are based upon an assumed initial public offering
price of $16.00 per share minus the per share exercise price multiplied by
the number of shares underlying the option.
(3) Includes options to purchase shares of common stock, which were issued under
the 1998 employee stock option plan. Options issued during 1998 under the
1998 employee stock option plan were granted at an exercise price of $0.001
per share. Options issued during 1999 under the 1998 stock option plan were
granted at an exercise price of $2.51 per share other than 50,000 options
that were granted in 1999 to Mr. Goldman at an exercise price of $1.67 per
share. All options vest 25% on the first anniversary of the grant date and
quarterly thereafter at a rate of 6.25% other than 50,000 options that were
granted in 1999 to Mr. Goldman, which vest quarterly from the grant date at
a rate of 6.25%.
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<PAGE>
EMPLOYMENT AGREEMENTS
Each of Messrs. Scott, Goldman, Lawhon, Moline, Shackelford and Vranicar
entered into an amended and restated employment agreement with us in October
1999. In addition, Mr. Sauder entered into an employment agreement with us in
February 1998, and Mr. Hollingsworth entered into an employment agreement with
us in February 2000.
The base salary under each of these agreements is $200,000 per year, except
that Mr. Scott's base salary is $250,000 per year, Mr. Goldman's is $225,000 per
year and Mr. Sauder's is $213,000 per year. Each of the executives is eligible
for a bonus based on achievement of performance criteria established by the
board for that executive.
Each of the employment agreements provides that upon termination of
employment by us, other than for cause, disability or death, or termination of
the employment by the executive for good reason, we will pay the executive the
following severance. We will pay the executive's salary for the remainder, if
any, of the calendar month in which the termination is effective and, in the
case of each of Messrs. Scott, Vranicar, Shackelford and Goldman, 24 calendar
months thereafter and, in the case of each of Messrs. Lawhon, Sauder,
Hollingsworth and Moline, 12 calendar months thereafter. In addition, we will
pay each executive his prorated targeted incentive compensation for the year
during which the termination is effective plus, in the case of each of
Messrs. Scott, Vranicar, Shackelford and Goldman, two times the executive's
targeted incentive compensation for that year, and, in the case of each of
Messrs. Lawhon, Hollingsworth and Moline, the full amount of the executive's
targeted incentive compensation for that year. Upon termination of employment
for disability, we will pay the employee's salary through the remainder of the
calendar month during which the termination is effective and for the lesser of
(1) six calendar months thereafter or (2) the period until disability insurance
benefits commence. Upon termination of employment from death, we will pay the
employee's salary through the end of the calendar month in which his death
occurs. Each agreement provides for noncompetition, nonsolicitation and
nondisclosure covenants.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES D PREFERRED STOCK OFFERING
In July 1999, we completed a private placement of 2,222,222 shares of
series D preferred stock at a purchase price of $4.50 per share for aggregate
proceeds of approximately $10.0 million. The transaction was consummated
pursuant to the purchasers rights agreement described below and the series D
preferred stock purchase agreement. Under the series D preferred stock purchase
agreement, NPG, a stockholder that owned in excess of 5% of our voting
securities at the time of the series D preferred stock offering, purchased
$1.0 million of series D preferred stock, and parties affiliated with NPG,
including Henry H. Bradley, chairman of our board of directors at that time and
of NPG, purchased $500,000 of series D preferred stock. Advantage Capital
Missouri Partners I, L.P., a stockholder that owned in excess of 5% of our
voting securities at the time of the series D preferred stock offering,
purchased $655,000 of the series D preferred stock. In addition, Ian R. N. Bund,
one of our directors at the time of the series D preferred stock offering,
purchased $82,000 of the series D preferred stock. Affiliates of KCEP I and KCEP
Ventures II also purchased $3.0 million of our series D preferred stock.
Mr. Palmer, one of our directors at the time of the series D preferred stock
offering, holds voting power of KCEP I and KCEP Ventures II.
SERIES F PREFERRED STOCK OFFERING
In August 1999, we issued and sold 13,333,334 shares of our series F
preferred stock at a purchase price of $4.50 per share to BTI Ventures, L.L.C.,
an affiliate of KKR, for aggregate proceeds of $60.0 million. BTI received three
seats on our then seven-seat board of directors. Additionally, on March 23,
2000, BTI exercised its options to purchase 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. Giving effect to this exercise, BTI's investment would
have represented a 51.2% equity interest as of March 23, 2000. In connection
with their exercise of these options, BTI received two additional seats on our
eleven-seat board of directors.
In connection with the series F preferred stock offering, we repurchased
2,222,222 shares of our series C preferred stock from Stephen L. Sauder, a
stockholder who owned more than 5% of our voting securities at the time of the
series F preferred stock offering, for $10.0 million.
Also, in connection with the series F preferred stock offering, we converted
each outstanding share of our series B preferred stock into one share of amended
and restated series B preferred stock. In addition, the holders of series B
preferred stock surrendered their existing redemption and participating
liquidation preference in exchange for 0.2222 shares of our series E preferred
stock. We redeemed the series E preferred stock issued to the series B preferred
stock holders for a total of $8.6 million. The rights and preferences of the
series B preferred stock were amended and restated to remove mandatory
redemption rights and change the liquidation rights.
In connection with the series F preferred stock offering, NPG, a stockholder
that owned in excess of 5% of our voting securities at the time of the series F
preferred stock offering, received 366,320 shares of series E preferred stock,
which were redeemed for an aggregate total of $1.6 million, and parties
affiliated with NPG, including Henry H. Bradley, chairman of our board of
directors at that time and of NPG, received 73,264 shares of series E preferred
stock, which were redeemed for an aggregate total of $329,690. Advantage Capital
Missouri Partners I, L.P., a stockholder which owned in excess of 5% of our
voting securities at the time of the series F preferred stock offering, received
293,056 shares of the of the series E preferred stock, which were redeemed for
an aggregate total of $1.3 million. Bradley A. Moline, our senior vice president
of finance and chief financial officer, received 15,385 shares of series E
preferred stock, which were redeemed for an aggregate total of $69,234. Pacific
Capital, L.P., a stockholder which owned in excess of 5% of our voting
securities at the time of the series F preferred stock offering, received
271,095 shares of the of the series E preferred stock, which were redeemed for
an aggregate total of $1.2 million. Steven L. Sauder, our vice president,
together with his father, Earl W. Sauder, received an aggregate of 19,048 shares
of series E preferred
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<PAGE>
stock, which were redeemed for an aggregate total of $85,718. KCEP I and KCEP
Ventures II together received an aggregate of 210,022 shares of series E
preferred stock, which were redeemed for an aggregate total of $945,099.
PURCHASERS RIGHTS AGREEMENT
Our current stockholders are parties to the purchasers rights agreement,
which provides that they vote their respective shares in a manner as to elect
persons specified in the agreement to serve as directors. The holders of
series F preferred stock have agreed to vote their shares to elect
Messrs. Greene, Navab and Clammer. The two additional designees of the holders
of series F preferred stock are Messrs. Kravis and Roberts. In addition, the
holders of series B preferred stock, series C preferred stock and series D
preferred stock have agreed to vote their shares to elect Henry H. Bradley and
Thomas R. Palmer. The holders of common stock have agreed to vote their shares
for the election of David E. Scott. So long as the purchasers rights agreement
is in effect, these investors will effectively control the election of our board
of directors.
REGISTRATION RIGHTS
The parties to the purchasers rights agreement, subject to some conditions,
have registration rights with respect to shares of common stock, including
shares of common stock issuable upon conversion or redemption of shares of
series F preferred stock or upon conversion of shares of series B preferred
stock, series C preferred stock, or series D preferred stock. These purchasers
have, subject to some conditions, demand and "piggy-back" registration rights.
The purchasers rights agreement provides that each purchaser of stock is subject
to lock-up restrictions in the event of a public offering of our securities.
RESTRICTIONS ON TRANSFER
Our outstanding common stock (including shares issued pursuant to options)
and each series of preferred stock are subject to restrictions on transfer.
Holders of common stock and each series of preferred stock that are parties to
the purchasers rights agreement, subject to some exceptions, may not transfer
their shares without first giving us the opportunity to purchase the shares. In
addition, subject to some exceptions, the holders of common stock or any series
of preferred stock that are parties to the purchasers rights agreement may not
transfer their shares without first giving the other purchasers under the
purchasers rights agreement the opportunity to participate in the transfer.
PRE-EMPTIVE RIGHTS
Holders of our common stock and each series of preferred stock that are
parties to the purchasers rights agreement have the right to purchase a pro rata
portion of any common stock or preferred stock that we propose to sell and
issue, subject to some exceptions. These pre-emptive rights do not apply to the
offering and will terminate immediately upon completion of the offering.
SIZE OF THE BOARD OF DIRECTORS
The purchasers rights agreement provides that so long as at least 6,666,667
shares of series F preferred stock remain outstanding, the holders of series F
preferred stock are entitled to elect and remove directors in accordance with
our restated certificate of incorporation. In the event that less than 6,666,667
shares of series F preferred stock remain outstanding, but BTI Ventures L.L.C.
and its affiliates, which include KKR, beneficially own at least 10% of our
outstanding common stock, BTI has the right to nominate the number of persons to
serve as members of the board determined in accordance with a formula set forth
in the purchasers rights agreement. Currently there are five BTI nominees
sitting on our eleven seat board of directors.
For so long as at least 8,532,394 shares of series B preferred stock,
series C preferred stock and series D preferred stock remain outstanding, the
holders of this stock, voting together as a class, are entitled to elect and
remove directors pursuant to our restated certificate of incorporation.
65
<PAGE>
BTI DRAG-ALONG RIGHTS
For so long as BTI or any of its affiliates beneficially own at least 20% of
our outstanding common stock (assuming conversion into common stock of all
shares of our series B preferred stock, series C preferred stock, series D
preferred stock and series F preferred stock). Holders of common stock and each
series of preferred stock that are parties to the purchasers rights agreement
are required to sell their shares in the event that BTI Ventures L.L.C. or its
affiliates agree to sell or transfer their shares, or to sell all or
substantially all of our assets, to a third party.
BTI VETO RIGHTS
The purchasers rights agreement provides that for so long as BTI or any of
its affiliates beneficially owns at least 10% of the outstanding shares of our
common stock (assuming conversion into common stock of all shares of our
series B preferred stock, series C preferred stock, series D preferred stock and
series F preferred stock) the approval of at least one BTI nominee on our board
will be required for our board of directors to approve and authorize any of the
following: any changes in our capital structure, such as increases or decreases
in the total authorized shares of our common stock and issuances of our capital
stock; any payment of dividends or distributions on our capital stock; subject
to limited exceptions, any reclassification, combination, split, redemption or
other acquisition of any shares of our capital stock; any incurrence of
indebtedness exceeding $25.0 million; any change in the size or composition of
our board or any board committee or creation of any board committee; subject to
limited exceptions, any affiliate transaction; any hiring or termination of a
chief executive officer; any adoption or modification of our annual budget and
business plan; any amendment or modification of any material provision of our
senior notes indenture, senior credit facility or any other material contract;
any adoption, renewal or material modification of any material compensation or
benefit plan or arrangement; any authorization of entering into a new line of
business; any consolidation, reorganization, recapitalization, merger or similar
transaction; any transfer of our assets, including by pledge, in excess of
$25.0 million; subject to limited exceptions, any acquisition of assets or
securities for more than $25.0 million; any amendment to our certificate of
incorporation or bylaws; any voting or similar arrangement regarding our capital
stock; any payment, discharge or satisfaction of any material claim or liability
or the commencement of a material suit; any joint venture involving material
assets or the payment or receipt of more than $25.0 million; any material
license, contract or agreement; or any liquidation, dissolution or winding up of
our company.
OTHER TRANSACTIONS WITH AFFILIATES
VALU-LINE LOANS
As of December 31, 1997, Valu-Line of Kansas, Inc., which merged into us on
February 10, 1998, had notes payable of $240,000 in the aggregate from Stephen
L. Sauder and Mr. Sauder's father. Mr. Sauder was the president and principal
stockholder of Valu-Line at the time the loan was made and currently owns more
than 5% of our voting securities. 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 1999, 1998, and 1997 we, and our predecessor, Valu-Line, provided
services principally related to rent and operating costs to
Valu-Broadcasting, Inc., an affiliate of Valu-Line, which is owned by Stephen L.
Sauder, one of our stockholders who owned more than 5% of our voting securities
at the time of the transactions, in the amounts of $29,187, $30,000 and $81,000,
respectively. Valu-Line also received services principally related to
advertising from Valu-Broadcasting in the amounts of $30,360, $40,000 and
$41,000 in 1999, 1998 and 1997, respectively.
SHARES ISSUANCES TO DIRECTORS
In March 2000, Mr. Jalkut, chairman of our board of directors, agreed to
purchase 47,867 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 119,667 shares of our
common stock for $500,000.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides summary information regarding the beneficial
ownership of our outstanding capital stock as of March 23, 2000 for:
- each person or group who beneficially owns more than 5% of our capital
stock on a fully diluted basis;
- each of the executive officers and the former executive officer named in
the Summary Compensation Table;
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by him. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of
March 23, 2000 and not subject to repurchase as of that date are deemed
outstanding for calculating the percentage of outstanding shares of the person
holding these options, but are not deemed outstanding for calculating the
percentage of any other person. Unless otherwise noted, the address for each
director and executive officer is c/o Birch Telecom, Inc., 2020 Baltimore
Avenue, Kansas City, Missouri 64108.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------------------
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING
- --------------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Richard A. Jalkut(2)............................... 47,866 * % * %
David E. Scott..................................... 2,478,298 3.0 2.6
Donald H. Goldman.................................. 501,477 * *
Gregory C. Lawhon.................................. 771,113 * *
Bradley A. Moline(3)............................... 668,530 * *
Jeffrey D. Shackelford(4).......................... 1,652,767 2.0 1.7
David W. Vranicar.................................. 633,717 * *
Henry H. Bradley(5)................................ 6,989,658 8.5 7.3
Adam H. Clammer(6)(7).............................. 42,355,703 51.2 44.5
Mory Ejabat(2)..................................... 119,666 * *
James H. Greene, Jr.(6)(7)......................... 42,355,703 51.2 44.5
Henry R. Kravis(6)(7).............................. 42,355,703 51.2 44.5
Alexander Navab, Jr.(6)(7)......................... 42,355,703 51.2 44.5
Thomas R. Palmer(8)................................ 2,893,135 3.5 3.0
George R. Roberts(6)(7)............................ 42,355,703 51.2 44.5
Stephen L. Sauder(9)............................... 7,494,652 9.1 7.9
All directors and executive officers as a group
(16 persons)..................................... 66,606,582 80.5 69.9
5% OWNERS:
News-Press & Gazette Company(10)................... 6,198,421 7.5 6.5
BTI Ventures L.L.C.(6)(7).......................... 42,355,703 51.2 44.5
</TABLE>
- ------------------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the SEC's rules and
includes voting and investment power with respect to the shares.
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<PAGE>
(2) In March 2000, Mr. Jalkut, chairman of our board of directors, agreed to
purchase 47,867 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 119,667 shares of our
common stock for $500,000.
(3) Includes 34,598 shares of common stock held by members of Mr. Moline's
immediate family.
(4) Includes 37,695 shares of common stock held by members of Mr. Shackelford's
immediate family.
(5) Includes 6,198,422 shares of common stock held by News-Press & Gazette
Company. Mr. Bradley and his brother hold voting power of News-Press &
Gazette Company. Also includes 721,237 shares of common stock held by
various trusts and relatives of the Bradley family.
(6) All of the shares indicated are owned of record by BTI Ventures L.L.C. and
are included because of Messrs. Clammer's, Greene's, Kravis', Navab's and
Roberts' affiliation with BTI Ventures L.L.C. These individuals disclaim
beneficial ownership of the shares within the meaning of Rule 13d-3 under
the Exchange Act.
(7) The principal business address of BTI Ventures L.L.C. is 9 West 57th Street,
Suite 4200, New York, New York 10019.
(8) Includes 1,895,913 shares of common stock held by KCEP I and 997,223 shares
of common stock held by KCEP Ventures II. Mr. Palmer holds voting power of
KCEP I and KCEP Ventures II. The principal business address of KCEP is 233
West 47(th) Street, Kansas City, Missouri 64112. Mr. Palmer disclaims
beneficial ownership of the shares within the meaning of Rule 13d-3 under
the Exchange Act.
(9) Includes 118,356 shares of common stock held by Mr. Sauder's father,
2,772,892 shares of common stock held in trust by his wife and 1,795,000
shares of common stock held in trust by S.L. Sauder LTP. L.L.P.
(10) The principal business address of News-Press & Gazette Company is 825
Edmond Street, St. Joseph, Missouri 64501.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR CREDIT FACILITY
In December 1999, we entered into a credit agreement with a syndicate of
banks, financial institutions and other entities arranged by Lehman Commercial
Paper, Inc. The agreement includes a seven year, $50.0 million term loan
facility and a seven year $25.0 million revolving credit loan facility.
In February 2000, we amended these term loan and revolving credit loan
facilities, resulting in a stated principal amount of $125.0 million, of which
$25.0 million is provided for a reducing revolver and $100.0 million for
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.
These senior credit facilities are secured by a perfected first priority
security interest in substantially all of our assets and capital stock and
contain a number of financial and operational covenants with which we must
comply. Among other things, the covenants require us to comply with specified
financial ratios and tests, including minimum revenues, minimum EBITDA/maximum
EBITDA losses, minimum access lines, senior secured debt to total capitalization
ratio, maximum capital expenditures, maximum leverage ratios, minimum fixed
charge coverage ratios and pro forma debt service coverage ratios. The covenants
restrict our ability to incur additional debt, make distributions on or redeem
our capital stock, create liens or negative pledges with respect to our assets,
make investments, issue, sell or allow distributions on capital stock of our
subsidiaries, prepay or defease specified indebtedness, enter into transactions
with affiliates, enter into specified hedging arrangements, merge, consolidate
or sell our assets or engage in any business other than telecommunications.
The loans must be repaid over a seven-year period commencing in
December 2003. Interest payments are due, at our option, either quarterly in the
case of base rate (prime based) draws or at the end of the relevant interest
period in the case of eurodollar draws. Interest will accrue at a lower rate if
we meet specified financial tests. In addition, we must pay a fee based on the
average daily unused committed portion of the credit facilities. This fee is
payable quarterly in arrears and is calculated at a rate of between 0.75% and
1.25% per annum depending upon the percentage of unused credit in the
facilities.
We are currently renegotiating the terms of our existing senior credit
facility, including an increase in the size of the facility and making
corresponding changes to the financial covenants.
14% SENIOR NOTES DUE 2008
In June 1998 we issued senior notes with a principal of $115 million along
with warrants to purchase 2,530,473 shares of common stock at $0.006 per share.
These notes, which are senior obligations, bear interest at the rate of 14% per
annum, payable semi-annually in arrears on June 15 and December 15. Payments on
these notes began on December 15, 1998.
The senior notes are not redeemable at our option prior to June 15, 2003,
except that prior to June 15, 2003 we may redeem up to 35% of the originally
issued aggregate principal amount of the notes at a rate of 114% of the
principal amount thereof on the redemption date, plus accrued and unpaid
interest and liquidated damages, if any, with the net cash proceeds of one or
more public or private sales of common stock or preferred stock, provided that
at least 65% of the senior notes remain outstanding after the redemption. At any
time on or after June 15, 2003, the senior notes are redeemable at our option,
in whole or in part, at a premium declining ratably to par on June 15, 2006.
The senior note indenture provides that, in the event of a change of control
of us, we will be required to make an offer to purchase in cash all or any part
of the outstanding senior notes at a price of 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages, if any.
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<PAGE>
The senior notes indenture contains restrictive covenants that, among other
things, impose on our ability and our restricted subsidiaries' ability to incur
additional indebtedness, merge, consolidate, sell or dispose of all or
substantially all of our assets, issue some kinds of preferred stock, pay cash
dividends or make other distributions on account of our equity interests,
repurchase equity interests or subordinated indebtedness and make other
restricted payments, create liens, enter into transactions with affiliates,
engage in any business other than telecommunications, enter into sale and
leaseback transactions and sell assets.
DESCRIPTION OF CAPITAL STOCK
Upon completion of the offering, our authorized capital stock will consist
of 150,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of preferred stock, $.001 par value per share.
COMMON STOCK
As of December 31, 1999 without giving effect to the exercise by an
affiliate of KKR of its options to invest an additional $50.0 million in our
company or to the conversion of all outstanding shares of our preferred stock
into shares of common stock, there were 8,414,541 shares of common stock
outstanding held of record by 81 stockholders. After giving effect to the
affiliate of KKR's exercise of its options and the conversion of our preferred
stock, as of December 31, 1999, there were 82,561,676 shares of common stock
held of record by 250 stockholders. The holders of common stock are entitled to
one vote for each share held of record on all matters submitted to a vote of the
stockholders. Subject to preferences that may be applicable to any outstanding
shares of preferred stock, the holders of common stock are entitled to receive
ratably those dividends as may be declared by the board of directors out of
funds legally available therefor. In the event of a liquidation, dissolution or
winding up, holders of the common stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preferences of
any outstanding shares of preferred stock. Holders of common stock have no
preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of the offering will be,
fully-paid and nonassessable.
PREFERRED STOCK
There will be no shares of preferred stock outstanding upon completion of
the offering. Our certificate of incorporation, as amended and restated prior to
the closing of the offering, will provide our board of directors with the
authority, without further action by the stockholders, to issue up to
10,000,000 shares of preferred stock, $.001 par value, in one or more series and
to fix the powers, preferences, privileges, rights and qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of the series, without any further vote or action by stockholders. We believe
that the board of directors' authority to set the terms of, and our ability to
issue, preferred stock will provide flexibility in connection with possible
financing transactions in the future. The issuance of preferred stock, however,
could adversely affect the voting power of holders of common stock, and the
likelihood that the holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control in us. We have no present plan to issue any shares of
preferred stock.
WARRANTS
We have outstanding warrants to purchase up to 2,530,473 shares of common
stock at an exercise price of $0.006 per share. These warrants are currently
exercisable and expire on June 15, 2008. The warrant agreement governing these
warrants provides the holders of the warrants with customary
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<PAGE>
antidilution protections. In addition, holders of these warrants have demand and
piggyback registration rights with respect to the exercise of their warrants and
the resale of the underlying shares. Prior to exercising their warrants, the
warrant holders do not have any voting rights relating to our company.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE GENERAL CORPORATION LAW
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE GENERAL CORPORATION LAW. Prior to the completion of the offering, we
will amend and restate our certificate of incorporation and bylaws. Certain
provisions of Delaware law and our amended and restated certificate of
incorporation and bylaws could make the following more difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of the potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging these proposals because negotiation of these proposals could result
in an improvement of their terms. Moreover, each of the provisions summarized
below cannot be amended or removed from our amended and restated certificate of
incorporation or our bylaws without the vote of a supermajority of our
stockholders.
ELECTION AND REMOVAL OF DIRECTORS. Our board of directors will be divided
into three classes. The directors in each class will serve for a three-year
term, one class being elected each year by our stockholders. This system of
electing and removing directors may tend to discourage a third party from making
a tender offer or otherwise attempting to obtain control of us because it
generally makes it more difficult for stockholders to replace a majority of the
directors.
In addition, our bylaws will provide that, except as otherwise provided by
law or our certificate of incorporation, newly created directorships resulting
from an increase in the authorized number of directors or vacancies on the board
may be filled only by a majority of the directors then in office, though less
than a quorum is then in office. Our certificate of incorporation will also
provide that the authorized number of directors may be changed only by a
resolution of our board.
STOCKHOLDER MEETINGS. Under our certificate of incorporation and bylaws,
only the chairman of the board, the chief executive officer, the president or a
majority of the board of directors will be permitted to call special meetings of
stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to
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the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Upon the completion
of the offering, our certificate of incorporation will eliminate the right of
stockholders to act by written consent without a meeting, unless the consent is
unanimous. This provision may have the effect of discouraging, delaying or
making more difficult a change in control of our company or preventing the
removal of incumbent directors even if a majority of our stockholders were to
deem such an action to be in our best interests.
TRANSFER AGENT AND REGISTRAR
UMB Bank, n.a. has been appointed as the transfer agent and registrar for
our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options or warrants, in the
public market following the offering, the market price of our common stock could
decline. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
Upon completion of the offering, we will have outstanding an aggregate of
95,229,209 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, all of the shares sold in the offering will be freely tradeable
without restriction or further registration under the Securities Act, unless the
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. This leaves 82,729,209 shares eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE
--------- ----
<S> <C>
15,832,959 After 180 days from the date of this
prospectus (subject, in some cases,
to volume limitations).
66,896,250 At various times after 180 days from
the date of this prospectus as
described below under "Lock-up
Agreements."
</TABLE>
In addition, subject to volume limitations, 2,530,473 shares issuable upon
the exercise of our outstanding warrants, are currently eligible for sale in the
public market and are not subject to lock-ups.
RULE 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 952,292 shares immediately after the offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
REGISTRATION RIGHTS
On or after the date that is 180 days after completion of the offering,
holders of 82,561,677 shares of our common stock will have demand registration
rights under the Securities Act at our expense of all or a portion of the shares
of common stock they own pursuant to the purchasers rights agreement. These
holders also have "piggy-back" registration rights. In addition, holders of
warrants to purchase
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<PAGE>
up to 2,530,473 shares of our common stock have piggy-back and demand
registration rights with respect to the exercise of their warrants and the
resale of the underlying shares.
LOCK-UP AGREEMENTS
All of our officers and directors and stockholders holding in aggregate more
than 99.0% of our outstanding voting securities on the date of this prospectus
have entered into lock-up agreements under which they agreed not to transfer or
dispose of, directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for shares of our
common stock, for a period of 180 days after the date of this prospectus,
without the prior written consent of Lehman Brothers Inc. and Bear, Stearns &
Co. Inc. on behalf of the underwriters.
In addition to the 180-day lock-up described above, all of our stockholders
with the exception of persons who became stockholders through the exercise of
employee stock options, all of whom held in the aggregate less than 2% of our
outstanding common stock as of March 15, 2000, have entered into the purchasers
rights agreement, which limits their ability to pledge or transfer their shares
of our common stock until August 5, 2002. In addition, Messrs. David E. Scott,
Jeffrey D. Shackelford, Gary L. Chesser, David W. Vranicar, Donald M. Goldman,
Bradley A. Moline and Gregory C. Lawhon, may not transfer shares issued or
issuable upon the exercise of stock options held by them for a period of five
years from the date their respective options were granted. These limitations are
subject to exceptions set forth in the purchasers rights agreement as exempt
transfers.
In addition, 20 other key employees have each entered into a management
stockholders agreement, under which they have agreed not to transfer shares
received upon exercise of their respective options for a period of five years
from the date their respective options were granted. These limitations are
subject to exceptions set forth in their management stockholders agreements.
All of our employees who have been granted stock options under our employee
benefits plans have each agreed in their option agreements that they will not
transfer any shares of our common stock for a period of 180 days after our
completion of a public offering of our stock if we request. We intend to make
this request.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares of our common
stock in connection with a compensatory stock or option plan or other written
agreement is eligible to resell those shares 90 days after we became a reporting
company under the Securities Exchange Act of 1934 in reliance on Rule 144, but
without compliance with some of the restrictions, including the holding period,
contained in Rule 144. We have been a reporting company under the Securities
Exchange Act since March 1999.
Following the offering, we intend to file a registration statement on
Form S-8 under the Securities Act covering approximately 27,100,000 shares of
common stock issued or issuable upon the exercise of stock options, subject to
outstanding options or reserved for issuance under our employee and director
stock benefit plans. Accordingly, shares registered under the registration
statement will, subject to Rule 144 provisions applicable to affiliates, be
available for sale in the open market, except to the extent that the shares are
subject to vesting restrictions or the contractual restrictions described above.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS
This is a general discussion of certain United States federal tax
consequences of the acquisition, ownership, and disposition of our common stock
by a holder that, for U.S. federal income tax purposes, is not a U.S. person as
we define that term below. A holder of our common stock who is not a U.S. person
is a non-U.S. holder. We assume in this discussion that you will hold our common
stock issued pursuant to the offering as a capital asset (generally, property
held for investment). We do not discuss all aspects of U.S. federal taxation
that may be important to you in light of your individual investment
circumstances, such as special tax rules that would apply to you, for example,
if you are a dealer in securities, financial institution, bank, insurance
company, tax-exempt organization, partnership or owner of more than 5% of our
common stock. Our discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations, judicial opinions,
published positions of the U.S. Internal Revenue Service and other applicable
authorities, all as in effect on the date of this prospectus and all of which
are subject to differing interpretations or change, possibly with retroactive
effect. We have not sought, and will not seek, any ruling from the Internal
Revenue Service or opinion of counsel with respect to the tax consequences
discussed in this prospectus, and there can be no assurance that the Internal
Revenue Service will not take a position contrary to the tax consequences
discussed below or that any position taken by the Internal Revenue Service would
not be sustained. We urge you to consult your tax advisor about the U.S. federal
tax consequences of acquiring, holding, and disposing of our common stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local, or other taxing jurisdiction.
For purposes of this discussion, a U.S. person means any one of the
following:
- a citizen or resident of the U.S.
- a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source.
- a trust, the administration of which is subject to the primary supervision
of a U.S. court and that has one or more U.S. persons who have the
authority to control all substantial decisions of the trust.
DIVIDENDS
Dividends paid to a non-U.S. holder will generally be subject to withholding
of U.S. federal income tax at the rate of 30%. If, however, the dividend is
effectively connected with the conduct of a trade or business of the U.S. by the
non-U.S. holder, the dividend will be subject to U.S. federal income tax imposed
on net income on the same basis that applies to U.S. persons generally, and, for
corporate holders under certain circumstances, the branch profits tax. Non-U.S.
holders should consult any applicable income tax treaties that may provide for a
reduction of, or exemption from, withholding taxes. For purposes of determining
whether tax is to be withheld at a reduced rate as specified by a treaty, we
generally will presume that dividends we pay on or before December 31, 2000, to
an address in a foreign country are paid to a resident of that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a non-U.S. holder generally will be required to
provide certification as to that non-U.S. holder's entitlement to treaty
benefits. These regulations also provide special rules to determine whether, for
purposes of applying a treaty, dividends that we pay a non-U.S. holder that is
an entity should be treated as paid to holders of interests in that entity.
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GAIN ON DISPOSITION
A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our common stock unless any one of the following is true:
- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder
- the non-U.S. holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
- the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates
- we are or have been during certain periods a "United States real property
holding corporation" for U.S. federal income tax purposes.
We believe that we are not currently and will not become a United States
real property holding corporation.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax, but will generally not be subject to withholding. Non-U.S. holders
should consult any applicable income tax treaties that may provide for different
rules.
UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S., as specially defined for U.S. federal
estate tax purposes, on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the Internal Revenue Service and to
each non-U.S. holder the amount of dividends that we paid to a holder, and the
amount of tax that we withheld on those dividends. This information may also be
made available to the tax authorities of a county in which the non-U.S. holder
resides.
Under current U.S. Treasury regulations, U.S. information reporting
requirements and backup withholding tax will generally not apply to dividends
that we pay on our common stock to a non-U.S. holder at an address outside the
U.S. Payments of the proceeds of a sale or other taxable disposition of our
common stock by a U.S. office of a broker are subject to both backup withholding
at a rate of 31% and information reporting, unless the holder certifies as to
its non-U.S. holder status under penalties of perjury or otherwise establishes
an exemption. Information reporting requirements, but not backup withholding
tax, will also apply to payments of the proceeds of a sale or other taxable
disposition of our common stock by foreign offices of U.S. brokers or foreign
brokers with certain types of relationships to the U.S. unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met or the holder otherwise established an
exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if certain required
information is furnished to the Internal Revenue Service.
The U.S. Treasury Department has promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, those
regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement to this prospectus, each of the underwriters named below,
for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, First Union Securities, Inc., J.P. Morgan
Securities Inc., Thomas Weisel Partners LLC and Fidelity Capital Markets, a
division of National Financial Services Corporation, are acting as
representatives, has agreed to purchase from us the number of shares of common
stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Lehman Brothers Inc.........................................
Bear, Stearns & Co. Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
First Union Securities, Inc.................................
J.P. Morgan Securities Inc..................................
Thomas Weisel Partners LLC..................................
Fidelity Capital Markets, a division of National
Financial.................................................
Services Corporation......................................
------
Total.....................................................
======
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock the underwriters have agreed to purchase under
the underwriting agreement must be purchased. The conditions contained in the
underwriting agreement include that:
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver customary closing documents to the underwriters.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
selected dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
We estimate that our share of the total expenses of the offering, excluding
the underwriting discount will be approximately $16.0 million.
We have granted to the underwriters an option to purchase up to an aggregate
of 1,875,000 additional shares of common stock, exercisable to cover any
over-allotments, if any, at the public offering price less the underwriting
discount shown on the cover page of this prospectus. The underwriters may
exercise this option at any time, and from time to time, until 30 days after the
date of the underwriting agreement. To the extent that the underwriters exercise
this option, each underwriter will be committed, so long as the conditions of
the underwriting agreement are satisfied, to purchase a number of additional
shares of common stock proportionate to that underwriter's initial commitment as
indicated in the preceding table, and we will be obligated, under such
over-allotment option, to sell the shares of common stock to the underwriters.
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We and our directors, officers, and all current stockholders have agreed not
to offer to sell, sell or otherwise dispose of, directly or indirectly, any
shares of capital stock or any securities that may be converted into or
exchanged for any shares of capital stock for a period of 180 days period from
the date of the prospectus without the prior written consent of Lehman
Brothers Inc. and Bear, Stearns & Co. Inc., except that we may issue, and grant
options to purchase, shares of common stock under our option plans.
Before this offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions:
- our historical performance and capital structure;
- estimates of our business potential and earning prospects;
- an overall assessment of our management; and
- the consideration of the above factors in relation to market valuations of
companies in related businesses.
Thomas Weisel Partners LLC, one of the representatives, was organized and
registered as a broker/dealer in December 1998. Since December 1998, Thomas
Weisel Partners has acted as a lead or co-manager on numerous public offerings
of equity securities. Thomas Weisel Partners does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary technology.
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "BRCH."
We have agreed to indemnify the underwriters against liabilities related to
the offering, including liabilities under the Securities Act and liabilities
incurred in connection with the directed share program referred to below, and to
contribute to payments that the underwriters may be required to make for these
liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of common stock. These transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering. This means that they may sell more shares of
common stock than are shown on the cover page of this prospectus. If the
underwriters create a short position, then the representatives may reduce that
short position by purchasing common stock in the open market. The
representatives also may elect to reduce any short position by exercising all or
part of the over-allotment option. The underwriters have informed us that the
they do not intend to confirm sales to discretionary accounts that exceed 5% of
the total number of shares of common stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that, if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the
78
<PAGE>
amount of the selling concession from the underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters makes any representation that the representatives will
engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
At our request, Lehman Brothers Inc. has reserved up to 1,250,000 shares of
the common stock offered by this prospectus, for sale pursuant to a directed
share program to our employees, directors and friends at the initial public
offering price set forth on the cover page of this prospectus. These persons
must commit to purchase no later than the close of business on the day following
the date of this prospectus. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase the reserved
shares.
Certain of the representatives have from time to time provided investment
banking, financial advisory and other services to us for which these
representatives received customary fees and commissions. Lehman Brothers Inc.
acted as lead arranger of our senior credit facility and its affiliate, Lehman
Commercial Paper Inc., is the administrative agent of the senior credit
facility. In addition, First Union Securities, Inc. is a lender under our senior
credit facility. Lehman Brothers Inc. was an initial purchaser of our senior
notes. In addition, Lehman Brothers Inc. acted as placement agent in connection
with the private placement of shares of our series F preferred stock in
August 1999. Lehman Brothers Inc. has also served as the solicitation agent in
connection with the related solicitation of consents from holders of our senior
notes.
79
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by our counsel, Latham & Watkins, 885 Third Avenue, New York, New
York 10022. At the time of completion of the offering, attorneys of Latham &
Watkins are expected to indirectly own in the aggregate less than 1% of our
common stock. Various regulatory matters in connection with the offering are
being passed upon for us by Dickstein Shapiro Morin & Oshinsky LLP, 2101 L
Street, NW, Washington, D.C. 20037. Various legal matters relating to the common
stock will be passed upon for the underwriters by Simpson Thacher & Bartlett 425
Lexington Avenue, New York, New York 10017. Certain partners of Simpson Thacher
& Bartlett, members of their families, related persons and others, have an
indirect interest, through limited partnerships, through KKR 1996 Fund L.P., in
less than 1% of our common stock. In addition, Simpson Thacher & Bartlett has in
the past provided, and may continue to provide, legal services to KKR and its
affiliates, including KKR 1996 Fund L.P.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1999 and 1998, and for each of
the three years in the period ended December 31, 1999 and the consolidated
financial statements of Valu-Line, our predecessor company, as of December 31,
1997 and for the year then ended, as set forth in their reports. We have
included our financial statements and schedule and the financial statements of
Valu-Line in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, and we file reports and other information with the SEC. We have also
filed with the SEC a registration statement on Form S-1 under the Securities Act
relating to the offer and sale of common stock under this prospectus. This
prospectus, filed as a part of the registration statement, does not contain all
of the information set forth in the registration statement or the exhibits and
schedules to the registration statement as permitted by the rules and
regulations of the SEC. You should read these exhibits for a more complete
description of the matters involved. Our reports, the registration statement and
the exhibits and schedules to the registration statement filed with the SEC may
be inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621-2511. The public may obtain information regarding the SEC's public
reference facility by calling 1-800-SEC-0330. Our reports, the registration
statement and other information filed by us with the SEC are also available at
the SEC's World Wide Web site on the internet at http://www.sec.gov. We have
applied to have our common stock approved for quotation on the Nasdaq National
Market, and our reports and information statements and other information also
can be inspected at the office of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
We will furnish our stockholders with annual reports containing audited
financial statements certified by independent auditors and quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BIRCH TELECOM, INC.
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
VALU-LINE COMPANIES, INC.
Report of Independent Auditors.............................. F-21
Consolidated Balance Sheet as of December 31, 1997.......... F-22
Consolidated Statement of Income and Retained Earnings for
the year ended December 31, 1997.......................... F-23
Consolidated Statement of Cash Flows for the year ended
December 31, 1997......................................... F-24
Notes to Consolidated Financial Statements.................. F-25
</TABLE>
F-1
<PAGE>
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. (Birch) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of Birch's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the 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, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Ernst & Young LLP
Kansas City, Missouri
February 17, 2000, except for note 19, as to
which the date is March 31, 2000
F-2
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 39,745 $ 5,053
Pledged securities........................................ 15,888 15,936
Accounts receivable, net.................................. 4,039 11,612
Inventory................................................. 916 3,735
Prepaid expenses and other................................ 526 2,443
-------- --------
Total current assets........................................ 61,114 38,779
Property and equipment...................................... 26,900 70,192
Less: accumulated depreciation.............................. 747 8,080
-------- --------
Property and equipment, net................................. 26,153 62,112
Pledged securities--noncurrent.............................. 21,897 7,484
Goodwill, net............................................... 16,863 19,316
Other intangibles, net...................................... 7,620 16,911
Other assets................................................ 502 2,369
-------- --------
Total assets................................................ $134,149 $146,971
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease
obligations............................................... $ 335 $ 1,300
Accounts payable.......................................... 8,503 13,300
Accrued expenses.......................................... 2,556 10,793
-------- --------
Total current liabilities................................... 11,394 25,393
Senior credit facility...................................... -- 10,000
14% senior notes............................................ 114,681 114,715
Capital lease obligations, net of current maturities........ 778 836
Other long-term debt, net of current maturities............. 332 234
Series B redeemable preferred stock, 8,572,039 shares issued
and outstanding in 1998 (stated at redemption and
aggregate liquidation value).............................. 14,063 --
Series F redeemable preferred stock, 13,333,334 shares
issued and outstanding in 1999 (stated at redemption and
aggregate liquidation value).............................. -- 63,550
Stockholders' deficit:
Series B preferred stock, 8,572,039 shares issued and
outstanding in 1999..................................... -- 8
Series C preferred stock, 8,492,749 and 6,270,527 shares
issued and outstanding.................................. 8 6
Series D preferred stock, 2,222,222 shares issued and
outstanding in 1999..................................... -- 2
Common stock, $.001 par value, 80,000,000 shares
authorized, 9,005,315 and 8,414,541 shares issued and
outstanding............................................. 5 5
Warrants.................................................. 337 337
Additional paid-in capital................................ 10,548 11,686
Accumulated deficit....................................... (17,997) (79,801)
-------- --------
Total stockholders' deficit................................. (7,099) (67,757)
-------- --------
Total liabilities and stockholders' deficit................. $134,149 $146,971
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Communications services................................... $ -- $ 21,783 $ 52,980
Equipment sales........................................... -- 4,304 7,558
------- -------- --------
Total revenue............................................... -- 26,087 60,538
Cost of services:
Cost of communications services........................... -- 16,339 41,870
Cost of equipment sales................................... -- 2,547 4,488
------- -------- --------
Total cost of services...................................... -- 18,886 46,358
------- -------- --------
Gross margin................................................ -- 7,201 14,180
Selling, general and administrative expenses................ 1,776 15,769 53,045
Depreciation and amortization expense....................... 27 2,308 10,828
------- -------- --------
Loss from operations........................................ (1,803) (10,876) (49,693)
Interest expense............................................ -- (8,254) (15,036)
Interest income............................................. 14 2,922 2,925
------- -------- --------
Net loss.................................................... (1,789) (16,208) (61,804)
Preferred stock dividends................................... -- (1,696) (3,550)
Amortization of preferred stock issuance costs.............. -- (29) (292)
------- -------- --------
Loss applicable to common stock............................. $(1,789) $(17,933) $(65,646)
======= ======== ========
Loss per common share--basic and diluted.................... $ (0.81) $ (2.62) $ (7.38)
======= ======== ========
Weighted average number of common shares outstanding........ 2,217 6,837 8,896
</TABLE>
See accompanying notes.
F-4
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E COMMON COMMON
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK WARRANTS STOCK
STOCK STOCK STOCK STOCK STOCK $.01 PAR $.01 PAR $.001 PAR
--------- --------- --------- --------- --------- -------- --------- ---------
<S> <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 18 --
Net loss and comprehensive
loss.......................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance at December 31, 1997.... -- -- -- -- -- 18 18 --
Recapitalization................ -- -- 2 -- -- (18) (18) --
Merger with Valu-Line........... 3 -- 6 -- -- -- -- --
Issuance of warrants in
connection with 14% senior
notes......................... -- -- -- -- -- -- -- --
Redemption of series A preferred
stock......................... (3) -- -- -- -- -- -- --
Stock dividend.................. -- -- -- -- -- -- -- 1
Option exercise................. -- -- -- -- -- -- -- 4
Restatement of series B
preferred stock dividends..... -- -- -- -- -- -- -- --
Amortization of series B
preferred stock issuance
costs......................... -- -- -- -- -- -- -- --
Series A preferred stock
dividends..................... -- -- -- -- -- -- -- --
Accretion of series B preferred
stock dividends............... -- -- -- -- -- -- -- --
Net loss and comprehensive
loss.......................... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Balance at December 31, 1998.... -- -- 8 -- -- -- -- 5
<CAPTION>
ADDITIONAL
WARRANTS PAID-IN ACCUMULATED
$.001 PAR CAPITAL DEFICIT TOTAL
--------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 23, 1996
(date of inception) and
December 31, 1996............. $-- $ -- $ -- $ --
Issuance of common stock and
warrants...................... -- 1,782 -- 1,818
Net loss and comprehensive
loss.......................... -- -- (1,789) (1,789)
--- -------- -------- --------
Balance at December 31, 1997.... -- 1,782 (1,789) 29
Recapitalization................ -- 34 -- --
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.................. -- (1) -- --
Option exercise................. -- -- -- 4
Restatement of series B
preferred stock dividends..... -- 464 -- 464
Amortization of series B
preferred stock issuance
costs......................... -- (29) -- (29)
Series A preferred stock
dividends..................... -- (168) -- (168)
Accretion of series B preferred
stock dividends............... -- (1,528) -- (1,528)
Net loss and comprehensive
loss.......................... -- -- (16,208) (16,208)
--- -------- -------- --------
Balance at December 31, 1998.... 337 10,548 (17,997) (7,099)
</TABLE>
F-5
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E COMMON COMMON
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK WARRANTS STOCK
STOCK STOCK STOCK STOCK STOCK $.01 PAR $.01 PAR $.001 PAR
--------- --------- --------- --------- --------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998........................ $ -- $-- $ 8 $-- $-- $ -- $ -- $ 5
Issuance of series D preferred
stock....................... -- -- -- 2 -- -- -- --
Issuance of series E preferred
stock....................... -- -- -- -- 2 -- -- --
Issuance of common stock...... -- -- -- -- -- -- -- --
Restatement of series B
preferred stock............. -- 8 -- -- -- -- -- --
Redemption of series C
preferred stock............. -- -- (2) -- -- -- -- --
Redemption of series E
preferred stock............. -- -- -- -- (2) -- -- --
Retirement of common stock.... -- -- -- -- -- -- -- --
Amortization of series F
preferred stock issuance
costs....................... -- -- -- -- -- -- -- --
Accretion of series F
preferred stock dividends... -- -- -- -- -- -- -- --
Net loss and comprehensive
loss........................ -- -- -- -- -- -- -- --
---- --- --- --- --- ---- ---- ---
Balance at December 31,
1999........................ $ -- $ 8 $ 6 $ 2 $-- $ -- $ -- $ 5
==== === === === === ==== ==== ===
<CAPTION>
WARRANTS ADDITIONAL
$.001 PAID-IN ACCUMULATED
PAR CAPITAL DEFICIT TOTAL
--------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31,
1998........................ $337 $ 10,548 $(17,997) $ (7,099)
Issuance of series D preferred
stock....................... -- 9,998 -- 10,000
Issuance of series E preferred
stock....................... -- (2) -- --
Issuance of common stock...... -- 211 -- 211
Restatement of series B
preferred stock............. -- 13,760 -- 13,768
Redemption of series C
preferred stock............. -- (9,998) -- (10,000)
Redemption of series E
preferred stock............. -- (8,570) -- (8,572)
Retirement of common stock.... -- (449) -- (449)
Amortization of series F
preferred stock issuance
costs....................... -- (262) -- (262)
Accretion of series F
preferred stock dividends... -- (3,550) -- (3,550)
Net loss and comprehensive
loss........................ -- -- (61,804) (61,804)
---- -------- -------- --------
Balance at December 31,
1999........................ $337 $ 11,686 $(79,801) $(67,757)
==== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
BIRCH TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(1,789) $(16,208) $(61,804)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 27 720 7,948
Amortization.............................................. -- 1,588 2,880
Provision for losses on accounts receivable............... -- 140 561
Other..................................................... 50 16 34
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable..................................... -- (1,905) (7,633)
Inventory............................................... -- (300) (989)
Prepaid expenses........................................ (7) (370) (1,907)
Other intangibles....................................... -- -- (2,065)
Other assets............................................ (87) (198) (2,357)
Accounts payable........................................ 255 3,888 4,592
Accrued expenses........................................ -- 1,986 7,515
------- -------- --------
Net cash used in operating activities..................... (1,551) (10,643) (53,225)
INVESTING ACTIVITIES
Purchase of property and equipment........................ (128) (21,550) (41,360)
Business acquisitions, net of cash acquired............... -- (7,757) (4,801)
Amortization of discount on pledged securities............ -- (1,231) (1,725)
Maturity of pledged securities............................ -- 7,692 16,100
Purchase of pledged securities............................ -- (44,247) (10)
------- -------- --------
Net cash used in investing activities..................... (128) (67,093) (31,796)
FINANCING ACTIVITIES
Proceeds from long-term debt.............................. -- 123 10,000
Proceeds from 14% senior notes............................ -- 114,663 --
Proceeds from convertible notes........................... -- 3,500 --
Proceeds from issuance of preferred stock................. -- 9,500 70,000
Proceeds from issuance of common stock and warrants....... 1,768 342 --
Payment of financing costs................................ (129) (4,922) (8,804)
Repayment of long-term debt............................... -- (321) (773)
Repayment of capital lease obligations.................... -- (172) (1,073)
Payment of series A preferred stock dividends............. -- (168) --
Borrowing (repayment) of notes payable to stockholders.... 250 (524) --
Redemption of preferred stock............................. -- (4,750) (18,572)
Redemption of common stock................................ -- -- (449)
------- -------- --------
Net cash provided by financing activities................. 1,889 117,271 50,329
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 210 39,535 (34,692)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. -- 210 39,745
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 210 $ 39,745 $ 5,053
======= ======== ========
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............................................... $ -- $ 5,064 $ 2,693
Fair value of intangible assets......................... -- 20,900 4,130
Assumption of liabilities............................... -- (2,430) (939)
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)
Common stock issued in exchange for other assets.......... 50 -- --
Property and equipment additions acquired through capital
lease................................................... -- 728 2,099
Property and equipment additions included in accounts
payable................................................. -- 2,157 5,873
Supplemental disclosure of cash flow information:
Cash payment for interest, net of interest capitalized of
$436 in 1998 and $1,324 in 1999......................... -- 7,725 13,690
</TABLE>
See accompanying notes.
F-7
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Birch Telecom, Inc. was incorporated on 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. The
consolidated financial statements of Birch Telecom, Inc. include the accounts of
Birch Telecom, Inc. and the accounts of its wholly-owned subsidiaries
(collectively, Birch). Birch currently serves certain markets in Missouri,
Kansas and Texas. Birch's business is highly competitive and is subject to
various federal, state and local regulations.
Birch was in the development stage for the period from December 23, 1996
(date of inception) to February 10, 1998. Accordingly, Birch 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, Birch includes as cash and cash
equivalents highly liquid investments with original maturities of three months
or less.
REVENUE RECOGNITION
Revenue for communications services is 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. Customers are not
charged fees to activate initial service.
COST OF SERVICES
Cost of services includes local and long-distance services purchased from
incumbent local exchange carriers, 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 in 1998 and
$3.0 million in 1999. There were no advertising costs in 1997.
F-8
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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...................................... 2-10
Buildings, furniture, fixtures and equipment................ 2-40
</TABLE>
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price paid over the fair
value of the net assets acquired in Birch's acquisitions. Goodwill is being
amortized over 25 years using the straight-line method. Accumulated amortization
on goodwill totaled $599,000 at December 31, 1998 and $1.4 million at
December 31, 1999.
Other intangibles consist primarily of customer lists related to Birch's
acquisitions, deferred financing costs and deferred line installation costs.
Customer lists are amortized over 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. Deferred line installation
costs are being amortized over 2 years, the approximate average life of customer
contracts, using the straight-line method (see Note 6).
Birch reviews its long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed of," for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such events or changes in circumstances are
present, a loss is recognized if the carrying value of the asset is in excess of
the sum of the undiscounted cash flows expected to result from the use of the
asset and its eventual disposition. An impairment loss is measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
INCOME TAXES
Birch accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Birch 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 14). Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
STOCK OPTIONS
Birch has adopted the disclosure provisions of 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, Birch has elected to continue to measure compensation
using the intrinsic value based method as prescribed by Accounting
F-9
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Birch's board of directors. In accordance
with APB No. 25, Birch has recorded no compensation expense related to options
granted because the exercise price is equal to the estimated market value of the
stock on the date of grant (see Note 15).
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 Birch's pledged
securities was $38 million at December 31, 1998 and $23.3 million at
December 31, 1999. The fair value of Birch's senior notes is estimated to be
$106 million at December 31, 1998 and $115 million at December 31, 1999 based on
the quoted market rates for the debt. The fair value of other long-term debt,
accounts receivable, accounts payable and accrued expenses 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-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 and 1998 consolidated financial statements have
been reclassified to be consistent with the classification in the 1999
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (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 our
consolidated
F-10
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements for the year ending December 31, 2001. We do not expect the
impact of SFAS No. 133 to be material in relation to our 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 September 1998, Birch acquired TFSnet, Inc. (TFSnet), an Internet service
provider based in the Kansas City metropolitan area, for $2.65 million.
In February 1999, Birch 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 cash and $211,000 in
common stock.
In March 1999, Birch 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 additional cash consideration, recorded as additional purchase
price, based on local service lines converted to Birch's service from Capital's
existing customer base, which totaled approximately $161,000 through
December 31, 1999.
All of the acquisitions referenced above were recorded using the purchase
method of accounting. Accordingly, the operations of each are included in the
consolidated statements of operations and cash flows from the date of
acquisition.
The following is unaudited pro forma information reflecting the effect of
the 1998 acquisitions on the results as though they had been completed effective
January 1, 1997 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue................................................... $18,847 $29,193
Net loss.................................................. 19,325 28,921
Loss per common share..................................... 8.72 4.48
</TABLE>
The impact of the 1999 acquisitions was not material to our results of
operations.
F-11
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
The composition of accounts receivable, net as of December 31, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Billed..................................................... $3,144 $ 9,312
Unbilled................................................... 1,129 2,756
------ -------
4,273 12,068
Less allowance for doubtful accounts....................... 234 456
------ -------
$4,039 $11,612
====== =======
</TABLE>
5. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Communications network.................................... $ 5,966 $28,525
Buildings, furniture, fixtures and equipment.............. 6,529 38,662
Construction in progress.................................. 14,405 3,005
------- -------
26,900 70,192
Less accumulated depreciation and amortization............ 747 8,080
------- -------
Property and equipment, net............................... $26,153 $62,112
======= =======
</TABLE>
6. OTHER INTANGIBLES
The composition of other intangible assets, net as of December 31, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Customer lists............................................. $3,525 $ 4,225
Preferred stock issuance costs............................. 325 6,989
Deferred financing costs................................... 4,630 6,412
Deferred installation costs................................ -- 2,363
Other...................................................... 153 330
------ -------
8,633 20,319
Less accumulated amortization.............................. 1,013 3,408
------ -------
Other intangibles, net..................................... $7,620 $16,911
====== =======
</TABLE>
7. DEBT, PLEDGED SECURITIES AND WARRANTS
During December 1999, Birch completed a $75 million senior credit facility
which increased to $125 million during syndication in February 2000. The
financing provides for a $25 million reducing revolver and $100 million in
multi-draw term loans. The revolver is available for general corporate
F-12
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT, PLEDGED SECURITIES AND WARRANTS (CONTINUED)
purposes of Birch's subsidiaries and the term loans are to be used to finance
the development, design, installation and acquisition of telecommunications
equipment, inventory network assets and back office systems. At Birch's
election, the borrowings bear interest at either the Prime Rate plus a margin
ranging from 1.50% to 2.50% or the London Interbank Offered Rate (LIBOR) plus a
margin ranging from 2.75% to 3.75%. The applicable margins are based upon
Birch's debt to EBITDA ratio, as defined by the senior credit facility. Interest
is paid quarterly in arrears for loans bearing interest based upon Prime and/or
on the last day of each relevant interest period, for periods not in excess of
three months, for LIBOR loans. For LIBOR loans with interest periods of longer
than three months, interest is paid each day which is three months after the
first day of such interest period and the last day of such interest period.
Commitment fees are paid quarterly in arrears on the average unused committed
portion of the senior credit facility, ranging from 0.75% to 1.25%. The
applicable percentages are based upon Birch's average borrowings in relation to
the average borrowing availability, as defined by the senior credit facility.
For the year ended December 31, 1999 commitment fees totaled $25,174. Principal
payments begin March 2003 and the credit facility matures December 30, 2006. The
senior credit facility is secured by a perfected first priority security
interest in substantially all of Birch's assets and capital stock. Deferred
financing costs incurred amounting to $1.5 million at December 31, 1999 are
being amortized over the life of the credit facility using the straight-line
method. Amortization for the year ended December 31, 1999 was not significant.
During June 1998, Birch completed a $115 million private offering of 14%
senior notes due June 2008 and 115,000 warrants to purchase 2,530,473 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 $0.006 per
share and expire June 2008. Birch 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. Birch classifies its pledged securities,
consisting of $37.8 million at December 31, 1998 and $23.4 million at
December 31, 1999 of U.S. Treasury securities, as held to maturity recorded at
amortized cost and maturing between six and eighteen 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 $319,000 at December 31, 1998 and
$285,000 at December 31, 1999. The amount allocated to the warrants represents
the estimated fair value of the warrants at the date of issuance. Deferred
financing costs incurred amounting to $4.9 million at December 31, 1999 are
being amortized over the life of the senior notes using the straight-line
method. Accumulated amortization on the financing costs totaled $1.5 million at
December 31, 1999. The senior notes rank pari pasu in right of payment to all
existing and future senior indebtedness of Birch and rank senior in the right of
payment to all existing and future subordinated indebtedness of Birch.
A Registration Statement on Form S-4, registering Birch's 14% senior notes
and exchanging the outstanding senior notes for exchange notes, was declared
effective by the Securities and Exchange Commission (SEC) in March 1999. The
terms and conditions of the exchange notes are identical to those of the senior
notes in all material respects.
The senior credit facility and the senior notes indenture contain certain
covenants which, among other things, restrict the ability of Birch to incur
additional indebtedness, pay dividends or make
F-13
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT, PLEDGED SECURITIES AND WARRANTS (CONTINUED)
distributions of Birch'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. Birch was in
compliance with these covenants at December 31, 1999.
Birch's debt consisted of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
14% senior notes........................................ $114,681 $114,715
======== ========
Senior credit facility:
Equipment term loans.................................. $ -- $ 10,000
-------- --------
Total senior credit facility........................ $ -- $ 10,000
======== ========
Other long-term debt, interest accruing between 8.6% and
9.8%, maturing through 2013, secured by buildings..... $ 345 $ 244
Less current maturities................................. 13 10
-------- --------
$ 332 $ 234
======== ========
</TABLE>
Assets securing the other long-term debt totaled $814,000 at December 31,
1998 and $766,237 at December 31, 1999, net of accumulated depreciation of
$19,000 at December 31, 1998 and $35,037 at December 31, 1999.
Principal payments required on the outstanding debt during each of the next
five years are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000........................................................ $ 10
2001........................................................ 10
2002........................................................ 11
2003........................................................ 5,012
2004........................................................ 5,014
Thereafter.................................................. 114,902
---------
$ 124,959
=========
</TABLE>
8. CAPITAL LEASE OBLIGATIONS
Birch leases telecommunications equipment, computer equipment and
automobiles under capital leases with imputed interest between 8.0% and 12.0%.
Assets under capital leases totaled $1.5 million at December 31, 1998 and
$3.6 million at December 31, 1999, net of accumulated amortization of $210,000
at December 31, 1998 and $1.1 million at December 31, 1999. The future minimum
lease
F-14
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL LEASE OBLIGATIONS (CONTINUED)
payments under the capital leases and the present value of the net minimum lease
payments as of December 31, 1999 are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000........................................................ $1,528
2001........................................................ 545
2002........................................................ 92
2003........................................................ 57
2004........................................................ --
------
Total minimum lease payments................................ 2,222
Less amount representing interest........................... 96
------
Present value of net minimum lease payments................. 2,126
Less current maturities..................................... 1,290
------
$ 836
======
</TABLE>
Amortization expense for assets under capital leases was $157,000 for 1998
and $974,165 for 1999.
9. CAPITAL STRUCTURE
During 1997, $1.8 million of common stock and $18,000 of 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
of common stock at $1.00 per share.
During February and March 1998, Birch issued $9.5 million of series B
preferred stock at $4.50 per share and $3.5 million of convertible notes
generating net proceeds of $12.4 million, converted all existing common stock to
series C preferred stock, terminated common stock warrants, canceled the 1997
stock option plan, created the 1998 stock option plan and issued 852,176 shares
of common stock to employees of Birch. Also during February 1998, Birch issued
$4.75 million of series A preferred stock and $10.0 million of series C
preferred stock in connection with the Valu-Line merger. Birch redeemed the
series A preferred stock in June 1998. Also in June 1998, the convertible notes
were converted into series B preferred stock.
During July and August 1999, Birch issued $10 million of series D preferred
stock and $60 million of series F preferred stock at $4.50 per share. Options
were granted to purchase $25 million of series F preferred stock at $4.75 per
share and $25 million of series F preferred stock at $5.00 per share which
expire on April 13, 2000. Additionally, Birch repurchased $10 million of
series C preferred stock at $4.50 and recapitalized the series B preferred stock
converting it into a new series B preferred stock and a new series E preferred
stock. The series E preferred stock was then redeemed for $8.6 million. Net
proceeds generated from these transactions totaled $44.4 million.
AUTHORIZED SHARES
At December 31, 1999, Birch had shares authorized totaling 80 million shares
of common stock and 55 million shares of preferred stock. The preferred stock
has designations of 8.75 million shares of series B, 8.5 million shares of
series C, 2.2 million shares of series D, 1.9 million shares of series E and
30 million shares of series F.
F-15
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STRUCTURE (CONTINUED)
RIGHTS
All shares of preferred stock are convertible into 1.795 shares of common
stock and contain certain voting rights. The common stock also has voting rights
similar to the series C preferred stock. The series B, series D and series F
preferred stock have additional voting rights in certain circumstances.
Additionally, the series F preferred stock contains mandatory redemption rights
based on certain senior management retention. In the event of mandatory
redemption, the shares are redeemable for amounts similar to the liquidation
preference discussed below.
LIQUIDATION RIGHTS
Birch's series D and series F preferred stock have a liquidation preference
over the series B and series C preferred stock and common stock at the greater
of (i) the purchase price plus accrued but unpaid dividends or (ii) the amount
the holders would have received upon liquidation if such shares of series D and
series F preferred stock had been converted to common stock immediately prior to
liquidation. Birch's series B preferred stock has a liquidation preference only
over series C preferred stock and common stock at an amount equal to the sum of
the purchase price plus accrued but unpaid dividends. series C preferred stock
has preference only over common stock at an amount equal to the sum of the
purchase price plus accrued but unpaid dividends.
DIVIDENDS
The series B preferred stock accrued cumulative compounding dividends at 15%
per annum until the series B was converted and restated into new series B. At
that time, the rights and preferences were amended and restated to remove the
mandatory dividend rights and now the series B cumulates cash dividends at 15%
per annum, amounting to $814,000 at December 31, 1999. The series C preferred
stock has a 10% non-cumulative cash dividend and the series D preferred stock
cumulates cash dividends at a rate of 15% per annum, totaling $750,000 at
December 31, 1999. Only the series F preferred stock contains mandatory dividend
rights. Accrued cash dividends on series F preferred stock totaled $3.6 million
at December 31, 1999, as reflected in stockholders' equity. Common stock
dividends, if any, will be declared at the discretion of Birch's board of
directors. Birch has not paid any cash dividends on common stock since inception
and does not intend to pay any in the foreseeable future. Restrictions contained
in the senior credit facility agreement and the senior notes indenture prohibit
Birch from paying certain dividends on its capital stock.
On June 23, 1998, Birch paid a stock dividend, in the amount of 0.055 shares
per share, to the holders of Birch's series B preferred stock and series C
preferred stock and 0.031 shares to the holders of common stock as of June 15,
1998. Dividends paid on series A preferred stock in 1998 totaled $168,000.
F-16
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED-PARTY TRANSACTIONS
During December 1997, Birch borrowed $250,000 from Birch's principal
stockholder under a note payable. The note payable was fully repaid in
February 1998.
Birch acquired notes payable to Valu-Line shareholders totaling $274,000 in
the Valu-Line merger. These notes were fully repaid during 1998.
A broadcasting company owned by one of the Birch's shareholders rented
office space from Birch for $30,000 during 1998 and $29,187 during 1999. Birch
purchased advertising from the broadcasting company totaling $40,000 in 1998 and
$30,360 in 1999.
A real estate company owned by the President of Birch's equipment division
was paid $3,588 for building maintenance in 1998 and $12,587 in 1999.
11. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments at December 31, 1999 for all noncancelable
operating leases, consisting mainly of leases for office space and equipment,
are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
2000........................................................ $ 2,766,794
2001........................................................ 3,042,829
2002........................................................ 2,925,940
2003........................................................ 2,567,295
2004........................................................ 2,443,322
Thereafter.................................................. 7,769,655
-----------
Total....................................................... $21,515,835
===========
</TABLE>
Total rent expense was $81,000 in 1997, $485,000 in 1998 and $1.5 million in
1999. Birch may renew leases on its corporate offices in terms ranging from
three to ten years at rates approximating the prevailing market. Renewal rentals
are excluded from the table.
Various suits arising in the ordinary course of business are pending against
Birch. Management cannot predict the final outcome of the actions, but believes
they will not be material to Birch's financial statements.
12. EMPLOYEE BENEFIT PLAN
Birch 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. Birch may also make discretionary
contributions. Birch contributions to the plan were $148,000 in 1998 and
$594,925 in 1999.
13. EMPLOYMENT AGREEMENTS
Birch 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
Birch's group health plan.
F-17
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES
Net deferred taxes consist of the following as of December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 5,528 $ 28,770
Accruals and reserves not currently deductible......... 91 182
Other.................................................. 668 614
------- --------
6,287 29,566
Valuation allowance.................................... (5,799) (28,741)
------- --------
488 825
Deferred tax liabilities:
Property and equipment................................. 488 825
------- --------
$ -- $ --
======= ========
</TABLE>
Net income tax benefits of approximately $5.1 million in 1998 and $22.9 in
1999 have been offset by increases in the valuation allowance. At December 31,
1999, Birch had operating loss carryforwards for federal income tax purposes of
approximately $71.9 million, expiring in 2013 and 2014.
The primary difference that caused the effective tax rate to vary from the
statutory federal income tax rate of 35% was the valuation allowance.
15. STOCK OPTION PLAN
At December 31, 1997, Birch 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 employee 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............................................. 4,995,485 $ 0.557
Exercised........................................... -- --
Forfeited........................................... -- --
----------
Outstanding at December 31, 1997.................... 4,995,485 0.557
Terminated.......................................... (4,995,485) 0.557
----------
Outstanding at December 31, 1998.................... -- --
==========
</TABLE>
F-18
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION PLAN (CONTINUED)
Stock option activity under the 1998 employee stock option plan was as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE PER
SHARE EXERCISE
SHARES PRICE
---------- --------------
<S> <C> <C>
Granted............................................. 9,142,050 $0.135
Exercised........................................... (8,197,566) 0.001
Forfeited........................................... (25,579) 1.393
----------
Outstanding at December 31, 1998.................... 918,905 1.300
Granted............................................. 3,221,666 2.142
Exercised........................................... -- --
Forfeited........................................... (495,196) 1.692
----------
Outstanding at December 31, 1999.................... 3,645,375 1.991
==========
</TABLE>
At December 31, 1998, 9,627 options were exercisable with a weighted average
exercise price of $0.001. At December 31, 1999, 192,905 options were exercisable
with a weighted average exercise price of $1.212.
The 1998 employee stock option plan authorized the grant of options for up
to 11,121,542 shares of Birch'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. No
options expired during 1998 or 1999.
Options granted in 1998 and 1999 had exercise prices approximating the
market value of the common stock. Exercise prices for options outstanding at
December 31, 1999 ranged from $0.001 to $2.507. The weighted-average remaining
contractual life of those options is 9.4 years. The weighted-average fair values
of options granted during the years ended December 31, 1998 and 1999 equaled
$0.028 and $0.407, respectively. At December 31, 1999, Birch has reserved
2,923,976 shares of common stock for issuance under the 1998 stock option plan.
Birch estimated the fair value of each option grant using the minimum value
method permitted by SFAS No. 123 for entities not publicly traded. Birch used
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. Under the minimum value method, the volatility factor is excluded. 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, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net loss--as reported........................... $(1,789) $(16,208) $(61,804)
Net loss--pro forma............................. (1,921) (16,384) (62,411)
Loss per share--Basic and Diluted--Pro Forma.... (0.87) (2.65) (7.45)
</TABLE>
F-19
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SIGNIFICANT SUPPLIERS
Birch purchased telephone services from Southwestern Bell Telephone
amounting to 35% of cost of services in 1998 and 65% in 1999. Birch is dependent
upon incumbent telephone companies, such as Southwestern Bell, for the supply of
fiber optic networks that we use. Birch purchased switches and other network
equipment and software from Lucent Technologies amounting to $12.9 million in
1998 and $9.9 million in 1999.
17. YEAR 2000 ISSUE--UNAUDITED
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. Birch completed all Year 2000
readiness work and experienced no significant problems as a result of the new
year. Birch does not believe it has continued exposure to the Year 2000 problem
and does not expect further costs incurred in relation to the Year 2000 issue to
be substantial.
18. QUARTERLY DATA--UNAUDITED
The following table includes summarized quarterly financial data for the
years ended December 31:
<TABLE>
<CAPTION>
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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
Loss from operations.................................. (567) (1,486) (2,996) (5,827)
Net loss.............................................. (623) (1,766) (5,468) (8,351)
Loss per common share--basic and diluted.............. (0.44) (0.31) (0.66) (0.98)
1999:
Revenue............................................... $10,636 $ 13,975 $ 17,022 $ 18,905
Gross margin.......................................... 2,711 3,574 3,753 4,142
Loss from operations.................................. (7,128) (9,525) (13,710) (19,330)
Net loss.............................................. (9,936) (12,639) (16,690) (22,539)
Loss per common share--basic and diluted.............. (1.15) (1.44) (1.91) (2.95)
</TABLE>
19. SUBSEQUENT EVENTS
Since December 31, 1999, Birch has borrowed an additional $40 million
through March 31, 2000 under the term loan portion of the senior credit
facility.
On March 23, 2000 an affiliate of Kohlberg Kravis Roberts & Co. exercised
its options to purchase an additional $50.0 million of Birch's series F
preferred stock (see note 9).
On March 23, 2000, Birch filed a registration statement on Form S-1 relating
to a proposed initial public offering of its common stock. All outstanding
shares of Birch's preferred stock will automatically convert into shares of
common stock upon completion of the proposed offering.
On March 31, 2000, the board of directors and stockholders of Birch approved
a stock split of 1.795 shares for each outstanding share of common stock. The
conversion ratio of the preferred stock was adjusted accordingly. All references
in the financial statements and related notes to the number of shares of common
stock and per share amounts have been restated to reflect the stock split.
F-20
<PAGE>
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 the
year 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides 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 the year then ended in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Kansas City, Missouri
May 15, 1998
F-21
<PAGE>
VALU-LINE COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 258
Accounts receivable, net of allowance of $70.............. 1,790
Other receivables--related parties........................ 97
Inventories............................................... 530
Prepaid expenses.......................................... 37
Income taxes receivable................................... 30
Other assets.............................................. 60
Deferred income taxes..................................... 71
------
Total current assets........................................ 2,873
Property and equipment, net................................. 1,612
Other assets................................................ 317
------
Total assets................................................ $4,802
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease
obligation.............................................. $ 110
Notes payable--related parties............................ 240
Accounts payable.......................................... 1,262
Accrued expenses.......................................... 225
Customer deposits......................................... 39
Accrued salaries and commissions.......................... 266
Deferred revenue.......................................... 287
------
Total current liabilities................................... 2,429
Long-term debt, net of current maturities................... 345
Capital lease obligation, net of current maturities......... 336
Deferred income taxes....................................... 27
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000 shares authorized;
10,360 issued and outstanding............................. 181
Retained earnings........................................... 1,484
------
Total stockholders' equity.................................. 1,665
------
Total liabilities and stockholders' equity.................. $4,802
======
</TABLE>
See accompanying notes.
F-22
<PAGE>
VALU-LINE COMPANIES, INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<S> <C>
Revenue:
Communications services, net.............................. $13,785
Equipment sales, net...................................... 3,016
-------
Total revenue............................................... 16,801
Cost of services:
Cost of communications services........................... 9,859
Cost of equipment sales................................... 1,983
-------
Total cost of services...................................... 11,842
-------
Gross margin................................................ 4,959
Selling, general and administrative......................... 4,067
Depreciation and amortization............................... 341
-------
Income from operations...................................... 551
Interest expense............................................ 97
-------
Income before income taxes.................................. 454
Income tax expense.......................................... 186
-------
Net income.................................................. 268
Retained earnings, beginning of year........................ 1,216
-------
Retained earnings, end of year.............................. $ 1,484
=======
Earnings per share--basic and diluted....................... $ 25.87
=======
Common shares outstanding--basic and diluted................ 10,360
</TABLE>
See accompanying notes.
F-23
<PAGE>
VALU-LINE COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.................................................. $268
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization............................. 341
Deferred income taxes..................................... (14)
Income tax expense........................................ 73
Changes in operating assets and liabilities:
Accounts receivable..................................... (660)
Other receivables--related parties...................... (52)
Inventory............................................... (94)
Income taxes receivable/payable......................... (56)
Accounts payable........................................ 520
Accrued expenses and other current liabilities.......... 304
Other................................................... (142)
----
Net cash provided by operating activities................... 488
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (243)
----
Net cash used in investing activities....................... (243)
FINANCING ACTIVITIES
Payment of notes payable.................................... (11)
Payment of notes payable--related parties................... (44)
Payment of capital lease obligation......................... (90)
----
Net cash used in financing activities....................... (145)
----
Net increase in cash and cash equivalents................... 100
Cash and cash equivalents, beginning of year................ 158
----
Cash and cash equivalents, end of year...................... $258
====
</TABLE>
See accompanying notes.
F-24
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
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 10). 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-25
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
1998........................................................ $137
1999........................................................ 137
2000........................................................ 137
2001........................................................ 57
2002........................................................ 57
2003........................................................ 57
----
Total minimum lease payments................................ 582
Less amount representing interest........................... (147)
----
Present value of net minimum lease payments with interest at
10.0%..................................................... 435
Less current maturities..................................... (99)
----
$336
====
</TABLE>
F-26
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
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,
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>
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 $128,000 in 1997.
Total interest paid in 1997 was $97,000.
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
$81,000 in 1997.
F-27
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
7. INCOME TAXES
The income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Current:
Federal................................................. $175
State................................................... 25
----
Total Current............................................. 200
Deferred:
Federal................................................. (12)
State................................................... (2)
----
Total deferred............................................ (14)
----
Income tax expense........................................ $186
====
</TABLE>
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>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Tax computed at statutory rate............................ $159
State taxes, net of federal effect........................ 22
Other, net................................................ 5
----
Income tax expense........................................ $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 for income taxes for the year ended December 31, 1997 was
$225,000.
F-28
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
8. ADDITIONAL FINANCIAL INFORMATION
RELATED PARTIES
In 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 amount of $81,000. Valu-Line also received
services principally related to advertising from Valu-Broadcasting, Inc. in the
amount of $41,000 in 1997. 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
40% of the total cost of communication services for the year ended December 31,
1997. Equipment purchases from Toshiba approximated 59% of cost of equipment
sales for the year ended December 31, 1997.
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 1997 was $56,000.
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.
F-29
<PAGE>
VALU-LINE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
11. YEAR 2000 COMPLIANCE--UNAUDITED (CONTINUED)
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-30
<PAGE>
12,500,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
J.P. MORGAN & CO.
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the registration fee for the Securities and
Exchange Commission, the filing fee for the National Association of Securities
Dealers, Inc., the listing fee for the Nasdaq National Market and estimates of
all other expenses to be incurred in connection with the issuance and
distribution of the securities described in the Registration Statement, other
than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 60,720
NASD filing fee............................................. 23,500
Nasdaq listing fee.......................................... 94,000
Blue Sky fee................................................ 5,000
Printing and engraving expenses............................. 355,000
Legal fees and expenses..................................... 600,000
Accounting fees and expenses................................ 75,000
Transfer agent and registrar fees........................... 15,000
Miscellaneous............................................... $ 771,780
----------
Total..................................................... $2,000,000
==========
</TABLE>
- ------------------------
* To be completed by amendments.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are a Delaware corporation. Reference is made to Section 102(b)(7) of the
Delaware General Corporation Law (the "DGCL"), which enables a corporation in
its original certificate of incorporation or an amendment thereto to eliminate
or limit the personal liability of a director for violations of the director's
fiduciary duty, except (i) for any breach of the director's 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 law,
(iii) pursuant to Section 174 of the DGCL (providing for liability of directors
for unlawful payments of dividends of unlawful stock purchase or redemptions),
or (iv) for any transaction from which a director derived an improper personal
benefit.
Reference is also made to Section 145 of the DGCL, which provides that a
corporation may indemnify any person, including an officer or director, who is,
or is threatened to be made, party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer,
director, employee or agent acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the corporation's best interest and, for
criminal proceedings, had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or director in an
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses that
such officer or director actually and reasonably incurred.
II-1
<PAGE>
Article V of our amended and restated by-laws (filed as Exhibit 3.2)
provides for indemnification of the officers and directors to the full extent
permitted by applicable law.
The underwriting agreement (Exhibit 1.1) provides for indemnification by the
underwriters of the registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of all securities that we have sold within
the past three years without registering the securities under the Securities
Act:
On February 10, 1998, as part of the consideration for our acquisition of
Value-Line, we paid to the principal stockholder of Valu-Line, 2,968,750 shares
of our series A preferred stock and 5,982,746 shares of our series C preferred
stock. These issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act. In June 1998, we repurchased all of the outstanding shares
of our Series A preferred held by Valu-Line's former principal stockholder.
On March 13, 1998, we completed a private placement to approximately 70
accredited investors of 5,937,500 shares of our series B preferred stock
comprised of shares with an aggregate liquidation preference of $9.5 million and
convertible notes in the aggregate principal amount of $3.5 million. On
June 18, 1998, we converted those notes to 2,307,965 shares of series B
preferred stock. These issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act.
In connection with this series B preferred stock offering, one stockholder
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. One of our officers 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. Another of our officers 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. We then
cancelled the exchanged shares and warrants exercisable into shares of common
stock. These issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act.
In February 1999, we acquired American Local, a competitive local exchange
carrier based in the Dallas, Texas metropolitan area. The acquisition included
substantially all assets of American Local. The total purchase price was
approximately $1.6 million in cash and $211,000 in common stock, or 126,249
shares. This issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act.
On July 23, 1999, we completed a private placement to approximately 55 of
our existing investors in series B preferred stock of 2,222,222 shares of series
D preferred stock at a purchase price of $4.50 per share for aggregate proceeds
of approximately $10.0 million. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
On August 5, 1999, BTI Ventures, L.L.C. an affiliate of KKR, purchased
13,333,334 shares of our series F preferred stock at a purchase price of $4.50
per share for aggregate proceeds of $60.0 million. On March 23, 2000, KKR
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. In connection with the private placement of the
series F preferred stock to BTI Ventures, L.L.C., which closed on August 5,
1999, and the related exercise of the KKR options, Lehman Brothers Inc. earned
compensation which included 646,316 shares of our series D preferred stock.
These issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act.
II-2
<PAGE>
On August 5, 1999, in connection with the series F preferred stock offering,
we repurchased 2,222,222 shares of our Series C preferred stock for $10.0
million from a board member. This issuance was exempt from registration pursuant
to Section 4(2) of the Securities Act.
On August 5, 1999, in connection with the series F preferred stock offering,
we converted each outstanding share of series B preferred stock into one share
of amended and restated series B preferred stock. The holders of series B
preferred stock, approximately 70 accredited investors, surrendered their
existing redemption and participating liquidation preference in exchange for
0.2222 shares of our series E preferred stock. These issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act. We redeemed the
series E preferred stock for a total of $8.6 million.
From February 10, 1998 to March 23, 2000, we granted stock options to
purchase up to 14,969,472 shares of our common stock pursuant to our stock
option plan, with a weighted average exercise price of $1.287 per share. These
issuances were exempt from registration pursuant to Rule 701 under the
Securities Act.
In connection with our sale of $115,000,000 of 14% senior notes due 2008 to
qualified institutional buyers, in June 1998 we granted warrants to purchase up
to 2,530,473 shares of our common stock at an exercise price of $0.006 per
share. These issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act.
In March 2000, Mr. Jalkut, a member of our board of directors, agreed to
purchase 47,867 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 119,667 shares of our
common stock for $500,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
<S> <C>
1.1 * Form of Underwriting Agreement.
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 (Form S-4)).
3.1 ** Restated certificate of incorporation of Birch Telecom, Inc.
3.2 ** Amended and restated bylaws of Birch Telecom, Inc.
3.3 ** Form of amended and restated certificate of incorporation of
Birch Telecom, Inc. (to be filed in Delaware immediately
prior to completion of the offering).
4.1 ** Specimen stock certificate.
5.1 ** Opinion of Latham & Watkins.
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. amended and restated purchasers rights
agreement, dated April 13, 2000.
10.3 ** Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and David E. Scott.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
<S> <C>
10.4 ** Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Gregory C. Lawhon.
10.5 ** Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Donald H. Goldman.
10.6 ** Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and David W. Vranicar.
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.
(Missouri Interconnection Agreement) (incorporated by
reference to Exhibit 10.13 to the Form S-4).
10.10 Amendment No. 1 dated May 27, 1998 to Missouri
interconnection agreement (incorporated by reference to
Exhibit 10.10 to Birch Telecom, Inc.'s annual report on form
10-K for the fiscal year ended December 31, 1998, originally
filed on March 31, 1999 (Form 10-K)).
10.11 + Software license agreement between Birch Telecom, Inc. and
Saville Systems Inc. (incorporated by reference to Exhibit
10.14 to the Form S-4).
10.12 Interconnection agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern
Bell Telephone Company and Birch Telecom of Kansas, Inc.
(incorporated by reference to Exhibit 10.12 to the Form
10-K).
10.13 Interconnection agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern
Bell Telephone Company and Birch Telecom of Texas Ltd., LLP.
(incorporated by reference to the Exhibit 10.13 to the Form
10-K).
10.14 1998 stock option plan (incorporated by reference to Exhibit
10.14 to Birch Telecom Inc.'s annual report on Form 10-K for
the fiscal year ended December 31, 1998, as amended, filed
on May 7, 1999 (Form 10-K/A)).
10.15 Form of incentive stock option agreement under 1998 stock
option plan (incorporated by reference to Exhibit 10.15 to
the Form 10-K/A).
10.16 Form of nonstatutory stock option agreement under 1998 stock
option plan (incorporated by reference to Exhibit 10.16 to
the Form 10-K/A).
10.17 Lease agreement between Francor, L.L.C. and Birch Telecom,
Inc. dated July 20, 1998 (incorporated by reference to
Exhibit 10.17 to the Form 10-K/A).
10.18 Series D preferred stock purchase agreement, dated July 2,
1999 (incorporated by reference to Exhibit 10.18 to the Form
10-Q).
10.19 Series F preferred stock purchase agreement, dated July 13,
1999 (incorporated by reference to Exhibit 10.19 to the Form
10-Q).
10.20 ** Amended and restated credit agreement among Birch Telecom
Finance, Inc., Birch Telecom, Inc., Lehman Brothers Inc.,
Lehman Commercial Paper Inc., Bankers Trust Company and Bank
of America, Inc., as agents and lenders, and the other
lenders party thereto dated February 2, 2000.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
<S> <C>
10.21 ** Amended and restated guarantee and collateral agreement,
dated as of February 2, 2000, among Birch Telecom Finance,
Inc., Birch Telecom, Inc. and Lehman Commercial Paper, Inc.,
as collateral agent (included as Exhibit A to Exhibit 10.20
filed with this S-1).
10.22 ** Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Bradley A. Moline.
10.23 ** Amended employment agreement dated as of October 7, 1999
between Birch Telecom, Inc. and Jeffrey D. Shackelford.
10.24 ** Employment agreement dated as of February 2000 between Birch
Telecom, Inc. and David M. Hollingsworth.
10.25 ** 2000 Equity Participation Plan.
10.26 * 2000 Employee Stock Purchase Plan, as amended.
10.27 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).
10.28 Specimen certificate of 14% senior notes due 2008 (Exchange
Notes) (included in Exhibit 4.1, which is incorporated by
reference to Exhibit 4.1 to the Form S-4).
10.29 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).
10.30 ** Letter agreement dated as of March 22, 2000 between Birch
Telecom, Inc. and Mory Ejabat.
10.31 ** Letter agreement dated as of March 22, 2000 between Birch
Telecom, Inc. and Richard A. Jalkut.
21.1 Subsidiaries of Birch Telecom, Inc. (incorporated by
reference to Exhibit 21.1 to the Form S-4).
23.1 ** Consent of Latham & Watkins (included in Exhibit 5.1).
23.2 * Consent of independent auditors.
24.1 ** Power of attorney.
27.1 ** Financial data schedule.
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. Such portions have been filed separately with the
Commission.
II-5
<PAGE>
(b) Financial Statement Schedules
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Birch Telecom, Inc.
We have audited the consolidated financial statements of Birch Telecom, Inc.
(Birch) as of December 31, 1998 and 1999, and for each of the three years in the
period ended December 31, 1999, and have issued our report thereon dated
February 17, 2000 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule included in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
management of Birch. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Kansas City, Missouri
February 17, 2000
II-6
<PAGE>
BIRCH TELECOM, INC.
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE CHARGED CHARGED TO BALANCE
BEGINNING TO OTHER OTHER END OF
OF YEAR INCOME ACCOUNTS DEDUCTIONS YEAR
--------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Valuation allowance--deferred income tax
assets................................... $ 0 $ 681 $ 0 $ 0 $ 681
------ ------- ---- ----- -------
1998
Allowance for doubtful accounts............ $ 0 $ 140 $133 $ (39)(1) $ 234
------ ------- ---- ----- -------
Valuation allowance--deferred income tax
assets................................... $ 681 $ 5,118 $ 0 $ 0 $ 5,799
------ ------- ---- ----- -------
1999
Allowance for doubtful accounts............ $ 234 $ 561 $125 $(464)(1) $ 456
------ ------- ---- ----- -------
Valuation allowance--deferred income tax
assets................................... $5,799 $22,942 $ 0 $ 0 $28,741
------ ------- ---- ----- -------
</TABLE>
- ------------------------
(1) Accounts written off, net of recoveries.
All other schedules are omitted because they are not applicable or because
the required information is contained in the consolidated financial statements
or notes thereto included in this Registration Statement.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York on April 14, 2000.
<TABLE>
<S> <C> <C>
BIRCH TELECOM, INC.
By: /s/ BRADLEY A. MOLINE
-----------------------------------------
Bradley A. Moline
CHIEF FINANCIAL OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 14TH DAY OF APRIL, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- President and Chief Executive April 14, 2000
David E. Scott Officer
*
------------------------------------------- Executive Vice President and April 14, 2000
Donald H. Goldman Chief Operating Officer
Senior Vice President of
* Finance and Chief Financial
------------------------------------------- Officer (chief accounting and April 14, 2000
Bradley A. Moline financial officer)
*
------------------------------------------- Director April 14, 2000
Henry H. Bradley
*
------------------------------------------- Director April 14, 2000
Adam H. Clammer
*
------------------------------------------- Director April 14, 2000
James H. Greene, Jr.
*
------------------------------------------- Director April 14, 2000
Alexander Navab, Jr.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- Director April 14, 2000
Thomas R. Palmer
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ Gregory C. Lawhon
--------------------------------------
Name: Gregory C. Lawhon
TITLE: ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
Exhibit 1.1
12,500,000 SHARES
BIRCH TELECOM, INC.
COMMON STOCK
FORM OF UNDERWRITING AGREEMENT
April __, 2000
LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN AND JENRETTE
SECURITIES CORPORATION
FIRST UNION SECURITIES, INC.
J. P. MORGAN SECURITIES INC.
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS,
A DIVISION OF NATIONAL
FINANCIAL SERVICES CORPORATION
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
and
Bear, Stearns & Co. Inc.
245 Park Avenue, 18th Floor
New York, New York 10167
Ladies and Gentlemen:
Birch Telecom, Inc., a Delaware corporation (the "Company"),
proposes to sell 12,500,000 shares (the "Firm Stock") of the Company's Common
Stock, par value $.001 per share (the "Common Stock"). In addition, the Company
proposes to grant to the Underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional 1,875,000 shares of
the Common Stock on the terms and for the purposes set forth in Section 2 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company by the Underwriters named
in Schedule 1 hereto (the "Underwriters").
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents, warrants and agrees that:
<PAGE>
2
(a) A registration statement on Form S-1, and amendments thereto,
with respect to the Stock have (i) been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, (ii) been filed with the Commission under the Securities Act
and (iii) become effective under the Securities Act. Copies of such
registration statement and the amendments to such registration statement
have been delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this Agreement,
"Effective Time" means the date and the time as of which such registration
statement, or the most recent post-effective amendment thereto, if any,
was declared effective by the Commission; "Effective Date" means the date
of the Effective Time of such registration statement; "Preliminary
Prospectus" means each prospectus included in such registration statement,
or amendments thereof, before it became effective under the Securities Act
and any prospectus filed with the Commission by the Company with the
consent of the Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration statement,
as amended at its Effective Time, including all information contained in
the final prospectus filed with the Commission pursuant to Rule 424(b) of
the Rules and Regulations in accordance with Section 5(a) hereof and
deemed to be a part of the Registration Statement as of the Effective Time
pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and
"Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules
and Regulations. If the Company has filed an abbreviated registration
statement to register additional shares of Common Stock pursuant to Rule
462(b) under the Securities Act (the "Rule 462 Registration Statement"),
then any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462 Registration Statement. The Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus.
(b) (i) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus, when they become effective or are filed with the Commission,
as the case may be, will conform, in all material respects to the
requirements of the Securities Act and the Rules and Regulations and do
not and will not, as of the applicable effective date (as to the
Registration Statement and any amendment thereto) and as of the applicable
filing date (as to the Prospectus and any amendment or supplement thereto)
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; PROVIDED that no representation or
warranty is made as to information contained in or omitted from the
Registration Statement or the Prospectus in reliance upon and in
conformity with written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for
inclusion therein.
<PAGE>
3
(ii) The Prospectus, any Preliminary Prospectus and any
further amendments or supplements thereto, at their respective times of
issuance and at the closing date, complied and will comply in all material
respects with any applicable laws or regulations of foreign jurisdictions
in which the Prospectus and Preliminary Prospectus, as amended or
supplemented, if applicable, are distributed in connection with the offer
and sale of the Directed Shares (as hereinafter defined).
(c) The Company and each of its subsidiaries (as defined in Section
16) have been duly incorporated or organized and are validly existing as
corporations, limited liability companies or limited partnerships in good
standing under the laws of their respective jurisdictions of incorporation
or organization, are duly qualified to do business and are in good
standing as foreign corporations, limited liability companies or limited
partnerships in each jurisdiction in which their respective ownership or
lease of property or the conduct of their respective businesses requires
such qualifications except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries
taken as a whole (A "Material Adverse Effect") and have all corporate,
limited liability company or limited partnership power and authority
necessary to own or hold their respective properties and to conduct the
businesses as described in the Registration statement; and none of the
subsidiaries of the Company, except for Birch Telecom of Missouri, Inc.,
Birth Telecom of Kansas, Inc. and Birch Telecom of Texas Ltd., LLP, is a
"significant subsidiary" as such term is defined in Rule 405 of the Rules
and Regulations..
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and validly issued, are fully paid
and non-assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and
are fully paid and non-assessable and (except for directors' qualifying
shares and except as set forth in the Registration Statement with respect
to shares subject to liens under the Amended and Restated Credit
Agreement, dated as of February 2, 2000, by and among the Company, Birch
Telecom Finance, Inc., Lehman Brothers Inc., Lehman Commercial Paper Inc.,
Bankers Trust Company and Bank of America, Inc., as agents and lenders,
and the other lenders party thereto) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances, equities or
claims.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly authorized and, when
issued and delivered against payment therefor as provided herein, will be
validly issued, fully paid and non-assessable; and the Stock will conform
to the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered
by the Company.
(g) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement.
<PAGE>
4
(h) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute (including with the giving of notice or
lapse of time of both) a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries is bound or to which any of the properties or
assets of the Company or any of its subsidiaries is subject, except for
such conflicts, breaches or violations that would not have a Material
Adverse Effect, nor will such actions result in any violation of (i) the
provisions of the charter or by-laws of the Company or any of its
subsidiaries or (ii) any statute or any order, rule or regulation of any
court, arbitrator, regulatory body, administrative agency or other
governmental body or agency (including, without limitation, the Federal
Communications Commission (the "FCC") or any state regulatory agency with
direct regulatory jurisdiction over telecommunications matters in any
state in which the Company and any of its subsidiaries provides services
(each, a "State Regulatory Agency")) having jurisdiction over the Company
or any of its subsidiaries or any of their properties or assets, except
with respect to this clause (ii) only, for such violations that would not
have a Material Adverse Effect; and except for the registration of the
Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby other than such consents, approvals,
authorizations, orders, filings or registrations the failure of which to
make or obtain would not have a Material Adverse Effect.
(i) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to
any other registration statement filed by the Company under the Securities
Act.
(j) Except as described in the Registration Statement, the Company
has not sold or issued any shares of Common Stock during the six-month
period preceding the date of the Prospectus, including any sales pursuant
to Rule 144A under, or Regulations D or S of, the Securities Act; other
than shares issued pursuant to employee benefit plans, qualified stock
option plans or other employee compensation plans or pursuant to
outstanding options, rights or warrants.
<PAGE>
5
(k) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the Prospectus;
and, since such date, there has not been any change in the capital stock
or long-term debt of the Company on a consolidated basis or any material
adverse change, or any development involving a prospective material
adverse change, in or affecting the consolidated financial position,
results of operations or business prospects of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus.
(l) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at
the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved. The other financial
information and data filed as part of the Registration Statement or
included in the Prospectus is fairly presented and prepared on a basis
consistent with such financial statements and the books and records of the
Company.
(m) Ernst & Young LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who
have delivered the initial letter referred to in Section 7(h) hereof, are
independent public accountants under Rule 101 the Code of Professional
Conduct of the American Institute of Certified Public Accountants and its
interpretations and rulings.
(n) The Company and each of its subsidiaries have good and
marketable title in fee simple to all real property and good and
indefeasible title to all personal property owned by them, in each case
free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as would not have a Material Adverse
Effect; and all real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as would not have a Material
Adverse Effect.
(o) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
businesses in similar industries.
(p) The Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of their
respective businesses and have no reason to believe that the conduct of
their respective businesses will conflict with, and have not received any
notice of any claim of conflict with, any such rights of others, in each
case except as could not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
<PAGE>
6
(q) There are no legal or governmental proceedings (including,
without limitation, before the FCC or any State Regulatory Agency) pending
to which the Company or any of its subsidiaries is a party or of which any
property or asset of the Company or any of its subsidiaries is the subject
which are not disclosed in the Prospectus or which, if determined
adversely to the Company or any of its subsidiaries, would have a Material
Adverse Effect; and to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(r) Each of the Company and its subsidiaries has such permits,
licenses, franchises, certificates of need and other approvals or
authorizations of any governmental or regulatory authority (including,
without limitation, any Permits required by the FCC and any State
Regulatory Agency) ("Permits"), as are necessary under applicable law to
own its properties and to conduct its business in the manner described in
the Prospectus, except to the extent that the failure to have such Permits
would not, singly or in the aggregate, have a Material Adverse Effect.
Each of such Permits is, and upon completion of the transactions
contemplated by this Agreement and the Prospectus will be, in full force
and effect. Each of the Company and its subsidiaries has fulfilled and
performed, in all material respects, all its obligations with respect to
the Permits, and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such
Permit, subject in each case to such qualifications as may be set forth in
the Prospectus and except to the extent that any such revocation or
termination would not, singly or in the aggregate, have a Material Adverse
Effect. Except as described in the Prospectus, none of the Permits
contains any restriction that has not previously been satisfied and that
is materially burdensome to the Company or any of its subsidiaries. None
of the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of, or denial of
any application for, any such Permit, and the Company has no knowledge
that the relevant authorities have threatened any such proceeding.
(s) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted
by the Rules and Regulations.
(t) No material relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(u) No strike, job action or labor dispute with any group of
employees of the Company exists or, to the knowledge of the Company, is
imminent which might be expected to have a Material Adverse Effect.
<PAGE>
7
(v) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension
plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986,
as amended, including the regulations and published interpretations
thereunder (the "Code"); and each "pension plan" for which the Company
would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing
has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(w) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company or any of its subsidiaries which has had (nor
does the Company have any knowledge of any tax deficiency which, if
determined adversely to the Company or any of its subsidiaries, would
have) a Material Adverse Effect.
(x) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted any
securities, (ii) incurred any material liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred in
the ordinary course of business, (iii) entered into any material
transaction not in the ordinary course of business or (iv) declared or
paid any dividend on its capital stock.
(y) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only
in accordance with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
<PAGE>
8
(z) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default, and no event has
occurred which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties or assets is subject
that would, singly or in the aggregate, have a Material Adverse Effect or
(iii) is in violation of any law, ordinance, governmental rule, regulation
or court decree to which it or its properties or assets may be subject or
has failed to obtain any license, permit, certificate, franchise or other
governmental authorization or permit necessary to the ownership of its
properties or assets or to the conduct of its business that would, singly
or in the aggregate, have a Material Adverse Effect.
(aa) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or
acting on behalf of the Company or any of its subsidiaries, has used any
corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977; or made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment.
(bb) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of
its subsidiaries (or, to the knowledge of the Company, any of its
predecessors in interest) at, upon or from any of the properties now or
previously owned or leased by the Company or its subsidiaries in violation
of any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit or which would require remedial action under any
applicable law, ordinance, rule, regulation, order, judgment, decree or
permit, except for any violation or remedial action which would not have,
or would not be reasonably likely to have, singularly or in the aggregate
with all such violations and remedial actions, a Material Adverse Effect;
there has been no material spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical wastes,
solid wastes, hazardous wastes or hazardous substances due to or caused by
the Company or any of its subsidiaries or with respect to which the
Company or any of its subsidiaries have knowledge, except for any such
spill, discharge, leak, emission, injection, escape, dumping or release
which would not have or would not be reasonably likely to have, singularly
or in the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a Material Adverse Effect; and
the terms "hazardous wastes," "toxic wastes," "hazardous substances" and
"medical wastes" shall have the meanings specified in any applicable
local, state, federal and foreign laws or regulations with respect to
environmental protection.
(cc) Neither the Company nor any of its subsidiaries is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the Commission
thereunder (the "Investment Company Act").
(dd) Neither the Company, nor to its knowledge, any of its
affiliates, has taken, directly or indirectly, any action designed to
cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of
the shares of Common Stock (including the Stock) to facilitate the sale or
resale of such shares.
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9
(ee) Except as set forth in the Registration Statement, there are no
affiliations or associations between any member of the National
Association of Securities Dealers, Inc. ("NASD") and any of the Company's
officers or directors or stockholders that own at least five percent of
the aggregate number of outstanding shares of Common Stock.
2. PURCHASE OF THE STOCK BY THE UNDERWRITERS. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 12,500,000 shares of
the Firm Stock to the several Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set opposite that Underwriter's name in Schedule 1 hereto. The respective
purchase obligations of the Underwriters with respect to the Firm Stock shall be
rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 1,875,000 shares of Option Stock. Such option is granted solely
for the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 4 hereof. Shares of Option Stock shall be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts.
The price of both the Firm Stock and any Option Stock shall be
$_____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on the First Delivery Date or the Second Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
3. OFFERING OF STOCK BY THE UNDERWRITERS.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus; PROVIDED, HOWEVER, that no
Stock registered pursuant to the Rule 462(b) Registration Statement, if any,
shall be offered prior to the Effective Time thereof.
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10
4. DELIVERY OF AND PAYMENT FOR THE STOCK. Delivery of and payment
for the Firm Stock shall be made at the offices of Simpson Thacher & Bartlett,
425 Lexington Avenue, New York, New York 10017, at 10:00 A.M., New York City
time, on the fourth full business day following the date of this Agreement or at
such other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to as
the "First Delivery Date." On the First Delivery Date, the Company shall deliver
or cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer of immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be
registered in such names and in such denominations as the Representatives shall
request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the Firm Stock, the Company shall make the certificates
representing the Firm Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement, the option granted in Section 2 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; PROVIDED, HOWEVER, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer of immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall
be registered in such names and in such denominations as the Representatives
shall request in the aforesaid written notice. For the purpose of expediting the
checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the Second Delivery Date.
5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees:
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11
(a) To prepare the Rule 462(b) Registration Statement, if necessary,
in a form approved by the Representatives and to file such Rule 462(b)
Registration Statement with the Commission on the date hereof; to prepare
the Prospectus in a form approved by the Representatives and to file such
Prospectus pursuant to Rule 424(b) under the Securities Act not later than
10:00 A.M., New York City time, on the day following the execution and
delivery of this Agreement; to make no further amendment or any supplement
to the Registration Statement or to the Prospectus except as permitted
herein; to advise the Representatives, promptly after it receives notice
thereof, of the time when any amendment to either Registration Statement
has been filed or becomes effective or any supplement to the Prospectus or
any amended Prospectus has been filed and to furnish the Representatives
with copies thereof; to advise the Representatives, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the qualification of
the Stock for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by
the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of each of the Registration
Statement as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith;
(c) To deliver promptly to the Representatives in New York City such
number of the following documents as the Representatives shall request:
(i) conformed copies of the Registration Statement as originally filed
with the Commission and each amendment thereto (in each case excluding
exhibits other than this Agreement and the computation of per share
earnings) and (ii) each Preliminary Prospectus, the Prospectus (not later
than 10:00 A.M., New York City time, on the day following the execution
and delivery of this Agreement) and any amended or supplemented Prospectus
(not later than 10:00 A.M., New York City time, on the day following the
date of such amendment or supplement); and, if the delivery of a
prospectus is required at any time after the Effective Time in connection
with the offering or sale of the Stock (or any other securities relating
thereto) and if at such time any event shall have occurred as a result of
which the Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply with
the Securities Act, to notify the Representatives and, upon their request,
to prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as the Representatives may from time
to time request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission (i) any amendment to the
Registration Statement or supplement to the Prospectus or (ii) any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a
copy thereof to the Representatives and counsel for the Underwriters and
obtain the consent of the Representatives to the filing (which consent may
not be unreasonably withheld);
<PAGE>
12
(f) As soon as practicable after the Effective Date (it being
understood that the Company shall have until at least 410 days after the
end of the Company's current fiscal quarter), to make generally available
to the Company's security holders and to deliver to the Representatives an
earning statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Securities Act and the Rules
and Regulations (including, at the option of the Company, Rule 158);
(g) Until completion of the distribution contemplated hereby and for
a period of five years following the Effective Date, to furnish to the
Representatives copies of all materials furnished by the Company to its
stockholders and all public reports and all reports and financial
statements furnished by the Company to the principal national securities
exchange or automatic quotation system upon which the Common Stock may be
listed or quoted pursuant to requirements of or agreements with such
exchange or system or to the Commission pursuant to the Exchange Act or
any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service
of process in any jurisdiction;
<PAGE>
13
(i) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly (whether any transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise) (1)
offer for sale, sell, grant any option for the sale of, pledge, make any
short sale or maintain any short position, establish or maintain a "put
equivalent position" (within the meaning of Rule 16a-1(h) under the
Exchange Act) or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the
disposition or purchase by any person at any time in the future of) any
shares of Common Stock (including, without limitation, shares of Common
Stock that may be deemed to be beneficially owned in accordance with the
rules or regulations of the Commission and shares of Common Stock that may
be issued upon exercise of any option or warrant) or securities
convertible into or exchangeable for Common Stock or substantially similar
securities (other than the Stock, the shares of Common Stock to be issued
concurrently with the closing of this offering upon the mandatory
conversion of the Company's outstanding preferred stock and shares of
Common Stock issued pursuant to employee benefit plans, qualified stock
option plans or other employee compensation plans existing on the date
hereof or under currently outstanding options, warrants or rights) or sell
or grant options, rights or warrants with respect to any shares of Common
Stock or securities convertible into or exchangeable for Common Stock or
substantially similar securities (other than the grant of options under
option plans existing on the date hereof), (2) enter into any swap or
other derivatives transaction that transfers to another, in whole or in
part, any of the economic benefits or risks of ownership of such shares of
Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, in each case without the prior written consent of
Lehman Brothers Inc. and Bear, Stearns & Co. Inc.; and to cause each
officer and director of the Company and certain stockholders of the
Company who beneficially own in the aggregate over 75% of the Company's
outstanding share capital to furnish to the Representatives, prior to the
First Delivery Date, a letter or letters, in the form of Annex A hereto (a
"Lock-up Agreement");
(j) To deliver a 180-day lock-up request to (i) each of the
stockholders of the Company parties to the Amended and Restated Purchasers
Rights Agreement by and among the Company and certain purchaser of capital
stock of the Company, dated as of March 30, 2000 (the "Purchasers Rights
Agreement"), pursuant to Section 2.10 of the Purchasers Rights Agreement,
which request shall be delivered jointly on behalf of the Company, Lehman
Brothers Inc. and Bear, Stearns & Co. Inc. and (ii) all employees of the
Company who have been granted options under the Company's employee
Benefits Plans;
(k) Prior to the Effective Date, to apply for inclusion of the Stock
in the National Market System and to use its best efforts to complete that
process, subject only to official notice of issuance, prior to the First
Delivery Date;
(l) To apply the net proceeds from the sale of the Stock being sold
by the Company as set forth in the Prospectus;
(m) To take such steps as shall be necessary to ensure that neither
the Company nor any of its subsidiaries shall become an "investment
company" within the meaning of such term under the Investment Company Act;
(n) During the period of 180 days from the date of the Prospectus,
to obtain an executed letter in the form of Annex A hereto from each
officer and director who has not previously executed such a letter and to
use all reasonable efforts to obtain from each other stockholder of the
Company who exercises options to purchase shares of Common Stock and who,
upon any such exercise, would beneficially own 1% or more of the Company's
outstanding share capital, an executed Lock-up Agreement;
(o) Not to take, directly or indirectly, any action designed to
cause or result in, or which constitutes or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of
the shares of Common Stock (including the Stock) to facilitate the sale or
resale of such shares; and
(p) To take such steps as shall be necessary to ensure that the
Directed Shares are restricted as required by the NASD or the rules and
regulations of the NASD from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Agreement.
<PAGE>
14
(q) During the period of 180 days from the date of the Prospectus,
not to amend or consent to, or otherwise permit the amendment of Section
2.10 of the Purchasers Rights Agreement or the lock-up or similar
provisions of the Company's employee benefit and stock option plans.
6a EXPENSES. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of reproducing and distributing this Agreement;
(e) the costs of distributing the terms of agreement relating to the
organization of the underwriting syndicate and selling group to the members
thereof by mail, telex or other means of communication; (f) the filing fees
incident to securing any required review by the NASD of the terms of sale of the
Stock; (g) any applicable listing or other fees; (h) the fees and expenses of
qualifying the Stock under the securities laws of the several jurisdictions as
provided in Section 5(h) of preparing, printing and distributing a Blue Sky
Memorandum (including related fees and expenses of counsel to the Underwriters);
(i) all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and sale of
shares of the Stock by the Underwriters to employees and persons having business
relationships with the Company, as described in Section 9; (j) the costs and
expenses of the Company (excluding costs and expenses of the Underwriters and
their representatives) relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Stock
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants (other than
representatives of the Underwriters) engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such
consultants, and the Company's share of the cost of any aircraft chartered in
connection with the road show and (k) all other costs and expenses incident to
the performance of the obligations of the Company under this Agreement; PROVIDED
that, except as provided in this Section 6 and in Sections 9 and 12 , the
Underwriters shall pay their own costs and expenses, including the costs and
expenses of their counsel, any transfer taxes on the Stock which they may sell
and the expenses of advertising any offering of the Stock made by the
Underwriters.
7a CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective
obligations of the Underwriters hereunder are subject to (x) the accuracy, when
made and on each Delivery Date, of the representations and warranties of the
Company contained herein (provided, that in the case of this clause (x), the
obligations of the Underwriters hereunder shall be subject to the accuracy in
all material respects of those representations and warranties that are not
qualified by material adverse effect), (y) to the performance in all material
respects by the Company of its obligations hereunder and (z) to each of the
following additional terms and conditions:
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15
(a) The Rule 462(b) Registration Statement, if any, and the
Prospectus shall have been timely filed with the Commission in accordance
with Section 5(a); no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement or the Prospectus or otherwise
shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration Statement
or the Prospectus or any amendment or supplement thereto contains any
untrue statement of a fact which, in the opinion of Simpson Thacher &
Bartlett, counsel for the Underwriters, is material or omits to state any
fact which, in the opinion of such counsel, is material and is required to
be stated therein or is necessary to made the statements therein not
misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Registration
Statement and the Prospectus, and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be satisfactory
in all respects to counsel for the Underwriters, and the Company shall
have furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) Latham & Watkins shall have furnished to the Representatives
their written opinion, as counsel to the Company, addressed to the
Underwriters and dated such Delivery Date, in form and substance
satisfactory to the Representatives, substantially in the form of Exhibit
A hereto.
(e) Gregory C. Lawhon, Senior Vice President of Public Policy and
General Counsel of the Company, shall have furnished to the
Representatives a written opinion, addressed to the Underwriters and dated
such Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that:
(i) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries (a) is in violation of its
charter or by-laws, (b) is in default under any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to
which it is a party or by which it is bound or to which any of its
properties or assets is subject or (c) is in violation of any law,
ordinance, court decree, rule or regulation of any court,
arbitrator, regulatory body, administrative agency or other
governmental body or agency (including, without limitation, the FCC
or any State Regulatory Agency) having jurisdiction over it or any
of its properties or assets, except in the case of clauses (b) and
(c) for such violations or defaults that, individually or in the
aggregate, would not have a Material Adverse Effect;
<PAGE>
16
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company (including the shares of Stock being delivered on such
Delivery Date) have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued and are fully paid, non-assessable and (except
for directors' qualifying shares and except as set forth in the
Registration Statement with respect to shares subject to liens under
the Amended and Restated Credit Agreement, dated as of February 2,
2000, by and among the Company, Birch Telecom Finance, Inc., Lehman
Brothers Inc., Lehman Commercial Paper Inc., Bankers Trust Company
and Bank of America, Inc., as agents and lenders, and the other
lenders party thereto) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or
claims;
(iii) Each of the Company and its subsidiaries has such
Permits (including, without limitation, any permits required by the
FCC and any State Regulatory Agency), as are necessary under
applicable law to own its properties and to conduct its business in
the manner described in the Prospectus, except to the extent that
the failure to have such Permits would not have a Material Adverse
Effect. Each of such Permits is, and upon completion of the
transactions contemplated by this Agreement and the Prospectus will
be, in full force and effect and is fairly described in the
Prospectus. Each of the Company and its subsidiaries has fulfilled
and performed, in all material respects, all its obligations with
respect to the Permits, and to the best of such counsel's knowledge,
no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any
other material impairment of the rights of the holder of any such
Permit, subject in each case to such qualifications as may be set
forth in the Prospectus and except to the extent that any such
revocation or termination would not have a Material Adverse Effect.
Except as described in the Prospectus, none of the Permits contains
any restriction that has not previously been satisfied and that is
materially burdensome to the Company or any of its subsidiaries. To
the best of such counsel's knowledge, none of the Company nor any of
its subsidiaries has received any notice of proceedings relating to
the revocation or modification of, or denial of any application for,
any such Permit;
(iv) None of the Company nor any of its subsidiaries is
subject to any pending complaint or investigation before the FCC or
any State Regulatory Agency or, to the best of such counsel's
knowledge, to any threatened complaint or investigation before the
FCC or any State Regulatory Agency, based on any alleged violation
by the Company or any of its subsidiaries in connection with their
provision of or failure to provide telecommunications services,
which complaint or investigation, if determined adversely to the
Company or any of its subsidiaries, would have a Material Adverse
Effect; and
<PAGE>
17
(v) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property or asset of the Company or any
of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries, might have a material
adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company
and its subsidiaries; and, to the best of such counsel's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(f) Dickstein Shapiro Morin & Oshinsky LLP shall have furnished to
the Representatives its written opinion, as U.S. communications regulatory
counsel to the Company, addressed to the Underwriters and dated such
Delivery Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that the statements contained in the
Prospectus under the captions "Regulation" and "Risk Factors--Federal
Communications Commission and state regulations may limit the services we
can offer or impact our ability to conduct our business" (other than those
statements purporting to express the Company's beliefs, as to which such
counsel need express no opinion), insofar as such statements purport to
constitute summaries of matters of U.S. federal and/or state law,
constitute fair summaries of the matters described therein, which are
accurate in all material respects.
(g) The Representatives shall have received from Simpson Thacher &
Bartlett, counsel for the Underwriters, such opinion or opinions, dated
such Delivery Date, with respect to the issuance and sale of the Stock,
the Registration Statement, the Prospectus and other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request for
the purpose of enabling them to pass upon such matters.
(h) At the time of execution of this Agreement, the Representatives
shall have received from Ernst & Young LLP a letter, in form and substance
satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, and (ii)
stating, as of the date hereof (or, with respect to matters involving
changes or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not more
than five days prior to the date hereof), the conclusions and findings of
such firm with respect to the financial information and other matters
ordinarily covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
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(i) With respect to the letter of Ernst & Young LLP referred to in
the preceding paragraph and delivered to the Representatives concurrently
with the execution of this Agreement (the "initial letter"), the Company
shall have furnished to the Representatives a letter (the "bring-down
letter") of such accountants, addressed to the Underwriters and dated such
Delivery Date (i) confirming that they are independent public accountants
within the meaning of the Securities Act and are in compliance with the
applicable requirements relating to the qualification of accountants under
Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the
date of the bring-down letter (or, with respect to matters involving
changes or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not more
than five days prior to the date of the bring-down letter), the
conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and findings set forth
in the initial letter.
(j) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating
that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date
(provided, that such representations, warranties and agreements that
are not qualified by material adverse effect shall be true and
correct in all material respects); the Company has complied in all
material respects with all its agreements contained herein; and the
conditions set forth in Section 7(a) and 7(k) have been fulfilled;
and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective
Date, the Registration Statement and the Prospectus did not include
any untrue statement of a material fact and did not omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading, and (B) since the Effective
Date, no event has occurred which should have been set forth in a
supplement or amendment to the Registration Statement or the
Prospectus.
(k) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus or (ii) since such date there shall not have been any change in
the capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective
change, in or affecting the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, otherwise than
as set forth or contemplated in the Prospectus, the effect of which, in
any such case described in clause (i) or (ii), is, in the judgment of the
Representatives, so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Stock being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
<PAGE>
19
(l) Subsequent to the execution and delivery of this Agreement (i)
no downgrading shall have occurred in the rating accorded the Company's
debt securities by any "nationally recognized statistical rating
organization", as that term is defined by the Commission for purposes of
Rule 436(g)(2) of the Rules and Regulations and (ii) no such organization
shall have publicly announced that it has under surveillance or review,
with possible negative implications, its rating of any of the Company's
debt securities.
(m) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or
in the over-the-counter market, or trading in any securities of the
Company on any exchange or in the over-the-counter market, shall have been
suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any
other regulatory body or governmental authority having jurisdiction, (ii)
a banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the Stock
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(n) The Nasdaq National Market System shall have approved the Stock
for inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
(o) The directors and executive officers of the Company and certain
stockholders of the Company who beneficially own in the aggregate over 75%
of the Company's outstanding share capital shall have each entered into a
Lock-up Agreement, and executed originals of each Lock-up Agreement shall
have been delivered to the Representatives.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance satisfactory to counsel
for the Underwriters.
8a INDEMNIFICATION AND CONTRIBUTION.
<PAGE>
20
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any amendment or supplement thereto, (B) in
any materials or information provided to investors by, or with the approval of,
the Company in connection with the marketing of the offering of the Stock
("Marketing Materials"), including any roadshow or investor presentations made
to investors by the Company (whether in person or electronically), or (C) in any
blue sky application or other document prepared or executed by the Company (or
based upon any written information furnished by the Company) specifically for
the purpose of qualifying any or all of the Stock under the securities laws of
any state or other jurisdiction (any such application, document or information
being hereinafter called a "Blue Sky Application"), (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, in any Marketing
Materials or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act, or any alleged act or failure to act, by any Underwriter
in connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (PROVIDED that the Company shall not be
liable in the case of any matter covered by this clause (iii) to the extent that
it is determined in a final judgement by a court of competent jurisdiction that
such loss, claim, damage, liability or action resulted directly from any such
act or failure to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or wilful misconduct), and shall reimburse each
Underwriter and each such officer, employee and controlling person promptly upon
demand for any legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred; PROVIDED, HOWEVER, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or in
any such amendment or supplement, in any Marketing Materials or in any Blue Sky
Application in reliance upon and in conformity with the written information
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein and described in Section 8(e).
The foregoing indemnity agreement is in addition to any liability which the
Company may otherwise have to any Underwriter or to any officer, employee or
controlling person of that Underwriter.
<PAGE>
21
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company its officers and employees, each of its directors and
each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, (B) any Marketing Materials or (C) in any Blue Sky Application or (ii)
the omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, in any Marketing Materials or in any Blue Sky Application any material
fact required to be stated therein or necessary to make the statements therein
not misleading, but in each case only to the extent that the untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with the written information furnished to the Company
through the Representatives by or on behalf of that Underwriter specifically for
inclusion therein and described in Section 8(e), and shall reimburse the Company
and any such director, officer or controlling person for any legal or other
expenses reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to the Company or any such
director, officer or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; PROVIDED, HOWEVER, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, PROVIDED FURTHER, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; PROVIDED, HOWEVER, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment of the
Representatives, it is advisable for the Representatives and those Underwriters,
officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with its written
consent or if there be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss of liability by reason of such settlement or judgment.
<PAGE>
22
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Stock or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company on the one hand and the Underwriters on the
other with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other with respect to such offering
shall be deemed to be in the same proportion as the total net proceeds from the
offering of the Stock purchased under this Agreement (before deducting expenses)
received by the Company, on the one hand, and the total underwriting discounts
and commissions received by the Underwriters with respect to the shares of the
Stock purchased under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 8(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 8(d) shall be
deemed to include, for purposes of this Section 8(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Stock
underwritten by it and distributed to the public was offered to the public
exceeds the amount of any damages which such Underwriter has otherwise paid or
become liable to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 8(d) are several in proportion to their respective underwriting
obligations and not joint.
<PAGE>
23
(e) The Underwriters severally confirm that the statements with
respect to the public offering of the Stock set forth on the cover page of, and
the concession and reallowance figures and the statements concerning
over-allotments appearing under the caption "Underwriting" in the Prospectus are
correct and constitute the only information furnished in writing to the Company
by or on behalf of the Underwriters specifically for inclusion in the
Registration Statement, the Prospectus and the Marketing Materials.
9a DIRECTED SHARE PROGRAM.
It is understood that approximately 1,250,000 shares of the Firm
Stock ("Directed Shares") will initially be reserved by the Underwriters for
offer and sale to employees and persons having business relationships with the
Company and its respective subsidiaries ("Directed Share Participants") upon the
terms and conditions set forth in the Prospectus and in accordance with the
rules and regulations of the NASD (the "Directed Share Program"). Under no
circumstances will any Underwriter be liable to the Company or to any Directed
Share Participant for any action taken or omitted to be taken in good faith in
connection with such Directed Share Program. To the extent that any Directed
Shares are not affirmatively reconfirmed for purchase by any Directed Share
Participant on or immediately after the date of this Agreement, such Directed
Shares may be offered to the public as part of the public offering contemplated
hereby.
The Company agrees to cause each Directed Share Participant to
furnish to the Representatives, prior to the First Delivery Date, a Lock-up
Agreement. The Company agrees and upon notification of which persons need to be
so restricted, to direct the transfer agent, at the request of the Underwriters,
to place a stop transfer restriction upon such securities for such a period of
time, and should the Company release, or seek to release, from such restrictions
any of the Directed Shares, to reimburse the Underwriters for any reasonable
expenses (including without limitation legal expenses) they incur in connection
with such release.
The Company agrees to pay all fees and disbursements incurred by the
Underwriters in connection with the Directed Share Program, including counsel
fees and any stamp duties or other taxes incurred by the Underwriters in
connection with the Directed Share Program.
<PAGE>
24
In connection with the offer and sale of the Directed Shares, the
Company agrees promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any loss, claim, damage, expense,
liability or action which (i) arises out of, or is based upon, any untrue
statement or alleged untrue statement of a material fact contained in any
material prepared by or with the approval of the Company for distribution to
Directed Share Participants in connection with the Directed Share Program or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
arises out of the failure of any Directed Share Program participant to pay for
and accept delivery of Directed Shares that the Directed Share Participant
agreed to purchase, (iii) arises out of the failure of any Directed Shares
Participant that is also an employee of the Company to pay for and accept
delivery by the end of the first day after the date of this Agreement any
Directed Shares that were allocated to such employee Directed Share Participant,
(iv) arises out of, or is based upon, the violation of any applicable laws or
regulations of foreign jurisdictions where Directed Shares have been offered or
(v) is otherwise related to the Directed Share Program, other than losses,
claims, damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted directly from the bad faith or gross
negligence of such Underwriter.
10a DEFAULTING UNDERWRITERS.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
PROVIDED, HOWEVER, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of shares of the Stock which it agreed to purchase on such Delivery
Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded,
the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representatives
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such Delivery Date, this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase, and of the Company to sell, the Option Stock) shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company , except that the Company will continue to be liable for the payment of
expenses to the extent set forth in Sections 6, 9 and 12. As used in this
Agreement, the term "Underwriter" includes, for all purposes of this Agreement
unless the context requires otherwise, any party not listed in Schedule 1 hereto
who, pursuant to this Section 10, purchases Firm Stock which a defaulting
Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of
any liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the First Delivery Date for up to seven full business days in order to
effect any changes that in the opinion of counsel for the Company or counsel for
the Underwriters may be necessary in the Registration Statement, the Prospectus
or in any other document or arrangement.
11a TERMINATION. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(k), 7(l) , 7(m) or 7(n) shall
have occurred or if the Underwriters shall decline to purchase the Stock for any
reason permitted under this Agreement.
<PAGE>
25
12a REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) the Company
shall fail to tender the Stock for delivery to the Underwriters for any reason
permitted under this Agreement, or (b) the Underwriters shall decline to
purchase the Stock for any reason permitted under this Agreement (including the
termination of this Agreement pursuant to Section 11), the Company shall
reimburse the Underwriters for the reasonable fees and expenses of their counsel
and for such other out-of-pocket expenses as shall have been incurred by them in
connection with this Agreement and the proposed purchase of the Stock, and upon
demand the Company shall pay the full amount thereof to the Representatives. If
this Agreement is terminated pursuant to Section 10 by reason of the default of
one or more Underwriters, the Company shall not be obligated to reimburse any
defaulting Underwriter on account of those expenses.
13a NOTICES, ETC. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-528-8822) and Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, Attention _________; and
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Gregory C. Lawhon (Fax:
816-300-3247);
PROVIDED, HOWEVER, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc. and Bear, Stearns
& Co. Inc. on behalf of the Representatives.
14a PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company and
their respective successors. This Agreement and the terms and provisions hereof
are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the officers and
employees of each Underwriter and the person or persons, if any, who control
each Underwriter within the meaning of Section 15 of the Securities Act and (B)
the indemnity agreement of the Underwriters contained in Section 8(b) of this
Agreement shall be deemed to be for the benefit of directors, officers and
employees of the Company and any person controlling the Company within the
meaning of Section 15 of the Securities Act. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 14, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
<PAGE>
26
15a SURVIVAL. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
16a DEFINITION OF THE TERMS "BUSINESS DAY"AND "SUBSIDIARY". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
17a GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
18a COUNTERPARTS. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
19a HEADINGS. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
27
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
BIRCH TELECOM, INC.
By:
---------------------------------
Name: Bradley A. Moline
Title: Senior Vice President
and Chief Financial Officer
Accepted:
LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN AND JENRETTE
SECURITIES CORPORATION
FIRST UNION SECURITIES, INC.
J. P. MORGAN SECURITIES INC.
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS,
A DIVISION OF NATIONAL
FINANCIAL SERVICES CORPORATION
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By
-------------------------------
AUTHORIZED REPRESENTATIVE
By BEAR, STEARNS & CO. INC.
By
-------------------------------
AUTHORIZED REPRESENTATIVE
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ------
<S> <C>
Lehman Brothers Inc...........................
Bear, Stearns & Co. Inc.......................
Donaldson, Lufkin and Jenrette Securities
Corporation...................................
First Union Securities, Inc...................
J. P. Morgan Securities Inc...................
Thomas Weisel Partners LLC....................
Fidelity Capital Markets, a division of __________
National Financial
Services Corporation.......................... 12,500,000
==========
</TABLE>
<PAGE>
SCHEDULE 2
LIST OF SUBSIDIARIES
Birch Telecom of Kansas, Inc.
Birch Texas Holdings, Inc.
Birch Telecom of the Great Lakes, Inc.
Birch Internet Services, Inc.
Birch Telecom Finance, Inc.
Birch Equipment, Inc.
Birch Kansas Holdings, Inc.
Birch Telecom of Missouri, Inc.
Birch Telecom of Arizona, Inc.
Birch Telecom of Arkansas, Inc.
Birch Telecom of Oklahoma, Inc.
Birch Telecom of Nebraska, Inc.
<PAGE>
ANNEX A
LOCK-UP LETTER AGREEMENT
LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN AND JENRETTE SECURITIES CORPORATION
FIRST UNION SECURITIES, INC.
J. P. MORGAN SECURITIES INC.
THOMAS WEISEL PARTNERS LLC
FIDELITY CAPITAL MARKETS,
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION
as Representatives of the several Underwriters
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
and
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Shares") of Common Stock, par value $.001 per share (the "Common Stock"), of
Birch Telecom, Inc. (the "Company") and that the Underwriters propose to reoffer
the Shares to the public (the "Offering").
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that, without the prior written consent of Lehman
Brothers Inc. and Bear, Stearns & Co., Inc., the undersigned will not, directly
or indirectly, (1) offer for sale, sell, grant any option for the sale of,
pledge, make any short sale or maintain any short position, establish or
maintain a "put equivalent position" (within the meaning of Rule 16a-1(h) under
the Securities Exchange Act of 1934, as amended) or otherwise dispose of (or
enter into any transaction or device that is designed to, or could be expected
to, result in the disposition by any person at any time in the future of) any
shares of Common Stock (including, without limitation, shares of Common Stock
that may be deemed to be beneficially owned by the undersigned in accordance
with the rules and regulations of the Securities and Exchange Commission and
shares of Common Stock that may be issued upon exercise of any option or
warrant) or securities convertible into or exchangeable for Common Stock, or (2)
enter into any swap or other derivatives transaction that transfers to another,
in whole or in part, any of the economic benefits or risks of ownership of such
shares of Common Stock, whether any such transaction described in clause (1) or
(2) above is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, for a period of 180 days after the date of the final
Prospectus relating to the Offering.
<PAGE>
In furtherance of the foregoing, the Company and its Transfer Agent are
hereby authorized to decline to make any transfer of securities if such transfer
would constitute a violation or breach of this Lock-Up Letter Agreement, and in
the case of any securities for which the undersigned is the beneficial but not
the record holder, the undersigned agrees to cause the record holder to cause
the Company and its Transfer Agent to decline to make any transfer of securities
if such transfer would constitute a violation or breach of this Lock-Up
Agreement.
It is understood that, if the Company notifies you that it does not intend
to proceed with the Offering, if the Underwriting Agreement does not become
effective, or if the Underwriting Agreement (other than the provisions thereof
which survive termination) shall terminate or be terminated prior to payment for
and delivery of the Shares, the undersigned will be released from his, her or
its obligations under this Lock-Up Letter Agreement. This Lock-up Letter
Agreement shall terminate if the Offering is not completed by ___________, 2000.
The undersigned understands that the Company and the Underwriters will
proceed with the Offering in reliance on this Lock-Up Letter Agreement.
The undersigned further agrees, from the date hereof until the end of the
Lock-Up period, that the undersigned will not exercise and will waive his, her
or its rights, if any, to require the Company to register its Common Stock and
to receive notice thereof.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Letter Agreement and that,
upon request, the undersigned will execute any additional documents necessary in
connection with the enforcement hereof. Any obligations of the undersigned shall
be binding upon the heirs, personal representatives, successors and assigns of
the undersigned.
Very truly yours,
Dated: March __, 2000
<PAGE>
Exhibit 10.2
BIRCH TELECOM, INC.
AMENDED AND RESTATED PURCHASERS RIGHTS AGREEMENT
<PAGE>
AMENDED AND RESTATED
PURCHASERS RIGHTS AGREEMENT
THIS AMENDED AND RESTATED PURCHASERS RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of April 13, 2000 by and among BIRCH
TELECOM, INC., a Delaware corporation (the "Company"), and certain purchasers of
the Company's Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred (together, the
"Series Preferred"), and of the Company's Common Stock (the "Common Stock")
(including the purchasers of the Common Shares), and certain holders of stock
options, each as set forth on Exhibit A hereto. Such purchasers of the Series
Preferred and Common Stock and holders of stock options or Option Shares
(including members of Key Management) shall be referred to hereinafter as the
"Purchasers" and each individually as a "Purchaser."
RECITALS
WHEREAS, the Purchasers possess registration rights, information rights
and other rights pursuant to that certain Amended and Restated Purchaser Rights
Agreement, dated as of March 30, 1999, among the Company and the Purchasers (the
"Prior Agreement");
WHEREAS, the Purchasers desire to amend and restate the Prior
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereto further agree as follows:
1. CERTAIN DEFINITIONS.
Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed thereto in the Purchase Agreement. As used in this Agreement,
the following terms shall have the meanings set forth below:
(A) "AFFILIATE" shall have the meaning ascribed to such term
in Rule 12b-2 promulgated under the Exchange Act.
(B) "COMMISSION" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(C) "COMMON SHARES" shall mean the shares of the Company's
Common Stock issued pursuant to the Securities Purchase Agreement.
(D) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
<PAGE>
(E) "HOLDER" shall mean any Purchaser who holds Registrable
Securities and any holder of Registrable Securities to whom the registration
rights conferred by this Agreement have been transferred in compliance with
Section 2.9 and Section 3 hereof.
(F) "INITIATING HOLDERS" shall mean any Holder or Holders who
in the aggregate hold at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding Registrable Securities.
(G) "KEY MANAGEMENT" shall mean David E. Scott, Jeffrey D.
Shackelford, Gary L. Chesser, David W. Vranicar, Donald H. Goldman, Bradley A.
Moline and Gregory C. Lawhon.
(H) "1998 AGREEMENT" shall mean that certain Purchaser Rights
Agreement, dated as of February 10, 1998, among the Company and certain Persons.
(I) "OPTION SHARES" shall mean the shares of Common Stock
issued or issuable upon the exercise of stock options granted pursuant to a
stock option plan of the Company (including the vested and unvested shares of
Common Stock held by Key Management as of the date hereof that were obtained
pursuant to the exercise of stock options pursuant to a stock option plan of the
Company).
(J) "OTHER PURCHASERS" shall mean persons other than Holders
who, by virtue of agreements with the Company, are entitled to include their
securities in certain registrations hereunder.
(K) "QUALIFYING PUBLIC OFFERING" shall mean the closing of a
firmly underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
for the account of the Company in which the gross proceeds to the Company
(before underwriting discounts, commissions and fees) are at least $60,000,000.
(L) "PERSONS" shall mean any individual, corporation
(including non-profit corporation), general partnership, limited partnership,
limited liability partnership, joint venture, estate, trust, company, firm or
other enterprise, association, organization or entity, or any governmental body
or authority (federal, state or local).
(M) "REGISTRABLE SECURITIES" shall mean (i) the Common Shares
and fully vested Option Shares; and (ii) the shares of Common Stock issuable
upon the conversion of the Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock;
provided, however, that Registrable Securities shall not include any shares of
Common Stock which have previously been registered or which have been sold to
the public either pursuant to a registration statement or Rule 144, or which
have been sold in a private transaction in which the transferor's rights and
obligations under this Agreement are not assigned.
(N) The terms "REGISTER," "REGISTER" and "REGISTRATION" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the
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Securities Act and applicable rules and regulations thereunder, and the
declaration or ordering of the effectiveness of such registration statement.
(O) "REGISTRATION EXPENSES" shall mean all expenses incurred
in effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, and expenses of any regular or special audits incident to or
required by any such registration, but shall not include Selling Expenses.
(P) "RESTRICTED HOLDERS" shall mean the Purchasers set forth
on Exhibit B hereto.
(Q) "RESTRICTED SECURITIES" shall mean any Registrable
Securities required to bear the legend set forth in Section 3.4 hereof.
(R) "RULE 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(S) "RULE 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(T) "SECURITIES" shall mean (i) the Common Stock, (ii) the
Series Preferred, and (iii) the shares of Common Stock issuable upon the
conversion of the Series Preferred. Notwithstanding the foregoing, Securities
shall not include any shares of Common Stock that have been issued by the
Company pursuant to a registration statement or have been sold to the transferee
in a "public" sale pursuant to a registration statement or Rule 144, PROVIDED,
HOWEVER, that Securities sold to a transferee in a "public" sale pursuant to
Rule 144 that were sold by a Purchaser in an Exempt Transfer pursuant to
Sections 3.2(a), (b), (c), (d), (e), (f), (g) or (h) shall still be deemed to be
Securities.
(U) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(V) "SECURITIES PURCHASE AGREEMENT" shall mean that certain
Securities Purchase Agreement, dated as of February 10, 1998, by and among the
Company and certain of the Existing Purchasers, as the same may be amended and
in effect from time to time.
(W) "SELLING EXPENSES" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the sale of
Registrable Securities.
(X) "WARRANTS" shall mean the Company's issued and outstanding
Warrants to purchase 1,409,734 shares of Common Stock issued pursuant to the
Warrant Agreement, dated as of June 23, 1998, between the Company and Norwest
Bank Minnesota, National Association, as warrant agent.
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<PAGE>
References to BTI herein shall refer to BTI and each of its Affiliates,
including, without limitation, Kohlberg Kravis Roberts & Co. L.P. and the KKR
1996 Fund L.P.
2. REGISTRATION RIGHTS.
2.1 REQUESTED REGISTRATION.
(A) REQUEST FOR REGISTRATION. If the Company shall receive
from Initiating Holders at any time after the earlier of (I) five years after
the date of this Agreement or (II) one year after the effective date of the
first registration statement filed by the Company pursuant to the Securities Act
covering an underwritten offering of Common Stock to the general public, a
written request that the Company effect any registration with respect to all or
a part of the Registrable Securities, the Company will:
(I) promptly give written notice of the proposed
registration to all other Holders; and
(II) as soon as practicable, use its commercially
reasonable efforts to effect such registration (including, without limitation,
filing post-effective amendments, appropriate qualifications under applicable
blue sky or other state securities laws, and appropriate compliance with the
Securities Act) and as would permit or facilitate the sale and distribution of
all or such portion of such Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a written request
received by the Company within twenty (20) calendar days after such written
notice from the Company is given. The registration statement filed pursuant to
the request of the Initiating Holders may, subject to the provisions of Sections
2.1(e), include other securities of the Company, with respect to which
registration rights have been granted, and may include securities of the Company
being sold for the account of the Company.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 2.1(a):
(A) In any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration, qualification, or compliance, unless the Company
is already subject to service in such jurisdiction and except as may be required
by the Securities Act;
(B) After the Company has initiated one such
registration pursuant to this Section 2.1(a) (counting for these purposes only
registrations which have been declared or ordered effective and pursuant to
which securities have been sold and registrations which have been withdrawn by
the Holders as to which the Holders have not elected to bear the Registration
Expenses pursuant to Section 2.3 hereof and would, absent such election, have
been required to bear such expenses) or
(C) During the period starting with the date
sixty (60) days prior to the Company's good faith estimate of the date of filing
of, and ending on a date one hundred
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<PAGE>
eighty (180) days after the effective date of, a Company-initiated registration;
provided that the Company is actively employing in good faith all reasonable
efforts to cause such registration statement to become effective.
(B) SPECIAL DEMAND RIGHTS. After 180 days after the effective
date of the first registration statement filed by the Company pursuant to the
Securities Act covering an underwritten offering of Common Stock to the general
public, upon the written request of BTI (or its Affiliates or a transferee who
agrees to be bound by the terms of this Agreement) (a "BTI Demand"), that the
Company effect any registration with respect to all or a part of the Registrable
Securities held by such entity, the Company will:
(I) promptly give written notice of the proposed
registration to all other Holders; and
(II) as soon as practicable, use commercially
reasonable efforts to effect such registration (including, without limitation,
filing post-effective amendments, appropriate qualifications under applicable
blue sky or other state securities laws, and appropriate compliance with the
Securities Act) and as would permit or facilitate the sale and distribution of
all or such portion of such Registrable Securities as are specified in such
request (including shares of Common Stock issuable upon the conversion of Series
F Preferred Stock, if applicable), together with all or such portion of the
Registrable Securities of any Holder or Holders joining in such request as are
specified in a written request received by the Company within twenty (20)
calendar days after such written notice from the Company is given. The
registration statement filed pursuant to a BTI Demand may, subject to the
provisions of Sections 2.1(e), include other securities of the Company, with
respect to which registration rights have been granted, and may include
securities of the Company being sold for the account of the Company.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 2.1(b):
(A) In any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration, qualification, or compliance, unless the Company
is already subject to service in such jurisdiction and except as may be required
by the Securities Act;
(B) After the Company has initiated pursuant
to this Section 2.1(b) (i) two such registrations, if BTI has not exercised the
Option in full, and (iii) three such registration if BTI has exercised the
Option in full (counting for these purposes only registrations which have been
declared or ordered effective and pursuant to which at least 80% of the
securities requested to be sold by BTI have been sold);
(C) If the party making the BTI Demand holds
less than 5% of the outstanding shares of Common Stock (on an as converted
basis) at the time of such demand;
(D) During the period starting with the date
sixty (60) days prior to the Company's good faith estimate of the date of filing
of, and ending on a date one hundred eighty (180) days after the effective date
of, a Company-initiated registration; provided
5
<PAGE>
that the Company is actively employing in good faith all reasonable efforts to
cause such registration statement to become effective;
(C) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the requests contemplated in
Sections 2.1(a) and 2.1(b); provided, however, that if (I) in the good faith
judgment of the Board of Directors of the Company, such registration would be
seriously detrimental to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (II) the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company for such registration statement to be filed
in the near future and that it is, therefore, essential to defer the filing of
such registration statement, then the Company shall have the right to defer such
filing (except as provided in clause (C) above) for a period of not more than
one hundred twenty (120) days after receipt of the request of the Initiating
Holders or the BTI Demand, as the case may be, and, provided further, that the
Company shall not defer its obligation in this manner more than once in any
twelve-month period.
(D) UNDERWRITING. If the Holders requesting registration
intend to distribute the Registrable Securities covered by their request by
means of an underwriting, they shall so advise the Company as part of their
request made pursuant to Section 2.1(a) or 2.1(b) and the Company shall include
such information in the written notice referred to in Section 2.1(a)(i) and
Section 2.1(b)(i). In such event, the right of any Holder to registration
pursuant to Sections 2.1(a) or 2.1(b) shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. A
Holder may elect to include in such underwriting all or a part of the
Registrable Securities such Holder holds.
(E) PROCEDURES. If the Company shall request inclusion in any
registration pursuant to Sections 2.1(a) or 2.1(b) of securities being sold for
its own account, or if other persons shall request inclusion in any registration
pursuant to Sections 2.1(a) or 2.1(b), the Initiating Holders or the party
making the BTI Demand shall, on behalf of all Holders, offer to include such
securities in the underwriting and may condition such offer on their acceptance
of the further applicable provisions of this Section 2. The Company shall
(together with all Holders and other persons proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders, in the case of registrations pursuant to Section 2.1(a) or the entity
making the BTI Demand, in the case of registrations pursuant to Section 2.1(b),
which underwriters are reasonably acceptable to the Company. Notwithstanding any
other provision of this Section 2.1(e), if the representative of the
underwriters advises the Initiating Holders or the entity making the BTI Demand,
in writing that marketing factors require a limitation on the number of shares
to be underwritten, the number of shares to be included in the underwriting or
registration shall be allocated: first, to the Holders of Registrable Securities
pro rata based on the number of shares of Registrable Securities for which
registration was requested; and second, to the Company for securities being sold
for its own account; and finally, to the holders of other securities of the
Company with
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<PAGE>
registration rights pro rata based on the number of shares for which
registration was requested. The Company shall not limit the number of
Registrable Securities to be included in a registration statement pursuant to
this Section 2.1 in order to include shares held by Purchasers with no
registration rights or any other shares of stock issued to employees, officers,
directors or consultants pursuant to a stock option plan of the Company or in
order to include in such registration securities registered for the Company's
own account. If a person who has requested inclusion in such registration as
provided above does not agree to the terms of any such underwriting, such person
shall be excluded therefrom by written notice from the Company, the underwriter,
the Initiating Holders or BTI, as the case may be, and the securities so
excluded shall also be withdrawn from registration. Any Registrable Securities
or other securities excluded or withdrawn from such underwriting shall also be
withdrawn from such registration. If shares are so withdrawn from the
registration and if the number of shares to be included in such registration was
previously reduced as a result of marketing factors pursuant to this Section
2.1(e), then the Company shall offer to all holders who have retained rights to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number of
shares so withdrawn, with such shares to be allocated among such Holders
requesting additional inclusion in accordance with this Section 2.1(e).
2.2 COMPANY REGISTRATION.
(A) If the Company shall determine to register any of its
securities either for its own account or the account of a security holder or
holders exercising their respective demand registration rights (other than
pursuant to Section 2.1 hereof), other than a registration statement on Form S-8
relating solely to employee benefit plans, or a registration relating to a
corporate reorganization or other transaction under Rule 145, or a registration
on any registration form that does not permit secondary sales, the Company will:
(I) promptly give to each Holder written notice
thereof; and
(II) use its best efforts to include in such
registration (and any related qualification under blue sky laws or other
compliance), except as set forth in Section 2.2(b) below, and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made by any Holder and received by the Company
within ten (10) calendar days after the written notice from the Company
described in clause (i) above is given by the Company. Such written request may
specify all or a part of a Holder's Registrable Securities.
(B) UNDERWRITING. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.2(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 2.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected by the Company.
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<PAGE>
(C) Notwithstanding any other provision of this Section 2.2,
if the representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and underwriting. The
Company shall so advise all holders of securities requesting registration, and
the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated: first, to the Company for
securities being sold for its own account; second, to the Holders of Registrable
Securities pro rata based on the number of shares of Registrable Securities for
which registration was requested; and finally, to the holders of other
securities of the Company with registration rights pro rata based on the number
of Other Shares for which registration was requested. The Company shall not
limit the number of Registrable Securities to be included in a registration
pursuant to this Agreement in order to include shares held by Purchasers with no
registration rights or any other shares of stock issued to employees, officers,
directors, or consultants pursuant to a stock option plan of the Company, in
order to include in such registration securities registered for the Company's
own account. If any person does not agree to the terms of any such underwriting,
he shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
If shares are so withdrawn from the registration or if the number of shares of
Registrable Securities to be included in such registration was previously
reduced as a result of marketing factors, the Company shall then offer to all
persons who have retained the right to include securities in the registration
the right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among the persons requesting additional inclusion as set forth above.
2.3 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Sections 2.1 and 2.2 hereof and reasonable fees and expenses of one counsel for
the selling Holders shall be borne by the Company; provided, however, that if
the Holders bear the Registration Expenses for any registration proceeding begun
pursuant to Section 2.1(a) and subsequently withdrawn by the Holders registering
shares therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 2.1(a)(ii)(B) hereof. Furthermore, in the event
that a withdrawal by the Holders is based upon material adverse information
relating to the Company that is different from the information known or
available (upon request from the Company or otherwise) to the Holders requesting
registration at the time of their request for registration under Section 2.1,
such registration shall not be treated as a counted registration for purposes of
Section 2.1 hereof, even though the Holders do not bear the Registration
Expenses for such registration. All Selling Expenses relating to securities so
registered shall be borne by the holders of such securities pro rata on the
basis of the number of shares of securities so registered on their behalf, as
shall any other expenses in connection with the registration required to be
borne by the holders of such securities.
2.4 REGISTRATION PROCEDURES. In the case of each registration effected
by the Company pursuant to Section 2, the Company will keep each Holder advised
in writing as to the
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<PAGE>
initiation of each registration and as to the completion thereof. At its
expense, the Company will use commercially reasonable efforts to:
(A) Keep such registration effective for a period of one
hundred eighty (180) days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs; provided, however, that such 180-day period shall be extended for
a period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company;
(B) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(C) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request and provide the Holders,
underwriters and their respective counsel the opportunity to participate in the
preparation of such documents;
(D) Notify each seller of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(E) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed and use commercially reasonable efforts to
register and qualify the Registrable Securities under state securities laws or
blue sky laws of those jurisdictions within the United States and Puerto Rico as
shall be reasonably required in order to effect the distribution of the
Registrable Securities; provided, however, that the Company shall not for any
such purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the requirements of
this Section 2.4 be obligated to be so qualified or to consent to general
service of process in any such jurisdiction and provided that the Company shall
not be required to register or qualify such Registrable Securities in any
jurisdiction in which the Company would solely as a result thereof (i) become
subject to taxation, (ii) be required (or any shareholder would be required) to
escrow shares of Common Stock or be subject to other significant limitations on
its (or any such shareholder's) disposition of such shares or (iii) be required
to amend the terms of such public offering, in each case in a manner which is
materially adverse to the Company;
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(F) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration;
(G) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act; and
(H) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 2.1 hereof, the Company will
enter into an underwriting agreement in form reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions.
(I) Use its commercially reasonable efforts to obtain the
withdrawal of any stop order suspending the effectiveness of such registration
statement or any post-effective amendment thereto at the earliest practicable
date;
(J) Cause to be furnished, at the request of each Holder of
Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale in connection with a registration, if
such Registrable Securities are being sold through underwriters, or, if such
Registrable Securities are not being sold through underwriters, on the date that
the registration statement with respect to such Registrable Securities becomes
effective, (i) a signed counterpart of an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance reasonably satisfactory to such Holder, addressed to the
underwriters, if any, and to each Holder of Registrable Securities, and (ii) a
letter dated such date, signed by the independent certified public accountants
of the Company, in form and substance reasonably satisfactory to such Holder of
Registrable Securities, addressed to the underwriters, if any, and to such
Holder of Registrable Securities, covering substantially the same matters with
respect to such registration statement (and the prospectus included therein)
and, in the case of the independent certified public accountants' letter, with
respect to events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuers' counsel and in independent certified
public accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the independent certified public
accountants' letter, such other financial matters, and, in the case of the legal
opinion, such other legal matters, as such Holder (or the underwriters, if any)
may reasonably request; and
(K) Otherwise use commercially reasonable efforts to make
available the executive officers of the Company (including David Scott and
Bradley Moline) to participate in such "Road Shows" or other selling efforts as
may be reasonably requested by the Holders in connection with the distribution
of the Registrable Securities.
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2.5 INDEMNIFICATION.
(A) The Company will indemnify each Holder, each of its
officers, directors and partners, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification, or compliance has been
effected pursuant to this Section 2, and each underwriter, if any, and each
person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability, or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein. It is agreed that the indemnity agreement contained in this Section
2.5(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent has not been unreasonably withheld).
(B) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors, officers, partners, legal counsel, and accountants and each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Securities Act, each other such Holder and Other
Purchaser, and each of their officers, directors, and partners, and each person
controlling such Holder or Other Purchaser, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular, or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such Holders, Other Purchasers,
directors, officers, partners, legal counsel, and accountants, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use therein provided,
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<PAGE>
however, that the obligations of such Holder hereunder shall not apply to
amounts paid in settlement of any such claims, losses, damages, or liabilities
(or actions in respect thereof if such settlement is effected without the
consent of such Holder (which consent shall not be unreasonably withheld); and
provided that in no event shall any indemnity under this Section 2.5 exceed the
gross proceeds from the offering received by such Holder.
(C) Each party entitled to indemnification under this Section
2.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnifying Party otherwise agrees
or unless representation by the Indemnifying Party's counsel is inappropriate
due to actual or potential conflicts of interest), and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 2, to the
extent such failure is not prejudicial. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
(D) If the indemnification provided for in this Section 2.5 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(E) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
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<PAGE>
(F) Notwithstanding any of the foregoing, no Holder shall be
required to contribute any amount in excess of the amount of net proceeds
received by such Holder from the sale of Registrable Securities covered by such
registration statement and no person guilty of fraudulent misrepresentation
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
2.6 INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 2.
2.7 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and until four
years after the date of this Agreement, if the Company enters into any agreement
with any holder or prospective holder of any securities of the Company giving
such holder or prospective holder any registration rights the terms of which are
more favorable than the registration rights granted to the Holders hereunder,
then the Company shall give equivalent registration rights to the Holders.
2.8 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use commercially reasonable efforts to:
(A) Make and keep public information regarding the Company
available as those terms are understood and defined in Rule 144 under the
Securities Act, at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act filed by the
Company for an offering of its securities to the general public;
(B) File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act at any time after it has become subject to such reporting
requirements;
(C) So long as a Holder owns any Restricted Securities,
furnish to the Holder forthwith upon written request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 (at any
time from and after ninety (90) days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed as a Holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
2.9 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register securities granted to a Holder by the Company under this
Section 2 may be transferred or assigned by a Holder only to a transferee or
assignee of not less than 200,000 shares of Registrable Securities (as currently
constituted and subject to subsequent adjustments for stock splits, stock
dividends, reverse stock splits, and the like), provided that the Company is
given written notice prior to said transfer or assignment, stating the name and
address of the
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<PAGE>
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned, and, provided further,
that the transferee or assignee of such rights assumes in writing the
obligations of such Holder under this Agreement.
2.10 "MARKET STAND-OFF" AGREEMENT. If requested by the Company and an
underwriter of securities of the Company, a Purchaser shall not sell or
otherwise transfer or dispose of any securities of the Company held by such
Purchaser (other than those included in the registration) during the one hundred
eighty (180) day period following the effective date of a registration statement
of the Company filed under the Securities Act, provided that:
(A) such agreement shall only apply to the first such
registration statement of the Company, including securities to be sold on its
behalf to the public in an underwritten offering; and
(B) all officers and directors of the Company are bound by and
have entered into similar agreements.
The obligations described in this Section 2.10 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
2.11 DELAY OF REGISTRATION. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 2.
3. RESTRICTIONS ON TRANSFER.
3.1 TRANSFER. No Purchaser will, voluntarily or involuntarily, directly
or indirectly, sell, transfer, assign, donate, pledge or otherwise encumber or
dispose of any interest in all or any portion of the Securities or Option Shares
(a "Transfer") except pursuant to an Exempt Transfer.
3.2 EXEMPT TRANSFER. The restrictions contained in this Section 3 will
not apply to any Transfer which is one of the following "Exempt Transfers":
(A) the Transfer by a partnership to its partners or retired
partners in accordance with partnership interests;
(B) the Transfer by a corporation to its shareholders in
accordance with their interest in the corporation;
(C) the Transfer by a limited liability company to its members
in accordance with their interest in the limited liability company;
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<PAGE>
(D) the Transfer by a Purchaser to such Purchaser's spouse,
lineal descendant, father, mother, brother or sister ("Immediate Family");
(E) the Transfer by a Purchaser to a custodian or trustee for
the account of such Purchaser or such Purchaser's Immediate Family;
(F) the Transfer by a Purchaser (other than Transfers of
Option Shares by a member of Key Management) to any Affiliate of that Purchaser;
(G) the Transfer to the Company or any other Purchaser;
provided, however, that a member of Key Management may not Transfer any Option
Shares to the Company or any other Purchaser during the Key Management
Restricted Period (as defined below), except for Transfers to the Company in
payment of the exercise price of any stock option granted pursuant to a stock
option plan and/or option agreement of the Company;
(H) a bona fide pledge or mortgage with a commercial lending
institution that creates a mere security interest;
(I) pursuant to Section 5 or 6 of this Agreement; PROVIDED,
THAT:
(I) Transfers of fully vested Option Shares held by
Key Management may be made only after the fifth anniversary of the date of the
option grant pursuant to which such Option Shares were acquired (the "Key
Management Restricted Period"); provided, however, that prior to the end of the
applicable Key Management Restricted Period with respect to any fully vested
Option Shares, each member of Key Management may exercise its co-sale rights
under Section 6 on Transfers by BTI or its Affiliates; and
(II) Restricted Holders may not Transfer any of their
respective Securities under this subsection 3.2(i) for a period of three (3)
years from and including the closing date of the Company's first Qualifying
Public Offering (the "IPO Closing Date"); PROVIDED, HOWEVER, that:
(A) Restricted Holders may transfer during
each of the periods set forth below up to the percentage of their respective
Securities (not including any Option Shares held by Key Management) outstanding
on the IPO Closing Date set forth opposite such periods:
<TABLE>
<CAPTION>
Period (measured in
days from IPO Closing Date) Percentage
--------------------------- ----------
<S> <C>
1 through 180 0%
181 through 270 12.5%
271 through 365 12.5%
366 through 456 8.75%
457 through 546 8.75%
547 through 636 8.75%
637 through 730 8.75%
731 through 821 10%
15
<PAGE>
822 through 911 10%
912 through 1001 10%
1002 through 1095 10%
</TABLE>
(B) Any unused portion of the percentage of
Securities (not including any Option Shares held by Key Management) a Restricted
Holder may transfer pursuant to subsection 3.2(ii)(A) above for any given period
may be carried over and added to the percentage permitted to be transferred in a
subsequent period.
(J) pursuant to Section 2 or 7 of this Agreement; provided,
however, each member of Key Management acknowledges and agrees that he may not
Transfer any Option Shares pursuant to Section 2 until the expiration of the Key
Management Restricted Period, except that prior to the end of the applicable Key
Management Restricted Period with respect to any Option Shares, each member of
Key Management may request registration of fully vested Option Shares pursuant
to Section 2.1 or 2.2 in an amount equal to the product of (i) the number of
fully vested Option Shares then held by such member of Key Management and (ii)
the quotient determined by dividing (A) the total number of shares of Common
Stock requested by BTI or its Affiliates to be registered in such offering by
(B) the aggregate number of shares of Common Stock beneficially owned by BTI and
its Affiliates; or
(K) transfers of fully vested Option Shares held Key
Management that are made after a Qualifying Public Offering but before the fifth
anniversary of the date of the option grant pursuant to which such Option Shares
were acquired; provided, that (i) no more than ten percent (10%) of the fully
vested Option Shares held by any individual may be transferred in any given
calendar year pursuant to this Section 3.2(k), (ii) any unused portion of this
ten percent (10%) from a given calendar year may be carried over to, and be
available for transfers in, subsequent calendar years pursuant to this Section
3.2(k), and (iii) in no event can any individual transfer more than an aggregate
of twenty five percent (25%) of their fully vested Option Shares pursuant to
this Section 3.2(k).
3.3 SECURITIES LAWS; ASSIGNMENT OF OBLIGATIONS. In addition to any
other restriction on Transfer herein, such Purchaser will not effect any
Transfer (other than Transfers pursuant to Sections 2, 3.2(i) or 7 hereof) until
the transferee has agreed in writing to be bound by the terms of this Agreement,
at which time such transferee shall be a "Purchaser" for all purposes of this
Agreement, and:
(A) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(B) Such Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and if
reasonably requested by the Company, such Purchaser shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the
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<PAGE>
Securities Act; provided however, that it is agreed that the Company will not
require opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
3.4 LEGEND.
(A) Each certificate representing Securities shall (unless
otherwise permitted by the provisions of this Agreement) be stamped or otherwise
imprinted with legends substantially similar to the following (in addition to
any legend required under applicable state securities laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAW OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED TO EFFECTUATE
SUCH TRANSACTION.
THE SALE, TRANSFER OR PLEDGE OF THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A CERTAIN PURCHASER RIGHTS AGREEMENT BETWEEN THE COMPANY AND
CERTAIN HOLDERS OF ITS SECURITIES, AS THE SAME MAY BE AMENDED AND IN EFFECT FROM
TIME TO TIME. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO
THE SECRETARY OF THE COMPANY.
(B) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any Purchaser if the Purchaser shall
have obtained an opinion of counsel at such Purchaser's expense (which counsel
may be counsel to the Company) reasonably acceptable to the Company to the
effect that the securities proposed to be disposed of may lawfully be so
disposed of without registration, qualification or legend.
3.5 IMPROPER TRANSFER. Any attempt to Transfer any Securities or Option
Shares which is not in accordance with this Agreement shall be null and void,
and the Company shall not give any effect to such attempted Transfer in the
records of the Company.
4. PRE-EMPTIVE RIGHT.
4.1 PRE-EMPTIVE RIGHT. The Company hereby grants to each Purchaser who
owns shares of Series Preferred or Common Stock (such Purchasers referred to as
the "Pre-Emptive Purchasers") the right to purchase a pro rata portion of New
Securities (as defined in Section 4.2) which the Company may, from time to time,
propose to sell and issue (the "Pre-Emptive Right"). Such Pre-Emptive
Purchaser's pro rata share for purposes of this Pre-Emptive Right is the ratio
of the number of shares of Common Stock owned by such Pre-Emptive Purchaser (on
an as-converted, as-exercised basis) immediately prior to the issuance of New
Securities, to the total number of shares of Common Stock outstanding
immediately prior to the issuance of New Securities, assuming full conversion of
all securities and full exercise of all outstanding rights,
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<PAGE>
options and warrants to acquire Common Stock of the Company. Each Pre-Emptive
Purchaser exercising their portion of the Pre-Emptive Right in full (an
"Exercising Pre-Emptive Purchaser") shall have a right of over-allotment such
that if any other Pre-Emptive Purchaser fails to exercise its right hereunder to
purchase its pro rata share of New Securities (a "Non-Purchasing Pre-Emptive
Purchaser"), such Exercising Pre-Emptive Purchaser may purchase such portion, on
a pro rata basis, by giving written notice to the Company within ten (10)
calendar days from the date that the Company provides written notice of the
amount of New Securities such Non-Purchasing Pre-Emptive Purchasers have failed
to exercise their Pre-Emptive Rights hereunder. This Pre-Emptive Right shall be
subject to the following provisions of this Section 4.
4.2 NEW SECURITIES. "New Securities" shall mean any capital stock
(including Common Stock and/or Preferred Stock) of the Company whether now
authorized or not, and rights, options or warrants to purchase such capital
stock, and securities of any type whatsoever that are, or may become,
convertible into capital stock; provided that the term "New Securities" does not
include (i) securities purchased under the Securities Purchase Agreement, Series
D Purchase Agreement, dated July 2, 1999 (the "Series D Purchase Agreement"),
the plan of recapitalization adopted by the Board of Directors and stockholders
of the Company providing for the conversion of each share of the Series B
Preferred Stock into one share of Series B Preferred Stock and 0.22222 of a
share of Series E Preferred Stock (the "Series E Recapitalization") or Purchase
Agreement; (ii) securities issuable upon conversion or exercise of the
securities purchased under the Securities Purchase Agreement, Series D Purchase
Agreement, Series E Recapitalization or Purchase Agreement;(iii) securities
issued pursuant to the acquisition of another business entity or business
segment of any such entity by the Company by merger, purchase of substantially
all the assets or other reorganization whereby the Company will own more than
fifty percent (50%) of the voting power of such business entity or business
segment of any such entity; (iv) any borrowings, direct or indirect, from
financial institutions or other Persons by the Company, whether or not currently
authorized, including any type of loan or payment evidenced by any type of debt
instrument, provided such borrowings do not have any equity features including
warrants, options or other rights to purchase capital stock and are not
convertible into capital stock of the Company; (v) securities issued to
employees, consultants, officers or directors of the Company pursuant to any
stock option, stock purchase or stock bonus plan, agreement or arrangement
approved by the Board of Directors; (vi) securities issued to vendors or
customers or to other Persons in similar commercial situations with the Company
if such issuance is approved by the Board of Directors; (vii) securities issued
in connection with obtaining lease financing, whether issued to a lessor,
guarantor or other Person; (viii) securities issued in connection with any stock
split, stock dividend or recapitalization of the Company; and (ix) securities
issuable upon the exercise of warrants pursuant to the Warrant Agreement, dated
June 23, 1998, between the Company and Norwest Bank Minnesota, National
Association,
4.3 NOTICE. In the event the Company proposes to undertake an issuance
of New Securities, it shall give each Pre-Emptive Purchaser written notice of
its intention, describing the type of New Securities, and their price and the
general terms upon which the Company proposes to issue the same. Each such
Pre-Emptive Purchaser shall have twenty (20) calendar days after any such notice
is given to agree to purchase such Pre-Emptive Purchaser's pro rata share of
such New Securities for the price and upon the terms specified in the notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.
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<PAGE>
4.4 SELLING PERIOD. In the event any Pre-Emptive Purchaser or
Exercising Pre-Emptive Purchaser fails to exercise fully the Pre-Emptive Right
within said twenty (20) day period and after the expiration of the 10-day period
for the exercise of the over-allotment provisions of Section 4.1, the Company
shall have one hundred twenty (120) calendar days thereafter to sell or enter
into an agreement (pursuant to which the sale of New Securities covered thereby
shall be closed, if at all, within one hundred twenty (120) calendar days from
the date of said agreement) to sell the New Securities respecting which any
Pre-Emptive Purchasers' or Exercising Pre-Emptive Purchasers' Pre-Emptive Right
option set forth in this Section 4 was not exercised, at a price and upon terms
no more favorable to the purchasers thereof than specified in the Company's
notice to the Pre-Emptive Purchasers pursuant to Section 4.3. In the event the
Company has not sold within said 120-day period or entered into an agreement to
sell the New Securities in accordance with the foregoing within said 120-day
period from the date of said agreement, the Company shall not thereafter issue
or sell any New Securities, without first again offering such securities to the
Pre-Emptive Purchasers in the manner provided in Section 4.3 above.
4.5 TRANSFER OF PRE-EMPTIVE RIGHT. The Pre-Emptive Right set forth in
this Section 4 may be transferred or assigned by a Pre-Emptive Purchaser only to
a transferee or assignee of not less than (i) 200,000 shares of Series B
Preferred Stock, (ii) 200,000 shares of Series C Preferred Stock, (iii) 200,000
shares of Series D Preferred Stock (iv) 200,000 shares of Series E Preferred
Stock, (v) 200,000 shares of Series F Preferred Stock or (vi) 200,000 shares of
Common Stock (in each case, as currently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits, and the
like), provided that the Company is given written notice prior to said transfer
or assignment, stating the name and address of the transferee or assignee and
identifying the securities with respect to which such Pre-Emptive Rights are
being transferred or assigned, and, provided further, that the transferee or
assignee of such rights assumes in writing the obligations of such Pre-Emptive
Purchaser under this Agreement.
4.6 TERMINATION OF PRE-EMPTIVE RIGHT. Notwithstanding any other
provision of this Article 4, no Purchaser shall have any Pre-Emptive Right
pursuant to this Agreement or otherwise with respect to the Company's initial
public offering of its common stock pursuant to a registration statement on Form
S-1 or Form S-3, and the Purchasers shall no longer have any Pre-Emptive Right
pursuant to this Agreement or otherwise after the Company's first Qualifying
Public Offering.
5. RIGHT OF FIRST REFUSAL.
5.1 RIGHT OF FIRST REFUSAL. Commencing on (i) the earlier of 180 days
after a Qualifying Public Offering and the third anniversary of the date of this
Agreement for Purchasers other than as provided in (ii), and (ii) the fifth
anniversary of the date of the option grant pursuant to which the fully vested
Option Shares held by members of Key Management were acquired, no Purchaser
shall sell, assign, pledge, or in any manner transfer any shares of capital
stock of the Company (whether now owned or hereafter acquired) or any right or
interest therein, whether voluntarily or by operation of law, or by gift or
otherwise, except as set forth herein:
19
<PAGE>
(A) If Purchaser desires to sell or otherwise transfer any
shares of capital stock, then such Purchaser (the "Section 5 Selling Purchaser")
shall give at least thirty (30) calendar days written notice thereof to the
Company and the other Purchasers. The notice shall name the proposed transferee
and state the number of shares of capital stock to be transferred, the proposed
consideration, and all other terms and conditions of the proposed transfer.
(B) For twenty (20) calendar days following receipt of such
notice, the Company shall have the option but not the obligation to purchase all
(but not less than all) of the shares of capital stock specified in the notice
at the price and upon the terms set forth in such notice; provided, however,
that, with the consent of the Section 5 Selling Purchaser, the Company shall
have the option to purchase a lesser portion of the shares of capital stock
specified in said notice at the price and upon the terms set forth therein. In
the event of a gift, property settlement or other transfer in which the proposed
transferee is not paying the full price for the shares of capital stock, and
that is not otherwise exempted from the provisions of this Section 5.1, the
price shall be deemed to be the fair market value of the capital stock at such
time as determined in good faith by the Board of Directors. In the event the
Company elects to purchase all of the shares of capital stock or, with consent
of the Section 5 Selling Purchaser, a lesser portion of the shares of capital
stock, it shall give written notice to the Section 5 Selling Purchaser of its
election and settlement for said shares of capital stock shall be made as
provided below in paragraph (d).
(C) If the Company does not elect to purchase the shares
specified in the notice, then the Company shall promptly provide written notice
to the Purchasers of such election (which in no event will be later than 20
calendar days following receipt of the notice referred to in Section 5.1(a)) and
the Purchasers may elect to purchase all (but not less than all) of the shares
by delivering written notice to the Company and the Section 5 Selling Purchaser
within ten (10) calendar days after notice is given by the Company.
(D) In the event the Company and/or any other Purchasers elect
to acquire any of the shares of capital stock of the Section 5 Selling Purchaser
as specified in said Section 5 Selling Purchaser's notice, the Secretary of the
Company shall so notify the Section 5 Selling Purchaser and settlement thereof
shall be made in cash within forty (40) days after the Secretary of the Company
receives said Section 5 Selling Purchaser's notice; provided that if the terms
of payment set forth in said Section 5 Selling Purchaser's notice were other
than cash against delivery, the Company and/or the other Purchasers shall pay
for said shares on the same terms and conditions set forth in said Section 5
Selling Purchaser's notice.
(E) In the event the Company and/or the other Purchasers do
not elect to acquire all of the shares of capital stock specified in the Section
5 Selling Purchaser's notice, said Section 5 Selling Purchaser may, within the
sixty-day period following the expiration of the rights granted to the Company
and/or the other Purchasers' herein, transfer the shares of capital stock
specified in said Section 5 Selling Purchaser's notice which were not acquired
by the Company and/or the other Purchasers as specified in said Section 5
Selling Purchaser's notice.
5.2 TRANSFER EXEMPT FROM RIGHT OF FIRST REFUSAL. Anything to the
contrary contained herein notwithstanding, the following transactions shall be
exempt from the provisions of this section:
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(A) A Purchaser's transfer to such Purchaser's Immediate
Family.
(B) A transfer to any custodian or trustee for the account of
such Purchaser or such Purchaser's Immediate Family.
(C) A Purchaser's bona fide pledge or mortgage with a
commercial lending institution creating a mere security interest.
(D) A corporate Purchaser's transfer of any or all of its
shares of capital stock to its stockholders in accordance with their interest in
the corporation.
(E) A transfer by a Purchaser which is a partnership to any or
all of its partners or retired partners in accordance with partnership
interests.
(F) A transfer by a Purchaser to any Affiliate of that
Purchaser.
(G) A transfer by a Purchaser which is a limited liability
company to its members in accordance with their interest in the limited
liability company.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this section, and there
shall be no further transfer of such stock except in accord with this section.
5.3 RIGHT OF FIRST REFUSAL AFTER A PUBLIC OFFERING. The foregoing right
of first refusal shall be modified after the closing of a Qualifying Public
Offering with respect to "public sales" pursuant to Rule 144 (including Rule
144(k)) under the Securities Act such that the Company shall have twenty-four
(24) hours to decide to exercise its right to purchase the shares specified in
the notice and to notify the Purchasers of its election and the Purchasers only
twenty-four (24) hours after such notice is given to exercise their election.
5.4 TRANSFER EXEMPT FROM FIRST REFUSAL RIGHT AFTER A PUBLIC OFFERING.
Anything to the contrary contained herein notwithstanding, any Transfer after
the closing of a Qualifying Public Offering by a Purchaser which in the
aggregate, over the term of this Agreement, amounts to no more than 10,000
shares of Series Preferred or Common Stock, shall be exempt from the provisions
of this Section 5.
6. CO-SALE RIGHT.
6.1 NOTICE. At any time after the third anniversary of the date of this
Agreement, if a Purchaser holding Series Preferred or Common Stock proposes to
sell or transfer any shares of Series Preferred or Common Stock ("Co-Sale
Stock") then such Purchaser (a "Section 6 Selling Purchaser") shall promptly
give written notice (the "Notice") simultaneously to the Company and to each of
the other Purchasers holding Series Preferred or Common Stock at least thirty
(30) calendar days prior to the closing of such sale or transfer. The Notice
shall describe in reasonable detail the proposed sale or transfer including,
without limitation, the number of shares of Co-Sale Stock to be sold or
transferred, the nature of such sale or transfer, the total consideration to be
paid to the Section 6 Selling Purchaser (including any consideration for the
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securities that is paid or to be paid under other arrangements with the Section
6 Selling Purchaser, including but not limited to, compensation for employment
or services in excess of the reasonable value of the Section 6 Selling
Purchaser's services), and the name and address of each prospective purchaser or
transferee.
6.2 NOTICE OF PARTICIPATION. Each Purchaser holding Series Preferred or
Common Stock shall have the right, exercisable upon written notice to the
Company within fifteen (15) calendar days after the Notice is given, to
participate in such sale of Co-Sale Stock on the same terms and conditions. Such
notice shall indicate the number of shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Common Stock such Purchaser wishes to sell under his or her
right to participate. To the extent one or more Purchasers exercises such right
of participation in accordance with the terms and conditions set forth in this
Section 6, the number of shares of Co-Sale Stock that may be sold in the
transaction shall be computed as set forth below. Each Purchaser desiring to
participate shall be referred to as a "Participant". If one or more Purchasers
become Participants, each Participant shall sell that number of shares of Series
Preferred or Common Stock equal to the product obtained by multiplying (a) the
aggregate number of shares of Co-Sale Stock by (b) a fraction the numerator of
which is the number of shares of Series Preferred or Common Stock owned by the
Participant or the Section 6 Selling Purchaser, as the case may be, at the time
of the sale of the transfer (on an as-converted to Common Stock basis) and the
denominator of which is the total number of shares of Series Preferred or Common
Stock owned by all Participants and the Section 6 Selling Purchaser at the time
of the sale or transfer (on an as-converted to Common Stock basis).
6.3 TRANSFER. Each Participant shall effect its participation in the
sale by promptly delivering to the Company for transfer to the prospective
purchaser one or more certificates, properly endorsed for transfer of the type
and number of shares of Series Preferred or Common Stock which such Participant
elects to sell. In the event the Participant holds the same type of stock as the
Section 6 Selling Purchaser intends to sell the Participant must sell that type
of stock.
6.4 ADDITIONAL TRANSFER PROVISIONS. The stock certificate or
certificates that the Participant delivers to the Company pursuant to Section
6.3 shall be transferred to the prospective purchaser in consummation of the
sale of the Series Preferred or Common Stock pursuant to the terms and
conditions specified in the Notice, and the Section 6 Selling Purchaser(s) shall
concurrently therewith remit to such Participant that portion of the sale
proceeds to which such Participant is entitled by reason of its participation in
such sale. To the extent that any prospective purchaser or purchasers prohibits
such assignment or otherwise refuses to purchase shares or other securities from
a Participant exercising its rights of co-sale hereunder, such Section 6 Selling
Purchaser(s) shall not sell to such prospective purchaser or purchasers any
Co-Sale Stock unless and until, simultaneously with such sale, such Section 6
Selling Purchaser(s) shall purchase such shares or other securities from such
Participant on the same terms and conditions specified in the Notice.
6.5 NO ELECTION TO PARTICIPATE. If none of the other Purchasers holding
Series Preferred or Common Stock to participate in the sale of the Co-Sale Stock
subject to the Notice, such Section 6 Selling Purchaser(s) may, not later than
sixty (60) calendar days following
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delivery to the Company of the Notice, enter into an agreement providing for the
closing of the transfer of the Co-Sale Stock covered by the Notice within thirty
(30) days of such agreement on terms and conditions not more favorable to the
transferor than those described in the Notice. Any proposed transfer on terms
and conditions more favorable than those described in the Notice, as well as any
subsequent proposed transfer of any of the Co-Sale Stock by a Section 6 Selling
Purchaser(s), shall again be subject to the co-sale rights of the Purchaser and
shall require compliance by such Section 6 Selling Purchaser(s) with the
procedures described in this Section 6.
6.6 TRANSFERS EXEMPT FROM CO-SALE RIGHT.
(A) Notwithstanding the foregoing, the co-sale rights of the
Purchaser shall not apply to (i) any transfer or transfers by a Section 6
Selling Purchaser(s) which in the aggregate, over the term of this Agreement,
amount to no more than 10,000 shares of Co-Sale Stock held by such holder, (ii)
any bona fide pledge or mortgage of Co-Sale Stock with a commercial lending
institution that creates a mere security interest, (iii) any transfer to the
Immediate Family of the holders of Co-Sale Stock, (iv) any transfer to a
custodian or trustee for the account of the holder of Co-Sale Stock or such
holder's Immediate Family, (v) any transfer or transfers by a holder of Co-Sale
Stock to another holder of Co-Sale Stock (the "Transferee-Holder") so long as
the Transferee-Holder is, at the time of the transfer, employed by, or acting as
a consultant or director of, the Company, (vi) any bona fide gift or (vii) any
transfer by any Purchaser to an Affiliate of such Purchaser; provided that in
the event of any transfer made pursuant to one of the exemptions provided by
clauses (ii), (iii), (iv), (v), (vi) and (vii), (A) the holder of Co-Sale Stock
shall inform the Purchasers of such pledge, transfer or gift prior to effecting
it and (B) the pledgee, transferee or donee shall furnish the Purchasers with a
written agreement to be bound by and comply with all provisions of Sections 6 of
this Agreement. Such transferred Co-Sale Stock shall remain "Restricted Stock"
hereunder.
(B) The co-sale rights of the Purchasers are subject to, and
shall in no manner limit the right which the Company may have to repurchase
securities from the holder of Co-Sale Stock pursuant to (i) a stock restriction
agreement or other agreement between the Company and the holder of Co-Sale Stock
and (ii) the Pre-Emptive Right set forth in Section 5 hereto.
6.7 TERMINATION OF CO-SALE RIGHTS. The provisions of Section 6 of this
Agreement shall not apply to sales pursuant to a registered public offering or
"public" sales pursuant to Rule 144 under the Securities Act after an initial
public offering.
7. DRAG ALONG RIGHTS.
7.1 DRAG ALONG RIGHT. If BTI or its Affiliates (the "Initiating
Securityholder"), agree to sell or transfer (whether in a stock sale, merger or
other transaction) all or substantially all of their securities of the Company
or agree to the sale of all or substantially all of the assets of the Company to
a third party (whether for cash, securities or a combination of both), then all
Purchasers (including the holders of the Option Shares) ("Selling
Securityholders") will be required to sell all of their securities of the
Company held by them (and may be required to convert their Series Preferred into
Common Stock in connection with such sale) or acquiesce to the sale of the
assets of the Company.
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7.2 CONSIDERATION. The consideration to be received by the Selling
Securityholders shall be the same consideration per share to be received by the
Initiating Securityholder for the corresponding class or series of stock (on an
as-converted basis, if applicable), or type of security, and the terms and
conditions of such sale shall be the same as those upon which the Initiating
Securityholder sells its securities; provided however, that any general
indemnity given by the Selling Securityholder, applicable to liabilities not
specific to a particular Selling Securityholder, to the purchaser in connection
with such sale shall be apportioned among the Selling Securityholder according
to the consideration received by each Selling Securityholder.
7.3 EXPENSES. The fees and expenses incurred in connection with a sale
under this Section 7 shall be shared by all the Purchasers on a pro rata basis.
7.4 NOTICE. The Initiating Securityholder shall provide written notice
to the other Selling Securityholder setting forth the consideration to be paid
by the purchaser for the securities and the material terms of the sale within
ten (10) business days after such Initiating Securityholder exercises the Drag
Along Rights pursuant to Section 7.1 ("Drag Along Notice").
7.5 DELIVERY OF SECURITIES. Within ten (10) business days after the
date of the Drag Along Notice, each Selling Securityholder shall deliver to the
Company, the duly endorsed certificate or certificates representing the
securities held by such Selling Securityholder to be sold, and a limited
power-of-attorney authorizing the Company to take all actions necessary to sell
or otherwise dispose of such securities. In the event that a Selling
Securityholder should fail to deliver the securities, the Company shall cause
the books and records of the Company to show that such securities are bound by
the provisions of this Section 7 and that such securities may only be
transferred to the purchaser in such sale.
7.6 REMITTANCE OF CONSIDERATION. Promptly after the consummation of the
sale, the Purchaser shall remit directly to the Selling Securityholder the
consideration for the securities sold pursuant thereto.
7.7 TERMINATION OF DRAG-ALONG RIGHTS. Nothwithstanding any other
provision in this Article 7, if at any time BTI and its Affiliates shall no
longer beneficially own more that 20% of the Company's outstanding Common Stock
(assuming conversion of all Series Preferred), BTI and its Affiliates shall no
longer have any Drag-Along Rights under this Agreement.
8. BOARD OF DIRECTORS.
8.1 NOMINATION AND ELECTION OF DIRECTORS.
(A) SIZE. Commencing on March 23, 2000, the Company and the
Purchasers agree to take any actions necessary so that the Board will be
comprised of eleven (11) directors. The Company and the Purchasers agree to take
any actions necessary so that, as of March 23, 2000, the Series F Directors
shall consist of Adam H. Clammer, James H. Greene, Jr., Henry R. Kravis,
Alexander Navab, Jr. and George R. Roberts, the Other Series Preferred Directors
shall consist of Henry H. Bradley and Thomas R. Palmer, the Common Director
shall be David E. Scott, the Other Directors shall be Mory Ejabat and Richard A.
Jalkut, and there shall be one
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vacancy. The Company and the Purchasers also agree to take any actions necessary
so that, as soon as practicable, an independent director nominated by Mr. Scott
and approved by the Series F Directors (such approval not to be unreasonably
withheld) is appointed or elected to the Board. Notwithstanding the foregoing,
upon the effectiveness of the Company's first registration statement on Form 8-A
with respect to its Common Stock (the "8-A Effectiveness Event"), no Purchaser
shall have any rights or obligations, voting or otherwise, under this Section
8.1(a).
(B) SERIES F AND BTI DIRECTORS.
(I) For so long at least 6,666,667 shares of Series F
Preferred Stock remain outstanding (subject to adjustment for any stock split,
reverse stock split and the like), the holders of Series F Preferred Stock shall
be entitled to elect and remove directors of the Company (the "Series F
Directors") pursuant to the Company's Restated Certificate.
(II) In the event that less than 6,666,667 shares of
Series F Preferred Stock remain outstanding (subject to adjustment for any stock
split, reverse stock split and the like), as a result of conversion or
otherwise, but BTI and its Affiliates beneficially own at least ten percent
(10%) of the outstanding Common Stock of the Company (assuming conversion of all
Series Preferred), BTI shall have the right to nominate the number of persons to
serve as members of the Board of Directors (each a "BTI Nominee" and together,
the "BTI Nominees") equal to (A) the authorized size of the Board of Directors,
multiplied by (B) (1) the total number of shares of Common Stock beneficially
owned by BTI and its Affiliates (assuming conversion of all Series Preferred),
divided by (2) the total number of shares of Common Stock then outstanding
(assuming conversion of all Series Preferred), rounding up so that the BTI
Nominees will not represent less than such proportionate interest in the Company
calculated above; provided, however, that for purposes of this Section
8.1(b)(ii) only, the calculation of the total number of shares outstanding shall
exclude any equity securities issued by the Company after August 5, 1999 (other
than the shares issued pursuant to the Option) if at such time BTI and its
Affiliates beneficially own twenty-five percent (25%) or more of the outstanding
Common Stock of the Company (assuming conversion of all Series Preferred and
including (i) all equity securities issued by the Company after August 5, 1999
and (ii) any vested Option Shares and all shares of Common Stock issuable upon
exercise of the Company's Warrants). The Company agrees to cause the BTI
Nominees to be nominated for election to the Board of Directors (the "BTI
Directors"). A BTI Director may be removed without cause by the Company or its
Board of Directors only with the approval of BTI.
(C) OTHER SERIES PREFERRED DIRECTORS. For so long as at least
8,532,394 shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock remain outstanding (subject to
adjustment for any stock split, reverse stock split and the like), the holders
of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock, voting together as a single class, shall be
entitled to elect and remove directors of the Company (the "Other Series
Preferred Directors") pursuant to the Company's Restated Certificate. The
Purchasers of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock agree that for so long as the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock remain outstanding and for such time as Henry H.
Bradley and Thomas R. Palmer are (i) employees of News-Press & Gazette Company
and Kansas City Equity Partners,
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respectively, (ii) are willing to continue to serve on the Board of Directors,
and (iii) do not violate their fiduciary duties to the stockholders of the
Company or otherwise demonstrate that they are unfit to serve as members of the
Board of Directors, that they will continue to nominate and elect Mr. Bradley
and Mr. Palmer as their representatives on the Board of Directors of the
Company.
(D) COMMON AND CEO DIRECTOR.
(I) For so long as the conditions set forth in
Sections 8.1(b)(i) and 8.1(c) are satisfied, the holders of Common Stock shall
be entitled to elect and remove a director of the Company (the "Common
Director") pursuant to the Company's Restated Certificate and the holders of the
Common Stock agree, that until such time as David E. Scott ceases to hold the
position of Chief Executive Officer of the Company, that they will nominate and
elect Mr. Scott as their representative on the Board of Directors, and if Mr.
Scott ceases to function as the Chief Executive Officer of the Company, the
holders of the Common Stock will nominate and elect another member of senior
management of the Company to replace Mr. Scott. Notwithstanding the foregoing,
after the 8-A Effectiveness Event, the holders of the Common Stock shall have no
rights or obligations, voting or otherwise, under this Section 8.1(d)(i).
(II) In the event the conditions set forth in either
Section 8.1(b)(i) or 8.1(c) cease to be satisfied or the 8-A Effectiveness Event
has occurred, the Company, for so long as Mr. Scott holds the position of Chief
Executive Officer of the Company, shall nominate Mr. Scott for election to the
Board of Directors (the "CEO Director").
(E) OTHER DIRECTORS. The Board of Directors shall nominate the
other members of the Board of Directors, if any, for election to the Board of
Directors (the "Other Directors").
(F) VOTING. Each Purchaser and any Affiliate of such Purchaser
owning shares of Series Preferred or Common Stock agree to cast the votes to
which they are entitled (whether at an annual or special meeting of stockholders
or by written consent in lieu of a meeting or otherwise) in such a manner as to
cause the BTI Nominees to be elected to the Board of Directors. Notwithstanding
the foregoing, after the 8-A Effectiveness Event, no Purchaser or any Affiliate
of a Purchaser shall have any rights or obligations, voting or otherwise, under
this Section 8.1(f).
(G) EFFECTIVENESS. The Company and the Purchasers hereby
represent and warrant that the procedures established in this Section 8.1
relating to the size of the Board of Directors and for the designation,
nomination and election of the BTI Nominees is effective, under the terms of
Company's Restated Certificate and Bylaws, to ensure that at all times
subsequent to the date hereof and until the earlier of the 8-A Effectiveness
Event or the termination of this Agreement, the BTI Nominees shall be members of
the Board of Directors. The Company and Purchasers covenant that if, at some
point in the future, these procedures shall prove to be ineffective in so
providing, the Company and the Purchasers shall take all steps within their
respective power to provide for the designation, nomination and election of the
BTI Nominees to the Board of Directors; PROVIDED that after the 8-A
Effectiveness Event, no Purchaser shall have any obligation, voting or
otherwise, with respect to the designation,
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nomination and election of the BTI Nominees. Upon the request of BTI, the
Company agrees that it shall take all actions necessary to cause the Board of
Directors to appoint nominees of the Series F Preferred Stock or BTI, as
applicable, to the Boards of Directors of one or more Subsidiaries in proportion
to the representation of the Series F Preferred Stock or BTI, as applicable, on
the Company's Board of Directors.
(H) PUBLIC SOLICITATION. After a registered offering to the
general public of the Company's equity securities, the Company shall use its
reasonable best efforts to solicit from the stockholders of the Company eligible
to vote for the election of directors proxies in favor of the nominees
designated in accordance with this Section 8.1. For purposes of this Section 8.1
and all other purposes of this Agreement, "beneficial ownership" or to
"beneficially own" shall be determined in a manner consistent with the meanings
assigned to such terms in Rule 13d-3 and Rule 13d-5 of the Securities Act.
8.2 BOARD COMMITTEES.
(A) The Company agrees that so long as BTI and its Affiliates
beneficially own at least ten percent (10%) of the outstanding Common Stock of
the Company (assuming conversion of all Series Preferred), the Company shall
take all actions necessary to cause the Board of Directors to appoint no less
than two of the Series F Directors or BTI Directors to any committees of the
Board of Directors other than the Audit Committee, as requested by (i) the
Purchasers holding a majority of the votes of the Series F Preferred Stock (if
the condition set forth in Sections 8.1(b)(i) is satisfied and the 8-A
Effectiveness Event has not occurred), or (ii) BTI (if the condition set forth
in Sections 8.1(b)(i) is not satisfied or the 8-A Effectiveness Event has
occurred).
(B) [Intentionally Omitted.]
(C) The Company agrees that so long as BTI and its Affiliates
beneficially own at least ten percent (10%) of the outstanding Common Stock of
the Company (assuming conversion of all Series Preferred), the Company shall
create a Compensation Committee of the Board of Directors consisting of four (4)
members. Two members of such Compensation Committee shall not be employees of
the Company and one member shall be either the Chief Executive Officer, the
President, the Chief Operating Officer or a Senior Vice President of the
Company. The Company agrees that no fewer than two of the Series F Directors or
BTI Directors shall serve on the Compensation Committee.
(D) Notwithstanding the foregoing, the Company agrees that in
the event BTI exercises its Option, BTI's representation on, and the size of,
such committees of the Board of Directors shall be increased as appropriate to
reflect BTI's proportionate equity interest in the Company.
8.3 VETO RIGHTS. So long as BTI or its Affiliates beneficially owns at
least 10% of the outstanding Common Stock of the Company (assuming conversion of
all Series Preferred) or shares of Series F Preferred Stock representing such
number of shares of Common Stock on an as-converted basis (subject to adjustment
for any stock split, reverse stock split and the like), the approval of at least
one of the BTI Nominees shall be required for the Board of Directors of the
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Company or any Subsidiary to approve and authorize any of the following with
respect to the Company or any Subsidiary:
(A) Any increase or decrease in the total authorized shares
of, or issuance, sale, pledge or other disposition of, capital stock or any
security exchangeable or exerciseable for or convertible into capital stock;
(B) Any payment of any cash or non-cash dividends or other
distributions with respect to any capital stock;
(C) Any reclassification, combination, split, subdivision,
redemption, repurchase or other acquisition of any shares of capital stock
(excluding repurchases upon termination of services, the Company's exercise of
its rights under Section 5 hereof where BTI or its Affiliate is the Section 5
Selling Purchaser, the redemption of the Series E Preferred Stock, and the
redemption by the Company of up to 2,222,222 shares of Series C Preferred Stock
from Stephen L. Sauder pursuant to the Stock Purchase Agreement dated July 12,
1999);
(D) Any individual incurrence or guarantee of indebtedness
(excluding draw downs on credit facilities) or the individual issuance of any
debt securities in excess of $25,000,000;
(E) Any change in the size or composition of the Board of
Directors or any committee of the Board of Directors or create any new committee
of the Board of Directors;
(F) Any transaction with an Affiliate or any entity in which
an Affiliate has an interest as a director, officer, employee or greater than 5%
stockholder or interest through a family relationship (excluding repurchases
upon termination of services, the Company's exercise of its rights under Section
5 hereof where BTI or its Affiliate is the Section 5 Selling Purchaser, the
redemption of the Series E Preferred Stock, and the redemption by the Company of
up to 2,222,222 shares of Series C Preferred Stock from Stephen L. Sauder
pursuant to the Stock Repurchase Agreement dated July 12, 1999);
(G) Any hiring or termination of a chief executive officer;
(H) Any adoption or modification of the annual budget and
business plan;
(I) Any amendment or modification of any material provision of
the Indenture for the Company's Senior Notes, or the Company's main credit
facility or any other material contract;
(J) Any adoption, renewal or material modification of any
material compensation or benefit plan or arrangement;
(K) Any authorization of entering into a new line of business
provided as of the date hereof;
(L) Any consolidation, reorganization, share exchange,
recapitalization, business combination, merger or similar transaction other than
intra-Company transactions;
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(M) Any sale, pledge, grant of security interest, lease,
transfer or other disposition of assets in excess of twenty-five million dollars
($25,000,000);
(N) Any acquisition of assets or securities of any other
person or entity, except for acquisitions involving cash with an aggregate value
of less than twenty-five million dollars ($25,000,000) for any single
acquisition or series of related transactions;
(O) Any amendment to the Company's Restated Certificate or
Bylaws;
(P) Any voting or similar agreement concerning the Company's
capital stock;
(Q) Any payment, discharge or satisfaction of any material
claim, liability or obligation or the commencement of any material suit or
proceeding;
(R) Any joint venture or similar profit sharing arrangement
involving material assets or the payment or receipt of more than twenty-five
million dollars ($25,000,000);
(S) Any material license, contract or agreement; or
(T) Any liquidation, dissolution or winding up of the Company.
8.4 OBSERVER RIGHTS. Subject to the provisions of this Section 8.4, so
long as Stephen L. Sauder holds at least an aggregate of 2,054,678 shares of the
Company's Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock (subject to adjustment for any stock split, reverse stock split
and the like), he shall have the right to attend all meetings of the Company's
Board of Directors (other than Board committee meetings) in a nonvoting observer
capacity, to receive notice of such meetings and to receive all minutes,
consents and other materials, financial or otherwise, which the Company provides
to its Board of Directors ("Observer Rights"). Subject to the provisions of this
Section 8.4, so long as Advantage Capital Missouri Partners I, L.P., Advantage
Capital Missouri Partners II, L.P. and their Affiliates hold at least an
aggregate of 940,875 shares the Company's Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock (subject to adjustment for any
stock split, reverse stock split and the like), they shall have the right to
appoint a total of one representative who shall have Observer Rights. Subject to
the provisions of this Section 8.4, so long as White Pines Limited Partnership I
and Pacific Capital, L.P. hold at least an aggregate of 1,104,526 shares the
Company's Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock (subject to adjustment for any stock split, reverse stock split
and the like), they shall have the right to appoint a total of one
representative who shall have Observer Rights. The Company may require as a
condition precedent to granting Observer Rights under this Section 8.4 that each
person proposing to attend any meeting of the Company's Board of Directors and
each person to have access to any of the information provided by the Company to
the Board of Directors shall agree to hold in confidence and trust and to act in
a fiduciary manner with respect to all information so received during such
meetings or otherwise. The Company also reserves the right not to provide
information and to exclude persons having Observer Rights from any meeting or
portion thereof (a) if the Company believes upon advice of counsel and with
reasonable notice to the persons having Observer Rights that attendance at such
meeting by such persons would adversely affect the attorney-client privilege or
the Board's fiduciary duties, or (b) to protect
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confidential or competitively sensitive information. The Observer Rights set
forth in this Section 8.4 shall terminate upon the closing of a Qualifying
Public Offering, unless terminated sooner pursuant to the terms of this Section
8.4.
9. MISCELLANEOUS.
9.1 GOVERNING LAW; PROCEEDINGS AND WAIVER OF JURY TRIAL. This Agreement
shall be governed in all respects by the laws of the State of New York. All
actions and proceedings arising our of or relating to this Agreement shall be
heard and determined in New York state or federal court located in New York.
Each party irrevocably waives all right to trial by jury in any action or
proceeding (including counterclaims) arising out of or relating to this
Agreement.
9.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. References to BTI in this Agreement shall be deemed to refer to
BTI and its Affiliates, including any affiliate of Kohlberg Kravis Roberts & Co.
L.P.
9.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER.
(A) This Agreement (including the Exhibits hereto) constitutes
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof; provided, that the parties to this Agreement
acknowledge and agree that the rights, restrictions and obligations set forth in
this Agreement are in addition to, and not in replacement of, the rights,
restrictions and obligations set forth in the Purchase Agreement, Restated
Certificate and the Management Stockholder Agreements.
(B) This Agreement may be amended or modified only upon the
written consent of the Company and Purchasers holding: (i) at least fifty
percent (50%) of the Common Stock, voting together as a single class; (ii) at
least fifty percent (50%) of the Series B Preferred, voting together as a single
class; (iii) at least fifty percent (50%) of the Series C Preferred Stock,
voting together as a single class; and (iv) at least fifty percent (50%) of the
Series D Preferred Stock, voting together as a single class; (v) at least fifty
percent (50%) of the Series E Preferred Stock, voting together as a single
class; and (vi) at least fifty percent (50%) of the Series F Preferred Stock,
voting together as a single class.
(C) The obligations of the Company and the rights of the
holders of any series of the Series Preferred or of the Common Stock under this
Agreement may be waived only with the written consent of Purchasers holding the
following percentage of that series of the Series Preferred or of the Common
Stock, as applicable: (i) at least fifty percent (50%) of the Common Shares,
voting together as a single class; (ii) at least fifty percent (50%) of the
Series B Preferred, voting together as a single class; (iii) at least fifty
percent (50%) of the Series C Preferred Stock, voting together as a single
class; (iv) at least fifty percent (50%) of the Series D Preferred Stock, voting
together as a single class; (v) at least fifty percent (50%) of the Series E
Preferred Stock, voting together as a single class; and (vi) at least fifty
percent (50%) of the Series F Preferred Stock, voting together as a single
class.
30
<PAGE>
9.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, sent by facsimile or delivered personally by
hand or nationally recognized courier addressed (a) if to a Holder, as indicated
on the list of Holders attached hereto as Exhibit A, or at such other address as
such holder or permitted assignee shall have furnished to the Company in
writing, or (b) if to the Company, at such address or facsimile number as the
Company shall have furnished to each Holder in writing. All such notices and
other written communications shall be effective on the date of mailing,
facsimile transfer or delivery.
9.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any Holder, upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of
such Holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default therefore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any Holder of any breach or default under this Agreement or any
waiver on the part of any Holder of any provisions or conditions of this
Agreement must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any Holder, shall be cumulative and
not alternative.
9.6 RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein, a
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
9.7 INFORMATION CONFIDENTIAL. Each Holder acknowledges that the
information received by them pursuant hereto may be confidential and for its use
only, and it will not use such confidential information in violation of the
Exchange Act or reproduce, disclose or disseminate such information to any other
person (other than its employees or agents having a need to know the contents of
such information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.
9.8 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing or interpreting this Agreement.
9.9 COUNTERPARTS; EXECUTION BY FACSIMILE SIGNATURE. This Agreement may
be executed in any number of counterparts, each of which shall be an original,
but all of which together shall constitute one instrument. This Agreement may be
executed by facsimile signature(s).
9.10 BOARD MEETINGS/INFORMATION. The Board of Directors of the Company
shall meet at least quarterly at all times during the term of this Agreement. In
addition to the
31
<PAGE>
information rights set forth in the Purchase Agreement, the Company shall
provide the Directors as soon as available after the end of each calendar month,
copies of the unaudited interim financial statements of the Company and its
consolidated Subsidiaries as at the end of such month or fiscal quarter, as the
case may be, in each case in a form customarily distributed to the officers of
the Company.
9.11 RESTATED CERTIFICATE AND BYLAWS. The Company and the Purchasers
shall take or cause to be taken all lawful action necessary to ensure at all
times that the Company's Restated Certificate and Bylaws do not, at any time,
contradict the provisions of this Agreement.
9.12 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
32
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Consent on the 30th
day of March, 2000.
BIRCH TELECOM, INC.
By: /s/ GREGORY C. LAWHON
----------------------------
Gregory C. Lawhon
Senior Vice President
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
BTI VENTURES L.L.C.
By: /s/ ALEXANDAR NAVAB
------------------------------
Name: ALEXANDAR NAVAB
Title: [AUTHOIRZED SIGNATORY]
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock 13,333,334
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ GREGORY C. LAWHON
---------------------------------
Gregory C. Lawhon
Number of shares held:
Common Stock: 682,345
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
LBI Group Inc.
By: /s/ STEPHEN BERKENFELD
------------------------------
Name: STEPHEN BERKENFELD
Title: SENIOR VICE PRESIDENT
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: 340,001
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ BRADLEY A. MOLINE
------------------------------
Bradley A. Moline
Number of shares held:
Common Stock: 534,787
Series B Preferred Stock: 55,234
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ DAVID E. SCOTT
----------------------------
David E. Scott
Number of shares held:
Common Stock: 2,137,428
Series B Preferred Stock: -0-
Series C Preferred Stock: 189,900
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ JEFFREY D. SHACKELFORD
------------------------------
Jeffrey D. Shackelford
Number of shares held:
Common Stock: 1,425,520
Series B Preferred Stock: -0-
Series C Preferred Stock: 126,600
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ DAVID W. VRANICAR
-------------------------------
David W. Vranicar
Number of shares held:
Common Stock: 568,620
Series B Preferred Stock: 36,266
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
ADVANTAGE CAPITAL MISSOURI
PARTNERS I, L.P.
By: Advantage Capital MO GPI LLC,
its general partner
By: /s/ DAVID W. BERGMANN
-------------------------------
Name: DAVID W. BERGMANN
Title: MEMBER/MANAGER/VP
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 1,318,750
Series C Preferred Stock: -0-
Series D Preferred Stock: 145,550
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
ADVANTAGE CAPITAL MISSOURI
PARTNERS II, L.P.
By: Advantage Capital MO GPII LLC,
its general partner
By: /s/ DAVID W. BERGMANN
-------------------------------
Name: DAVID W. BERGMANN
Title: MEMBER/MANAGER/VP
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: 417,450
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
NEWS-PRESS & GAZETTE COMPANY
By: /s/ HENRY H. BRADLEY
-----------------------------
Name: HENRY H. BRADLEY
Title: [Authorized Signatory]
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 1,648,438
Series C Preferred Stock: 1,582,500
Series D Preferred Stock: 222,222
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ HENRY H. BRADLEY
----------------------------------------
Henry H. Bradley, as custodian for
Katherine Elizabeth Bradley under the
Missouri Uniform Transfers to Minors Act
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 32,969
Series C Preferred Stock: -0-
Series D Preferred Stock: 11,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ HENRY H. BRADLEY
----------------------------------------
Henry H. Bradley, as custodian for Stephane
Suzanne Bradley under the Missouri Uniform
Transfers to Minors Act.
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 32,969
Series C Preferred Stock: -0-
Series D Preferred Stock: 11,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
/s/ HENRY H. BRADLEY
----------------------------------------
Henry H. Bradley, as custodian for David
Bradley, III under the Missouri Uniform
Transfers to Minors Act.
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 32,969
Series C Preferred Stock: -0-
Series D Preferred Stock: 11,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
WHITE PINES LIMITED PARTNERSHIP I
By: WHITE PINES MANAGEMENT, LLC
--------------------------------
its Manager
By: /s/ IAN BUND
--------------------------------
Name: IAN BUND
Title: PRESIDENT
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 989,128
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
PACIFIC CAPITAL, L.P.
By: WHITE PINES MANAGEMENT, LLC
---------------------------
its Manager
By: /s/ IAN BUND
---------------------------
Name: IAN BUND
Title: PRESIDENT
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 1,219,925
Series C Preferred Stock: -0-
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
KCEP I, L.P.
By: /s/ THOMAS PALMER
------------------------------------
Name: THOMAS PALMER
Title: VICE PRESIDENT, KCEP I, LC
(general partner to KCEP I, L.P.)
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 945,108
Series C Preferred Stock: -0-
Series D Preferred Stock: 111,111
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
KCEP VENTURES II, L.P.
By: /s/ THOMAS PALMER
------------------------------------
Name: THOMAS PALMER
Title: VICE PRESIDENT, KCEP II, LC
(general partner to KCEP II, LLC)
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: -0-
Series D Preferred Stock: 555,556
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
KANSAS VENTURE CAPITAL, INC.
By: /s/ MARSHALL PALMER
-----------------------------
Name: MARSHALL PALMER
Title: EXECUTIVE VICE PRESIDENT
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: 164,844
Series C Preferred Stock: -0-
Series D Preferred Stock: 166,666
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
STEPHEN LOCKWOOD SAUDER REVOCABLE
TRUST DTD MARCH 1, 1976
/s/ STEPHEN L. SAUDER
--------------------------------------
Stephen L. Sauder, Trustee
/s/ PAULA KAY FRIESEN SAUDER
--------------------------------------
Paula Kay Friesen Sauder, Trustee
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: 1,544,788
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Action by Written
Consent as of this 30th day of March, 2000.
PAULA KAY FRIESEN SAUDER REVOCABLE
TRUST DTD MARCH 1, 1976
/s/ STEPHEN L. SAUDER
-----------------------------------
Stephen L. Sauder, Trustee
/s/ PAULA KAY FRIESEN SAUDER
-----------------------------------
Paula Kay Friesen Sauder, Trustee
Number of shares held:
Common Stock: -0-
Series B Preferred Stock: -0-
Series C Preferred Stock: 1,544,787
Series D Preferred Stock: -0-
Series F Preferred Stock: -0-
<PAGE>
EXHIBIT A
PURCHASERS
SERIES B PURCHASERS
Advantage Capital Missouri Partners I, L.P.
KCEP I, L.P.
News-Press & Gazette Company
Henry H. Bradley and Vickie A. Bradley, Trustees of the Henry H. Bradley Trust
dtd 1/9/98
Henry H. Bradley and Vickie A. Bradley, Trustees of the Vickie A. Bradley Trust
dtd 1/9/98
Brian A. Bradley
Eric A. Bradley
David R. Bradley, Jr. and Katherine Suzanne Bradley, Trustees of the David R.
Bradley, Jr. Trust dated March 1, 1983
Katherine Suzanne Bradley
Henry H. Bradley, as custodian for Katherine Elizabeth Bradley under the
Missouri Uniform Transfers to Minors Act
Henry H. Bradley, as custodian for Stephane Suzanne Bradley under the Missouri
Uniform Transfers to Minors Act
Henry H. Bradley, as custodian for David R. Bradley, III under the Missouri
Uniform Transfers to Minors Act
Gregory C. Lawhon
Gary L. Chesser
David W. Vranicar
Bradley A. Moline
Gwen C. Fox
Earl W. Sauder
Stephen L. Sauder
Bobbie L. Agler
Dale McCabe
Citruck & Co., as Trustee for Emily Modeer
Samuel Allen & Maurine Ruth Agron as Trustees of the Samuel Agron Trust
Dorothy H. Ammon, Trustee of the Dororthy H. Ammon Trust dated 12/15/97
Charles G. & Val Jean Adams, Joint Tenants with Rights of Survivorship
Richard A. Bauman, Trustee of Richard A. Bauman Living Trust dated 5/16/97
Marsha L. Broomfield, Trustee of Marsha L. Broomfield Trust dated 12/7/90
Charles S. Broomfeld, Trustee of Charles S. Broomfield Trust dated 11/12/96
Steven R. & Nancy A. Cobb, Tenants in the entirety
Joseph M. Crowe, Sr.
Joseph M. Crowe, Jr.
Jeffrey M. Crowe
Martin J. Crowe, III & Frances C. Crowe, Trustee of the Martin J. Crowe III
Trust dated 3/26/92
Martin J. Crowe, III & Frances C. Crowe, Trustee of the Francis C. Crowe Trust
dated 3/26/92
<PAGE>
SERIES B PURCHASERS CONTINUED
GJA, LLC
Edward D. Jones & Co. as Custodian FBO Michael Griess, IRS #159-90586-1-5
Michael D. & Linda Griess, Joint Tenants with Rights of Survivorship
James & Kathryn Healy, Joint Tenants with Rights of Survivorship
H. David Heumann
Jerry M. & Mary S. Huffman, Joint Tenants with Rights of Survivorship
Kansas Venture Capital, Inc.
KCEP I, L.P.
Thomas E. Keller
Charles H. Koslowsky, Jr.
Kathryn K. Koslowsky
Charles H. Koslowsky, III
Ronald L. Langstaff
John Mark Legg
Suzanne S. McCann Revocable Trust u/t/a dated 12/5/88 as amended
George J. McLiney, Jr. & Laurie M. McLiney, Trustees of the Revocable Living
Trust Agreement of George J. McLiney, Jr. dated October 12, 1992
Kevin C. McLiney
Frederick P. & Lisa S. Mahler, Joint Tenants with Rights of Survivorship
UMB Bank, n.a. Trustee for Robert Modeer #523585008
Roger A. Moline SEP IRA
Jerry Moyes
Pamela J. Perilstein
Jeff A. Poe
Edward D. Jones & Co. Custodian FBO Sean F. Pyle IRA #639-90603-1-5
Sean F. Pyle
Michael A. & Anne Marie C. Russell, Joint Tenants with Rights of Survivorship
Timothy R. & Roselee C. Saracini, Joint Tentants with Rights of Survivorship
Theodore H. Schell
Dain Rauscher Inc., Custodian for Christine S. Schroff IRA
Dain Rauscher Inc., Custodian for Earl H. Scudder, Jr., IRA
Mark A. Scudder & Alison Armstrong, Joint Tenants with Rights of Survivorship
Smith Barney Inc., IRA Custodian for Mark A. Scudder IRA
Don Simpson
Ron Simpson
Jane E. Snowden, Trustee for the Jane E. Snowden Trust dated 12/23/94
Philip L. Spartis
Wayne & Judy Widener
Carolyn J. Crowe
Elizabeth E. Crowe
Martin C. Crowe
Michael P. Crowe
<PAGE>
SERIES B PURCHASERS CONTINUED
Thomas K. Crowe
Daniel B. Bauman
Ellen C. Ganey
Mary & Steve Gaarder, JTWROS
Eileen & Doug Johnson, JTWROS
Lawrence K & Melinda Crowe, JTWROS
Pacific Capital, L.P.
White Pines Limited Partnership I
Ian R. N. Bund
Herbert S. Amster, Trustee of the Herbert S. Amster Amended Trust dated January
23, 1989
Ronald G. Kalish, as Trustee of the Ronald G. Kalish Trust dated September 9,
1997
Volunteer Healthcare Associates, L.L.C.
Yocum Consulting Associates, Inc.
Michael & Julie McCann
Robert & Karen McCann
Christopher McCann
Dean Griess
Lori Ann Greenberg
Gerri Lyn Greenberg
Daniel J. Boyle
Lois F. Marler
Michael G. Williams
John P. Crowe
Frances C. Lester, Trustee UAD 10-30-92 for Frances C. Lester
Brenda Lou Bartels
Beth Denise Karnopp
Kim Rachelle Jaeger
Charles G. Adams
Roger A. Moline
Jill Moline, as custodian for Ryan A. Moline
Jill Moline, as custodian for Adam M. Moline
SERIES C PURCHASERS
News-Press & Gazette Company
David E. Scott
Jeffrey D. Shackelford
Richard L. Tidwell
Stormy C. Supiran
S. L. Sauder Family Limited Partnership, LLP
Stephen Lockwood Sauder Revocable Trust dtd March 1, 1976
Paula Kay Friesen Sauder Revocable Trust dtd March 1, 1976
Hubert Shackelford
<PAGE>
Marge Shackelford
Albert Miller
Bernice Miller
Steven Shackelford
Constance Shackelford
Margie Ann Shackelford
Wallace and Janet Whitney
Gregory Shackelford
David Taylor
Stephen Miller
Jeannie Miller
Kent Hydeman
Diane Hydeman
Joe Miller
David Miller
Phillip Lee Tidwell
Christopher William Tidwell
COMMON STOCK PURCHASERS
David E. Scott
Jeffrey D. Shackelford
Gregory C. Lawhon
Gary L. Chesser
David W. Vranicar
Bradley A. Moline
Michael D. Griess
Sean F. Pyle
Gwen C. Fox
Steven R. Cobb
Paul D. Rowlett
Anne M. Krinsky
Michelle Mulik
James R. Pyle
Carolyn S. Pyle
Amy K. Pyle
Sylvia M. Scott
Gary W. Widener
Judith S. Widener
<PAGE>
SERIES D PURCHASERS
KCEP Ventures II, L.P.
KCEP I, L.P.
Advantage Capital Missouri Partners I, L.P.
Advantage Capital Missouri Partners II, L.P.
News-Press & Gazette Company
Henry H. Bradley and Vickie A. Bradley Trustees of the Henry H. Bradley Trust
dated 1/9/98
Henry H. Bradley and Vickie A. Bradley Trustees of the Vickie A. Bradley Trust
dated 1/9/98
Brian A. Bradley
Eric A. Bradley
David R. Bradley, Jr. and Katherine Suzanne Bradley, Trustees of the David R.
Bradley, Jr. Trust dated March 1, 1983
Katherine Suzanne Bradley
Henry H. Bradley, as custodian for Katherine Elizabeth Bradley under the
Missouri Uniform Transfer to Minors Act
Henry H. Bradley, as custodian for Stephane Suzanne Bradley under the Missouri
Uniform
Transfers to Minors Act
Henry H. Bradley, as custodian for David R. Bradley, III under the Missouri
Uniform Transfers to Minors Act
Kansas Venture Capital, Inc.
Douglas B. Fuller
Lyle Leimkuhler
Lee Sawyer
GJA, Inc.
Tim R. & Roselee Saracini, JTWROS
Richard A. Bauman, Trustee of Richard A. Bauman Living Trust dated 5/16/97
Jeffrey M. Crowe
Frederick P. & Lisa S. Mahler, JTWROS
Pamela J. Perilstein
John Mark Legg
Thomas E. Keller
Martin J. Crowe, III & Frances C. Crowe Trustees of the Frances C. Crowe Trust
dated 3/26/92
Martin J. Crowe, III & Frances C. Crowe Trustees of the Martin J. Crowe Trust
dated 3/26/92
Charles H. Koslowsky, III
Kevin C. McLiney
George J. McLiney, Jr. & Lauri M. McLiney, Trustees of the Revocable Living
Trust Agreement of George J. McLiney, Jr. dated October 12, 1992
James & Kathryn Healy, JTWROS
Michael A. & Anne Marie C. Russell, JTWROS
Jerry M. & Mary S. Huffman, JTWROS
Charles S. Broomfield, Trustee of Charles S. Broomfield Trust dated November 12,
1996
Marsha L. Broomfield, Trustee of Marsha L. Broomfield Trust dated December 7,
1990
Jane E. Snowden, Trustee of the Jane E. Snowden Trust dated December 23, 1994
<PAGE>
SERIES D PURCHASERS CONTINUED
Ian R. N. Bund
Herbert S. Amster IRA
Ronald G. Kalish, Trustee of the Ronald G. Kalish Living Trust dated September
9, 1997
Volunteer Healthcare Associates, L.L.C.
Daniel J. Boyle, IRA
Daniel J. Boyle
Michael Williams
S. Sterling McMillan, III
Mark A. Scudder & Alison Armstrong, JTWROS
Wayne & Judy Widener, Community Property
Suzanne S. McCann Revocable Trust u/t/a dated 12/5/88 as amended
Anthony Grover
H. David Heumann
Jerry Moyes c/o Swift Transportation Co., Inc.
Dain Rauscher Inc., Custodian for Christine S. Schroff IRA
Smith Barney Inc., IRA Custodian for Mark A. Scudder, IRA
Dain Rauscher Inc., Custodian for Earl H. Scudder, Jr., IRA
Don Simpson
Ron Simpson
GC&H Investments
LBI Group Inc.
George H. Young III
Philip A. Dougall
Ros L'Esperance
Peter J. Toal
John S. Zuckerman
Stephen J. Jeselson, Jr.
David Zwick
Eileen Johnson, custodian for George Crowe Lester UTMA/MO
Eileen Johnson, custodian for Joseph Andrew Lester UTMA/MO
Eileen Johnson, custodian for Amelia Claire Lester UTMA/MO
John P. Crowe
Frances C. Lester, Trustee UAD 10-30-92 for Frances C. Lester
<PAGE>
SERIES E PURCHASERS
Advantage Capital Missouri Partners I, L.P.
KCEP I, L.P.
News-Press & Gazette Company
Henry H. Bradley and Vickie A. Bradley, Trustees of the Henry H. Bradley Trust
dtd 1/9/98
Henry H. Bradley and Vickie A. Bradley, Trustees of the Vickie A. Bradley Trust
dtd 1/9/98
Brian A. Bradley
Eric A. Bradley
David R. Bradley, Jr. and Katherine Suzanne Bradley, Trustees of the David R.
Bradley, Jr. Trust dated March 1, 1983
Katherine Suzanne Bradley
Henry H. Bradley, as custodian for Katherine Elizabeth Bradley under the
Missouri Uniform Transfers to Minors Act
Henry H. Bradley, as custodian for Stephane Suzanne Bradley under the Missouri
Uniform Transfers to Minors Act
Henry H. Bradley, as custodian for David R. Bradley, III under the Missouri
Uniform Transfers to Minors Act
Gregory C. Lawhon
Gary L. Chesser
David W. Vranicar
Bradley A. Moline
Gwen C. Fox
Earl W. Sauder
Stephen L. Sauder
Bobbie L. Agler
Dale McCabe
Citruck & Co., as Trustee for Emily Modeer
Samuel Allen & Maurine Ruth Agron as Trustees of the Samuel Agron Trust
Dorothy H. Ammon, Trustee of the Dororthy H. Ammon Trust dated 12/15/97
Charles G. & Val Jean Adams, Joint Tenants with Rights of Survivorship
Richard A. Bauman, Trustee of Richard A. Bauman Living Trust dated 5/16/97
Marsha L. Broomfield, Trustee of Marsha L. Broomfield Trust dated 12/7/90
Charles S. Broomfeld, Trustee of Charles S. Broomfield Trust dated 11/12/96
Steven R. & Nancy A. Cobb, Tenants in the entirety
Joseph M. Crowe, Sr.
Joseph M. Crowe, Jr.
Jeffrey M. Crowe
Martin J. Crowe, III & Frances C. Crowe, Trustee of the Martin J. Crowe III
Trust dated 3/26/92
Martin J. Crowe, III & Frances C. Crowe, Trustee of the Francis C. Crowe Trust
dated 3/26/92
GJA, LLC
Edward D. Jones & Co. as Custodian FBO Michael Griess, IRS #159-90586-1-5
Michael D. & Linda Griess, Joint Tenants with Rights of Survivorship
James & Kathryn Healy, Joint Tenants with Rights of Survivorship
<PAGE>
SERIES E PURCHASERS CONTINUED
H. David Heumann
Jerry M. & Mary S. Huffman, Joint Tenants with Rights of Survivorship
Kansas Venture Capital, Inc.
KCEP I, L.P.
Thomas E. Keller
Charles H. Koslowsky, Jr.
Kathryn K. Koslowsky
Charles H. Koslowsky, III
Ronald L. Langstaff
John Mark Legg
Suzanne S. McCann Revocable Trust u/t/a dated 12/5/88 as amended
George J. McLiney, Jr. & Laurie M. McLiney, Trustees of the Revocable Living
Trust Agreement of George J. McLiney, Jr. dated October 12, 1992
Kevin C. McLiney
Frederick P. & Lisa S. Mahler, Joint Tenants with Rights of Survivorship
UMB Bank, n.a. Trustee for Robert Modeer #523585008
Roger A. Moline SEP IRA
Jerry Moyes
Pamela J. Perilstein
Jeff A. Poe
Edward D. Jones & Co. Custodian FBO Sean F. Pyle IRA #639-90603-1-5
Sean F. Pyle
Michael A. & Anne Marie C. Russell, Joint Tenants with Rights of Survivorship
Timothy R. & Roselee C. Saracini, Joint Tentants with Rights of Survivorship
Theodore H. Schell
Dain Rauscher Inc., Custodian for Christine S. Schroff IRA
Dain Rauscher Inc., Custodian for Earl H. Scudder, Jr., IRA
Mark A. Scudder & Alison Armstrong, Joint Tenants with Rights of Survivorship
Smith Barney Inc., IRA Custodian for Mark A. Scudder IRA
Don Simpson
Ron Simpson
Jane E. Snowden, Trustee for the Jane E. Snowden Trust dated 12/23/94
Philip L. Spartis
Wayne & Judy Widener
Carolyn J. Crowe
Elizabeth E. Crowe
Martin C. Crowe
Michael P. Crowe
Thomas K. Crowe
Daniel B. Bauman
Ellen C. Ganey
Mary & Steve Gaarder, JTWROS
<PAGE>
SERIES E PURCHASERS CONTINUED
Eileen & Doug Johnson, JTWROS
Lawrence K & Melinda Crowe, JTWROS
Pacific Capital, L.P.
White Pines Limited Partnership I
Ian R. N. Bund
Herbert S. Amster, Trustee of the Herbert S. Amster Amended Trust dated January
23, 1989
Ronald G. Kalish, as Trustee of the Ronald G. Kalish Trust dated September 9,
1997
Volunteer Healthcare Associates, LLC
Yocum Consulting Associates, Inc.
Michael & Julie McCann
Robert & Karen McCann
Christopher McCann
Dean Griess
SERIES F PURCHASER
BTI Ventures L.L.C.
OPTION SHARE PURCHASERS
David E. Scott
Jeffrey D. Shackelford
Gregory C. Lawhon
Gary L. Chesser
David W. Vranicar
Bradley A. Moline
Richard L. Tidwell
Stormy C. Supiran
Gwen C. Fox
Bobbie L. Agler
Dale McCabe
Sean F. Pyle
Michael D. Griess
Steven R. Cobb
Paul D. Rowlett
Anne M. Krinsky
Michelle Mulik
Donald H. Goldman
<PAGE>
EXHIBIT B
RESTRICTED HOLDERS
BTI Ventures LLC
News-Press & Gazette Company
Henry H. Bradley and Vickie A. Bradley, Trustees of the Henry H. Bradley Trust
dtd 1/9/98
Henry H. Bradley and Vickie A. Bradley, Trustees of the Vickie A. Bradley Trust
dtd 1/9/98
Brian A. Bradley
Eric A. Bradley
David R. Bradley, Jr. and Katherine Suzanne Bradley, Trustees of the David R.
Bradley, Jr. Trust dated March 1, 1983
Katherine Suzanne Bradley
Henry H. Bradley, as custodian for Katherine Elizabeth Bradley under the
Missouri Uniform Transfers to Minors Act
Henry H. Bradley, as custodian for Stephane Suzanne Bradley under the Missouri
Uniform Transfers to Minors Act
Henry H. Bradley, as custodian for David R. Bradley, III under the Missouri
Uniform Transfers to Minors Act
Douglas B. Fuller Trust dated March 31, 1988
Rhonda K. Fuller Trust dated December 5, 1997
Lyle Leimkuhler
Lee M. Sawyer and Toni J. Sawyer, JTWROS
Stephen L. Sauder
S. L. Sauder Family Limited Partnership, LLP
Stephen Lockwood Sauder Revocable Trust dtd March 1, 1976
Paula Kay Friesen Sauder Revocable Trust dtd March 1, 1976
Earl W. Sauder
Advantage Capital Missouri Partners I, L.P.
Advantage Capital Missouri Partners II, L.P.
KCEP I, L.P.
KCEP Ventures II, L.P.
Pacific Capital, L.P.
White Pines Limited Partnership I
Ian R. N. Bund
Herbert S. Amster, Trustee of the Herbert S. Amster Amended Trust dated January
23, 1989
Ronald G. Kalish, as Trustee of the Ronald G. Kalish Trust dated September 9,
1997
Volunteer Healthcare Associates, LLC
Yocum Consulting Associates, Inc.
Daniel J. Boyle, IRA
Daniel J. Boyle
Michael Williams
<PAGE>
S. Sterling McMillan, III
Anthony Grover
Kansas Venture Capital, Inc.
David E. Scott
Jeffrey D. Shackelford
Gregory C. Lawhon
Gregory C. Lawhon IRA
Gary L. Chesser
David W. Vranicar
Bradley A. Moline
Michael D. Griess
Edward D. Jones & Co. as Custodian FBO Michael Griess, IRS #159-90586-1-5
Michael D. & Linda Griess, Joint Tenants with Rights of Survivorship
Dean W. Griess
Sean F. Pyle
Edward D. Jones & Co. Custodian FBO Sean F. Pyle IRA #639-90603-1-5
Gwen C. Bortner
Steven R. Cobb
Steven R. & Nancy A. Cobb, Tenants in the entirety
Paul D. Rowlett
Michelle Mulik
Richard L. Tidwell
Stormy C. Supiran
Bobbie L. Agler
Dale McCabe
LBI Group Inc.
George H. Young III
Philip A. Dougall
Ros L'Esperance
Peter J. Toal
John S. Zuckerman
Stephen J. Jeselson, Jr.
David Zwick
<PAGE>
EXHIBIT 10.26
BIRCH TELECOM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I.
PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN
1.1 PURPOSE AND SCOPE. The purpose of the Birch Telecom, Inc. 2000 Employee
Stock Purchase Plan is to assist employees of Birch Telecom, Inc. and its
subsidiaries in acquiring a stock ownership interest in the Company pursuant to
a plan which is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended.
1.2 ADMINISTRATION OF PLAN. The Plan shall be administered by the
Committee. The Committee shall have the power to make, amend and repeal rules
and regulations for the interpretation and administration of the Plan consistent
with the qualification of the Plan under Section 423 of the Code, and the
Committee also is authorized to change the Option Periods, Offering Dates and
Exercise Dates under the Plan by providing written notice to all Employees at
least 15 days prior to the date following which such changes will take effect.
The Committee may delegate administrative tasks under the Plan to one or more
Officers of the Company. The Committee's interpretation and decisions in respect
to the Plan shall be final and conclusive.
ARTICLE II.
DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
The singular pronoun shall include the plural where the context so indicates.
2.1 "BOARD" shall mean the Board of Directors of the Company.
2.2 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
2.3 "COMMITTEE" shall mean the Compensation Committee of the Board, which
Committee shall administer the Plan as provided in Section 1.2 above.
2.4 "COMMON STOCK" shall mean shares of common stock of the Company.
2.5 "COMPANY" shall mean Birch Telecom, Inc., a Delaware corporation.
2.6 "COMPENSATION" shall mean the base salary or wages and targeted
commissions paid to an Employee by the Company or a Subsidiary in accordance
with established payroll procedures.
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2.7 "ELIGIBLE EMPLOYEE" shall mean an Employee who (a) is customarily
scheduled to work at least 20 hours per week, and (b) whose customary employment
is more than five (5) months in a calendar year.
2.8 "EMPLOYEE" shall mean any employee of the Company or a Subsidiary.
2.9 "EXERCISE DATE" shall mean (a) with respect to Option Periods beginning
on April 15 or the IPO Date, the next following April 14, and (b) with respect
to Option Periods beginning October 15, the next following October 14.
2.10 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
2.11 "FAIR MARKET VALUE" of a share of Common Stock as of a given date
shall mean (i) the closing price of the sale of Common Stock on the Nasdaq
National Market System ("Nasdaq") as of 4:00 P.M., New York time on such date or
on the immediately preceding trading date, or (ii) if Common Stock is not quoted
on Nasdaq, the fair market value of a share of Common Stock as established by
the Committee acting in good faith; provided, however, that for purposes of the
Option Period commencing on the IPO Date, the Fair Market Value of a Share of
Common Stock shall be the Price to the Public as set forth in the final
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424 under the Securities Act of 1933, as amended.
2.12 "IPO DATE" shall mean the effective date of the initial public
offering of Common Stock pursuant to a registration statement filed with the
Securities and Exchange Commission.
2.13 "OFFERING DATE" shall mean each April 15 and October 15; provided,
however, that the first Offering Date under the Plan shall be the IPO Date.
2.14 "OFFICER" shall mean an employee of the Company who is either an
executive officer or member of the management of the Company.
2.15 "OPTION PERIOD" shall mean the period beginning on an Offering Date
and ending on the next succeeding Exercise Date.
2.16 "OPTION PRICE" shall mean the purchase price of a share of Common
Stock hereunder as provided in Section 4.1 below.
2.17 "PARTICIPANT" shall mean any Eligible Employee who elects to
participate.
2.18 "PLAN" shall mean this Birch Telecom, Inc. 2000 Employee Stock
Purchase Plan, as it may be amended from time to time.
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2.19 "PLAN ACCOUNT" shall mean a bookkeeping account established and
maintained by the Company in the name of each Participant.
2.20 "SUBSIDIARY" shall mean any corporation of which the Company or a
Subsidiary owns stock possessing 50% or more of the total combined voting power
of all classes of stock in the corporation.
ARTICLE III.
PARTICIPATION
3.1 ELIGIBILITY. An Eligible Employee may participate in the Plan if
immediately after the applicable Offering Date, that Employee would not be
deemed for purposes of Section 423(b)(3) of the Code to possess 5% or more of
the total combined voting power or value of all classes of stock of the Company
or any Subsidiary.
3.2 ELECTION TO PARTICIPATE; PAYROLL DEDUCTIONS
(a) An Eligible Employee may participate in the Plan only by means of
payroll deduction. An Eligible Employee may elect to participate in the Plan
during an Option Period by delivering to the Company in the calendar month
preceding the Offering Date on which such Option Period commences a written
payroll deduction authorization on a form prescribed by the Company; provided,
however, that for the Option Period commencing on the IPO Date, an Eligible
Employee may elect to participate in the Plan at any time on or prior to the IPO
Date.
(b) Payroll deductions (i) shall be equal to at least 1%, but not more
than 15%, of the Participant's Compensation as of the Offering Date; (ii) must
equal at least five dollars ($5.00) per pay period; and (iii) may be expressed
either as (A) a whole number percentage, or (B) a fixed dollar amount, subject
to the provisions of Sections 4.2 and 4.3 below. Amounts deducted from a
Participant's Compensation pursuant to this Section 3.2 shall be credited to the
Participant's Plan Account.
3.3 LEAVE OF ABSENCE. During leaves of absence approved by the Company
meeting the requirements of Regulation Section 1.421-7(h)(2) under the Code, a
Participant may continue participation in the Plan by making cash payments to
the Company on his or her normal payday equal to his or her authorized payroll
deduction.
ARTICLE IV.
PURCHASE OF SHARES
4.1 OPTION PRICE. The Option Price per share of the Common Stock sold to
Participants hereunder shall be 85% of the Fair Market Value of such share on
either the Offering Date or the Exercise Date of the Option Period, whichever is
lower, but in no event shall the Option Price per share be less than the par
value per share ($0.001) of the Common Stock.
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<PAGE>
4.2 PURCHASE OF SHARES
(a) On each Exercise Date on which he or she is employed, each
Participant will automatically and without any action on his or her part be
deemed to have exercised his or her option to purchase at the Option Price the
largest number of whole shares of Common Stock which can be purchased with the
amount in the Participant's Plan Account. The balance, if any, remaining in the
Participant's Plan Account (after exercise of his or her option) as of an
Exercise Date shall be carried forward to the next Option Period, unless the
Participant has elected to withdraw from the Plan pursuant to Section 6.1 below.
(b) As soon as practicable following each Exercise Date, the number of
shares purchased by such Participant pursuant to subsection (a) above will be
delivered, in the Company's sole discretion, to either (i) the Participant, or
(ii) an account established in the Participant's name at a stock brokerage or
other financial services firm designated by the Company. In the event the
Company is required to obtain from any commission or agency authority to issue
any such shares of Common Stock, the Company will seek to obtain such authority.
Inability of the Company to obtain from any such commission or agency authority
which counsel for the Company deems necessary for the lawful issuance of any
such shares shall relieve the Company from liability to any Participant except
to refund to him or her the amount withheld.
4.3 LIMITATIONS ON PURCHASE. No Employee shall be granted an option under
the Plan which permits his or her rights to purchase Common Stock under the Plan
or any other employee stock purchase plan of the Company or any of its
Subsidiaries to accrue at a rate which exceeds $25,000 (as measured by the Fair
Market Value of such Common Stock at the time the option is granted) for each
calendar year such option is outstanding. For purposes of this Section 4.3, the
right to purchase Common Stock under an option accrues when the option (or any
portion thereof) becomes exercisable, and the right to purchase Common Stock
which has accrued under one option under the Plan may not be carried over to any
other option.
4.4 TRANSFERABILITY OF RIGHTS. An option granted under the Plan shall not
be transferable and is exercisable only by the Participant. No option or
interest or right to the option shall be available to pay off any debts,
contracts or engagements of the Participant or his or her successors in interest
or shall be subject to disposition by pledge, encumbrance, assignment or any
other means whether such disposition be voluntary or involuntary or by operation
of law by judgment, levy, attachment, garnishment or any other legal or
equitable proceedings (including bankruptcy), and any attempt at disposition of
the option shall have no effect.
ARTICLE V.
PROVISIONS RELATING TO COMMON STOCK
5.1 COMMON STOCK RESERVED. Subject to adjustment as provided in Section
5.2, the maximum number of shares of Common Stock that shall be made available
for sale under this Plan shall be 1,000,000, plus an annual increase on the
first day of each of the
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<PAGE>
Company's fiscal years beginning in 2001 and ending in 2010, equal to the lesser
of (a) 1,000,000 shares, (b) 1.2% of the shares outstanding on the last day of
the immediately preceding fiscal year, or (c) such lesser number of shares as is
determined by the Board. Shares of Common Stock made available for sale under
this Plan may be authorized but unissued or reacquired shares reserved for
issuance under this Plan.
5.2 ADJUSTMENT FOR CHANGES IN COMMON STOCK. In the event that
adjustments are made in the number of outstanding shares of Common Stock or
the shares are exchanged for a different class of stock of the Company by
reason of stock dividend, stock split or other subdivision, the Committee
shall make appropriate adjustments in (a) the number and class of shares or
other securities that may be reserved for purchase hereunder, and (b) the
Option Price of outstanding options.
5.3 MERGER, ACQUISITION OR LIQUIDATION. In the event of the merger or
consolidation of the Company into another corporation, the acquisition by
another corporation of all or substantially all of the Company's assets or 80%
or more of the Company's then outstanding voting stock or the liquidation or
dissolution of the Company, the date of exercise with respect to outstanding
options shall be the business day immediately preceding the effective date of
such merger, consolidation, acquisition, liquidation or dissolution unless the
Committee shall, in its sole discretion, provide for the assumption or
substitution of such options in a manner complying with Section 424(a) of the
Code.
5.4 INSUFFICIENT SHARES. If the aggregate funds available for the purchase
of Common Stock on any Exercise Date would cause an issuance of shares in excess
of the number provided for in Section 5.1 above, (a) the Committee shall
proportionately reduce the number of shares that would otherwise be purchased by
each Participant in order to eliminate such excess, and (b) the Plan shall
automatically terminate immediately after such Exercise Date.
5.5 RIGHTS AS STOCKHOLDERS. With respect to shares of Common Stock
subject to an option, a Participant shall not be deemed to be a stockholder
and shall not have any of the rights or privileges of a stockholder. A
Participant shall have the rights and privileges of a stockholder when, but
not until, a certificate has been issued to him or her following exercise of
his or her option.
ARTICLE VI.
TERMINATION OF PARTICIPATION
6.1 CESSATION OF CONTRIBUTIONS; VOLUNTARY WITHDRAWAL
(a) A Participant may cease payroll deductions during an Option Period
by delivering written notice of such cessation to the Company. Upon any such
cessation, the Participant may elect either to withdraw from the Plan pursuant
to subsection (b) below or to have amounts credited to his or her Plan Account
held in the Plan for the purchase of Common Stock pursuant to Section 4.2. A
Participant who ceases contributions to the Plan during any
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<PAGE>
Option Period shall not be permitted to resume contributions to the Plan during
that Option Period.
(b) A Participant may withdraw from the Plan at any time by written
notice to the Secretary of the Company prior to the close of business on an
Exercise Date. Within 21 days after the notice of withdrawal is delivered, the
Company shall refund the entire amount, if any, in a Participant's Plan Account
to him or her, at which time the Participant's payroll deduction authorization,
his or her interest in the Plan and his or her option under the Plan shall
terminate. Any Eligible Employee who withdraws from the Plan may again become a
Participant in accordance with Section 3.2 above.
6.2 TERMINATION OF ELIGIBILITY
(a) If a Participant ceases to be eligible under Section 3.1 above for
any reason, the amount in such Participant's Plan Account will be refunded to
the Participant or his or her designated beneficiary or estate within 21 days of
his or her termination of employment or other cessation of eligibility.
(b) Upon payment by the Company to the Participant or his or her
beneficiary or estate of the remaining balance, if any, in Participant's Plan
Account, the Participant's interest in the Plan and the Participant's option
under the Plan shall terminate.
ARTICLE VII.
GENERAL PROVISIONS
7.1 CONDITION OF EMPLOYMENT. Neither the creation of the Plan nor an
Employee's participation therein shall be deemed to create a contract of
employment, any right of continued employment or in any way affect the right of
the Company or a Subsidiary to terminate an Employee at any time with or without
cause.
7.2 AMENDMENT OF THE PLAN
(a) The Board may, in its sole discretion, amend, suspend or terminate
the Plan at any time and from time to time; provided, however, that without
approval of the Company's stockholders given within 12 months before or after
action by the Board, the Plan may not be amended to increase the maximum number
of shares subject to the Plan or change the designation or class of Eligible
Employees.
(b) Upon termination of the Plan, the balance in each Participant's
Plan Account shall be refunded within 21 days of such termination.
7.3 USE OF FUNDS; NO INTEREST PAID. All funds received by the Company by
reason of purchase of Common Stock under this Plan will be included in the
general funds of the
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Company free of any trust or other restriction and may be used for any corporate
purpose. No interest will be paid to any Participant or credited under the Plan.
7.4 TERM; APPROVAL BY STOCKHOLDERS. The Plan shall terminate on the tenth
anniversary of the date of its initial approval by the stockholders of the
Company, unless earlier terminated by action of the Board. No option may be
granted during any period of suspension of the Plan nor after termination of the
Plan. The Plan will be submitted for the approval of the Company's stockholders
within 12 months after the date of the Board's initial adoption of the Plan.
Options may be granted prior to such stockholder approval; provided, however,
that such options shall not be exercisable prior to the time when the Plan is
approved by the stockholders; provided further that if such approval has not
been obtained by the end of said 12-month period, all options previously granted
under the Plan shall thereupon be canceled and become null and void.
7.5 EFFECT UPON OTHER PLANS. The adoption of the Plan shall not affect any
other compensation or incentive plans in effect for the Company or any
Subsidiary. Nothing in this Plan shall be construed to limit the right of the
Company or any Subsidiary (a) to establish any other forms of incentives or
compensation for employees of the Company or any Subsidiary, or (b) to grant or
assume options otherwise than under this Plan in connection with any proper
corporate purpose, including, but not by way of limitation, the grant or
assumption of options in connection with the acquisition, by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, firm or association.
7.6 CONFORMITY TO SECURITIES LAWS. Notwithstanding any other provision of
this Plan, this Plan and the participation in this Plan by any individual who is
then subject to Section 16 of the Exchange Act shall be subject to any
additional limitations set forth in any applicable exemptive rule under Section
16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange
Act) that are requirements for the application of such exemptive rule. To the
extent permitted by applicable law, the Plan shall be deemed amended to the
extent necessary to conform to such applicable exemptive rule.
7.7 NOTICE OF DISPOSITION OF SHARES. The Company may require any
Participant to give the Company prompt notice of any disposition of shares of
Common Stock, acquired pursuant to the Plan, within two years after the
applicable Offering Date or within one year after the applicable Exercise Date
with respect to such shares. The Company may direct that the certificates
evidencing shares acquired pursuant to the Plan refer to such requirement.
7.8 TAX WITHHOLDING. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Participant of any
sums required by federal, state or local tax law to be withheld with respect to
any purchase of shares of Common Stock under the Plan or any sale of such
shares.
7.9 GOVERNING LAW. The Plan and all rights and obligations thereunder shall
be construed and enforced in accordance with the laws of the State of Delaware.
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* * * * * *
I hereby certify that the foregoing Birch Telecom, Inc. 2000 Employee
Stock Purchase Plan was duly approved by the Compensation Committee of the Board
of Directors of Birch Telecom, Inc. on March 30, 2000.
I hereby certify that the foregoing Birch Telecom, Inc. 2000 Employee
Stock Purchase Plan was duly approved by the stockholders of Birch Telecom, Inc.
on March 30, 2000.
Executed on this 30th day of March, 2000.
---------------------------
Secretary
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Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Summary
Consolidated Financial and Operating Data", "Selected Consolidated Financial
and Operating Data" and "Experts" and to the use of our reports dated
February 17, 2000 (except for Note 19, as to which the date is March 31,
2000), with respect to the consolidated financial statements and schedule of
Birch Telecom, Inc., and May 15, 1998, with respect to the consolidated
financial statements of Valu-Line Companies, Inc., in Amendment No. 2 to the
Registration Statement (Form S-1) and related Prospectus of Birch Telecom,
Inc. dated April 14, 2000.
Ernst & Young LLP
Kansas City, Missouri
April 14, 2000
