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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR
/ / 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NUMBER:
333-62797
BIRCH TELECOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1766929
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2020 BALTIMORE AVENUE 64108
KANSAS CITY, MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(816) 300-3000
--------------
Securities registered pursuant to Section 12(b) of the Act:
14% senior notes due 2008
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. There were 8,604,764
shares of common stock, $.001 par value, outstanding as of August 7, 2000.
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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three months and six months
ended June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE PAGE 14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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JUNE 30, DECEMBER 31,
2000 1999
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents............................................... $ 3,916 $ 5,673
Pledged securities...................................................... 15,982 15,926
Accounts receivable, net................................................ 14,528 10,992
Inventory............................................................... 3,907 3,735
Prepaid expenses and other.............................................. 4,828 3,759
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Total current assets....................................................... 43,161 40,085
Property and equipment..................................................... 106,435 70,192
Less: accumulated depreciation............................................. 15,539 8,080
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Property and equipment, net................................................ 90,896 62,112
Pledged securities - noncurrent............................................ -- 7,484
Goodwill, net.............................................................. 19,331 19,316
Preferred stock issuance costs, net........................................ 10,005 6,698
Other intangibles, net..................................................... 12,260 10,213
Other assets............................................................... 3,152 1,063
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Total assets............................................................... $ 178,805 $ 146,971
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease obligations...... $ 1,186 $ 1,300
Senior credit facility.................................................. 50,000 10,000
Accounts payable ....................................................... 7,959 13,300
Accrued expenses........................................................ 8,745 9,142
Deferred revenue........................................................ 2,478 1,651
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Total current liabilities ................................................. 70,368 35,393
14% senior notes........................................................... 114,732 114,715
Other long-term debt and capital lease obligations, net of current maturities 1,508 1,070
Series F redeemable preferred stock, 23,596,492 and 13,333,334 shares issued
and outstanding (stated at redemption and aggregate liquidation value).. 119,425 63,550
Stockholders' deficit:
Series B preferred stock, 8,572,039 shares issued and outstanding....... 8 8
Series C preferred stock, 6,270,527 shares issued and outstanding....... 6 6
Series D preferred stock, 2,868,538 and 2,222,222 shares issued and
outstanding........................................................... 3 2
Common stock, $.001 par value, 150,000,000 shares authorized, 8,596,912
and 8,414,541 shares issued and outstanding........................... 5 5
Warrants ............................................................... 337 337
Additional paid-in capital ............................................. 9,088 11,686
Accumulated deficit .................................................... (135,972) (79,801)
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(126,525) (67,757)
Less receivable from stockholders....................................... 703 --
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Total stockholders' deficit................................................ (127,228) (67,757)
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Total liabilities and stockholders' deficit................................ $ 178,805 $ 146,971
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
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Revenue:
Communications services................................ $ 25,484 $ 11,589 $ 46,770 $ 20,897
Equipment sales........................................ 2,206 2,386 4,728 3,714
------------ ------------ ------------ ------------
Total revenue............................................ 27,690 13,975 51,498 24,611
Cost of services:
Cost of communications services........................ 18,952 9,034 34,649 16,172
Cost of equipment sales................................ 1,434 1,367 3,073 2,154
------------ ------------ ------------ ------------
Total cost of services................................... 20,386 10,401 37,722 18,326
------------ ------------ ------------ ------------
Gross margin............................................. 7,304 3,574 13,776 6,285
Selling, general and administrative expenses............. 30,162 11,068 51,365 19,364
Depreciation and amortization expense.................... 5,423 2,031 9,883 3,574
------------ ------------ ------------ ------------
Loss from operations..................................... (28,281) (9,525) (47,472) (16,653)
Interest expense......................................... (5,378) (3,769) (9,976) (7,484)
Interest income.......................................... 831 655 1,277 1,562
------------ ------------ ------------ ------------
Net loss................................................. (32,828) (12,639) (56,171) (22,575)
Preferred stock dividends................................ (3,625) (492) (5,875) (986)
Amortization of preferred stock issuance costs........... (268) (8) (443) (16)
------------ ------------ ------------ ------------
Loss applicable to common stock.......................... $ (36,721) $ (13,139) $ (62,489) $ (23,577)
============ ============ ============ ============
Loss per common share -- basic and diluted............... $ (4.36) $ (1.44) $ (7.42) $ (2.59)
============ ============ ============ ============
Weighted average number of common shares outstanding..... 8,425 9,093 8,420 9,086
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BIRCH TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
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NET CASH FROM OPERATING ACTIVITIES $ (60,845) $ (18,356)
INVESTING ACTIVITIES
Purchase of property and equipment...................................... (35,357) (20,496)
Business acquisitions, net of cash acquired............................. (400) (4,756)
Amortization of discount on pledged securities.......................... (622) (913)
Maturity of pledged securities.......................................... 8,050 8,050
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Net cash from investing activities...................................... (28,329) (18,115)
FINANCING ACTIVITIES
Proceeds from long-term debt............................................ 50,000 --
Proceeds from issuance of preferred stock............................... 50,000 --
Proceeds from issuance of common stock.................................. 18 --
Payment of financing costs.............................................. (1,752) --
Repayment of long-term debt and capital lease obligations............... (10,849) (1,007)
Repayment of short-term notes........................................... -- (200)
----------- -----------
Net cash from financing activities...................................... 87,417 (1,207)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................. (1,757) (37,678)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 5,673 39,745
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 3,916 $ 2,067
=========== ===========
Supplementary schedule of non-cash investing and financing activities:
Amounts recorded in connection with acquisitions:
Fair value of net assets acquired, net of cash acquired............ $ -- $ 2,678
Fair value of intangible assets.................................... 400 4,087
Assumption of liabilities.......................................... -- (926)
Assumption of long-term debt and capital lease obligations......... -- (872)
Issuance of common stock........................................... -- (211)
Property and equipment additions included in accounts payable......... 2,503 2,646
Property and equipment additions acquired through capital lease....... 1,173 1,147
Series D preferred stock issued for payment of preferred stock
issuance costs...................................................... 3,000 --
Receivable from stockholders for common stock......................... 703 --
Supplemental disclosure of cash flow information:
Cash payment for interest, net of interest capitalized of $731 in
2000 and $629 in 1999............................................... 9,902 7,528
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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BIRCH TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Birch Telecom, Inc. (Birch) have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Birch's annual report on Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission (SEC) on
March 30, 2000.
2. LOSS PER SHARE
The net loss per share amount reflected on the condensed
consolidated statements of operations is based on the weighted-average number
of common shares outstanding. Stock options and convertible preferred stock
are anti-dilutive, and therefore excluded from the computation of earnings
per share. In the future, these stock equivalents may become dilutive.
3. RECLASSIFICATIONS
Certain items in the 1999 condensed consolidated financial statements
have been reclassified to be consistent with the classification in the 2000
condensed consolidated financial statements.
4. CAPITAL STRUCTURE
Since December 31, 1999, the following equity transactions occurred:
o In March 2000, Birch filed a registration statement on Form S-1
with the SEC for an underwritten initial public offering of
common stock. In connection with the filing, Birch's board of
directors approved a 1.795-for-1 split of common stock, effective
April 6, 2000. All prior period share and per share information
has been restated to reflect the split. All outstanding shares of
Birch's preferred stock will automatically convert into shares of
common stock upon completion of the proposed offering. The
conversion ratio on the preferred stock has been adjusted in
accordance with the 1.795-for-1 common stock split. Additionally,
authorized shares of capital stock were increased to 208,403,275,
with 150,000,000 allocated to common stock and 58,403,275
allocated to preferred stock;
o In March 2000, BTI Ventures, L.L.C. (BTI), an affiliate of
Kohlberg Kravis Roberts & Co. (KKR), Birch's largest stockholder,
exercised its options to purchase an additional 5,263,158 shares
of series F preferred stock at $4.75 per share and 5,000,000
shares of series F preferred stock at $5.00 per share, totaling
$50.0 million. The transaction was funded and the associated
shares were issued in April 2000. In connection with the private
placement of series F preferred stock to BTI, which closed on
August 5, 1999, and the related exercise of options in March
2000, Birch's placement agent earned compensation which included
646,316 shares of series D preferred stock; and
o In March 2000, certain members of Birch's board of directors
agreed to purchase 167,534 shares of common stock for $700,000.
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5. SENIOR CREDIT FACILITY
In February 2000, Birch increased its $75.0 million senior credit
facility to $125.0 million. The credit facility provides for a $25.0 million
reducing revolver and $100.0 million in multi-draw term loans. The revolver is
available for general corporate purposes of Birch's subsidiaries and the term
loans are to be used to finance telecommunications equipment, inventory, network
assets and back office systems. As of June 30, 2000, $50.0 million was
outstanding under the term loan portion of the senior credit facility.
The senior credit facility contains certain financial and
operational covenants with which Birch must comply. At June 30, 2000, Birch
was not in compliance with certain covenants of the agreement and obtained a
waiver dated August 9, 2000 to dismiss the default for the three months ended
June 30, 2000. The debt has been included in current liabilities due to the
financial institutions' ability to call the loan in the next twelve months if
future covenants are not met. Birch intends to refinance the loan and the
loan covenants on a long-term basis. However, it can not be assured that the
refinancing will be on satisfactory terms or done at all.
6. SUBSEQUENT EVENTS
Since June 30, 2000, Birch has borrowed an additional $29.8 million
through August 10, 2000 under the term loan portion of the senior credit
facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30,
1999
REVENUE. Revenue increased 98.1% to $27.7 million for the 2000 period
compared to $14.0 million for the 1999 period. The increase in revenue was
primarily a result of new customer sales in new and existing markets. As a
percentage of total revenue, communications services were 92.0% for the 2000
period and 82.9% for the 1999 period, and equipment sales were 8.0% for the 2000
period and 17.1% for the 1999 period.
COST OF SERVICES. Cost of services increased 96.0% to $20.4 million for the
2000 period compared to $10.4 million for the 1999 period. The increase in cost
of services was primarily the result of associated revenue increases. Gross
margins increased 104.4% to $7.3 million (26.4% of revenue) for 2000 compared to
$3.6 million (25.6% of revenue) for 1999. The increase in gross margin as a
percentage of revenue was primarily the result of a greater percentage of
revenue being derived from higher margin facility-based local services as
compared to resold services in the 1999 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 172.5% to $30.2 million for the 2000 period
compared to $11.1 million for the 1999 period. The increase in expense was
primarily a result of supporting and attracting customers in new and existing
markets and entry into Oklahoma markets, which affected wages, rent,
advertising, internal communications and information technology expense.
Additionally, we had 1,484 employees at June 30, 2000 compared to 666 employees
at June 30, 1999. EBITDA, a commonly used measure by securities analysts of
earnings before deducting interest, taxes, depreciation and amortization,
decreased 205.0% to a loss of $22.9 million for the 2000 period compared to a
loss of $7.5 million for the 1999 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
167.0% to $5.4 million for the 2000 period compared to $2.0 million for the 1999
period. The increase in depreciation and amortization was primarily attributable
to the depreciation of a larger base of property and equipment.
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INTEREST. Interest expense increased 42.7% to $5.4 million for the 2000
period compared to $3.8 million for the 1999 period. The increase in interest
expense was primarily a result of borrowings on our senior credit facility,
which began December 1999.
NET LOSS. Net loss increased 159.7% to $32.8 million for the 2000 period
compared to $12.6 million for the 1999 period.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUE. Revenue increased 109.2% to $51.5 million for the 2000 period
compared to $24.6 million for the 1999 period. The increase in revenue was
primarily a result of new customer sales in new and existing markets. As a
percentage of total revenue, communications services were 90.8% for the 2000
period and 84.9% for the 1999 period, and equipment sales were 9.2% for the 2000
period and 15.1% for the 1999 period.
COST OF SERVICES. Cost of services increased 105.8% to $37.7 million for
the 2000 period compared to $18.3 million for the 1999 period. The increase in
cost of services was primarily the result of associated revenue increases. Gross
margins increased 119.2% to $13.8 million (26.8% of revenue) for 2000 compared
to $6.3 million (25.5% of revenue) for 1999. The increase in gross margin as a
percentage of revenue was primarily the result of a greater percentage of
revenue being derived from higher margin facility-based local services as
compared to resold services in the 1999 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 165.3% to $51.4 million for the 2000 period
compared to $19.4 million for the 1999 period. The increase in expense was
primarily a result of supporting and attracting customers in new and existing
markets, market launches in Texas, entry into Oklahoma markets and having six
months of expenses in the 2000 period for Capital Communications Corporation
(acquired March 1999), which affected wages, rent advertising, internal
communications and information technology expenses. Additionally, we had 1,484
employees at June 30, 2000 compared to 666 employees at June 30, 1999. EBITDA, a
commonly used measure by securities analysts of earnings before deducting
interest, taxes, depreciation and amortization, decreased 187.4% to a loss of
$37.6 million for the 2000 period compared to a loss of $13.1 million for the
1999 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
176.5% to $9.9 million for the 2000 period compared to $3.6 million for the 1999
period. The increase in depreciation and amortization was primarily attributable
to the depreciation of a larger base of property and equipment and the
amortization of intangible assets related to acquisitions.
INTEREST. Interest expense increased 33.3% to $10.0 million for the 2000
period compared to $7.5 million for the 1999 period. The increase in interest
expense was primarily a result of borrowings on our senior credit facility,
which began December 1999. Interest income decreased 18.2% to $1.3 million for
the 2000 period compared to $1.6 million for the 1999 period. The decrease in
interest income is primarily a result of the maturity and sale of $16.1 million
of pledged securities for the payment of interest on the 14% senior notes.
NET LOSS. Net loss increased 148.8% to $56.2 million for the 2000 period
compared to $22.6 million for the 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets increased to $178.8 million at June 30, 2000 from
$147.0 million at December 31, 1999. This increase was primarily the result
of expansion of our local and data networks and development of operations
support systems and automated back office systems. At June 30, 2000, our
current liabilities of $70.4 million exceeded our current assets of $43.2
million, resulting in negative working capital of $27.2 million and a $31.9
million decrease compared to working capital of $4.7 million at December 31,
1999. At December 31, 1999, our current assets of $40.1 million exceeded
current liabilities of $35.4 million. The decrease in working capital was
primarily attributable to new borrowings on our senior credit facility and
reductions in accounts payable, partially offset by increases in customer
receivable accounts due to revenue
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increases in new and existing markets. Pledged securities to satisfy interest
payments on our senior notes amounted to $16.0 million at June 30, 2000 and
$23.4 million at December 31, 1999.
OPERATING ACTIVITIES. Net cash used in operating activities was $60.8
million for the six months ended June 30, 2000 compared to $18.4 million for the
same period in 1999. Net cash used in operating activities was primarily used to
fund our net losses of $56.2 million for the 2000 period and $22.6 million for
the 1999 period.
INVESTING ACTIVITIES. Net cash used in investing activities was $28.3
million for the six months ended June 30, 2000 compared to $18.1 million for
same period 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, totaling $35.4 million in the
2000 period and $20.5 million in the 1999 period. Net proceeds from the sale of
pledged securities related to the 14% senior notes was $8.1 million in each of
the 2000 and 1999 periods. Additionally, $4.8 million was spent on acquisitions
in the 1999 period.
FINANCING ACTIVITIES. Net cash provided by financing activities was
$87.4 million for the six months ended June 30, 2000 compared to net cash used
in financing activities of $1.2 million for the same period in 1999. In the 2000
period, net cash provided by financing activities was primarily from $40.0
million in net borrowings on our senior credit facility and $47.5 million in net
proceeds from the issuance of series F preferred stock.
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. At June 30, 2000, we were not in compliance with certain covenants of
the agreement. We obtained a waiver dated August 9, 2000 to dismiss the covenant
violation for the three months ended June 30, 2000.
In March 2000, an affiliate of KKR exercised its options to purchase an
additional $50.0 million of our series F preferred stock. The transaction was
funded and the associated shares were issued in April 2000.
The development and expansion of our business will continue to require
significant capital to fund capital expenditures, working capital and debt
service and will generate negative operating cash flows. Our principal capital
expenditure requirements will include:
o the purchase, installation, and expansion of switches and
transmission equipment for our local and data networks; and
o the further development of operations support systems and
automated back office systems.
We do not believe that the growth of our long distance and customer
premises equipment business will require significant capital expenditures.
Our business plan calls for us to offer our services in additional
markets. We expect to expand our operations in Oklahoma in the third quarter of
this year and commence service in the regions served by Ameritech and BellSouth
in 2001. We will need additional cash to fund our working capital needs, debt
service requirements and operating losses. Until we begin to generate positive
cash flow from operations, these liquidity requirements will need to be financed
with additional debt and equity capital.
During the second quarter 2000, we began renegotiating the terms of our
existing senior credit facility and making corresponding changes to the
financial covenants. We believe that our current resources, including
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availability under our senior credit facility, will be sufficient to satisfy our
liquidity needs for the next nine months. If our plans or assumptions change, if
our assumptions prove to be inaccurate, or if we experience unexpected costs or
competitive pricing pressures, we will be required to seek additional capital
sooner than we currently expect. In particular, if we elect to pursue
acquisition opportunities or open additional markets, our cash needs may
increase substantially. We cannot assure you that our current projection of cash
flow and losses from operations, which will depend upon numerous future factors
and conditions, many of which are outside of our control, will be accurate.
Actual results will almost certainly vary materially from our current
projections. The cost of expanding our network services and sales efforts,
funding other strategic initiatives and operating our business will depend on a
variety of factors, including, among other things:
o the number of subscribers and the services for which they
subscribe;
o the nature and penetration of services that we may offer;
o regulatory and legislative developments; and
o the response of our competitors to their loss of customers to us
and to changes in technology.
We intend to seek additional debt and equity financing to fund our
future liquidity needs. We cannot assure you that we will be able to raise
additional capital on satisfactory terms or at all. If we decide to raise
additional funds through the incurrence of debt, our interest obligations will
increase and we may become subject to additional or more restrictive financial
covenants. In addition, the terms of our senior credit facility and our senior
notes each restrict our ability to obtain additional debt financing. If we
decide to raise additional funds through the issuance of equity, the ownership
interests represented by the common stock will be diluted. In the event that we
are unable to obtain additional capital or to obtain it on acceptable terms or
in sufficient amounts, we may be required to delay the development of our
network and business plans or take other actions that could materially and
adversely affect our business, operating results and financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101, as amended, is effective for our consolidated financial
statements beginning in the fourth quarter 2000. We do not expect the impact of
SAB No. 101 to have a material effect in relation to our consolidated financial
statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation: An Interpretation of Accounting Principles Board (APB) Opinion No.
25" (the FASB Interpretation). The FASB Interpretation poses and answers 20
separate questions dealing with APB No. 25, "Accounting for Stock Issued to
Employees," implementation practice issues. The FASB Interpretation will be
effective for our consolidated financial statements beginning in the third
quarter 2000 and we do not expect its impact in relation to our consolidated
financial statements to be material.
In March 2000, the FASB Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 00-2, "Accounting for Web Site Development Costs."
EITF Issue No. 00-2 provides guidance on accounting for costs incurred to
develop Internet web sites. EITF Issue No. 00-2 is effective beginning in the
third quarter 2000. We do not expect the impact of EITF Issue No. 00-2 to be
material in relation to our consolidated financial statements.
In June 2000, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities: An Amendment of SFAS No. 133." SFAS No. 138 amends
the accounting and reporting standards for certain derivative instruments and
certain hedging activities that have caused application difficulties since the
issuance of SFAS No. 133. We are required to adopt SFAS No. 138 concurrently
with SFAS No. 133. SFAS No. 133 is effective for our consolidated financial
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statements beginning in the first quarter 2001. We do not expect the impact of
SFAS No. 133 or SFAS No. 138 to be material in relation to our consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth, expansion strategy and an intended public stock offering. The
forward-looking statements are subject to risks, uncertainties and assumptions,
and actual results may differ materially from anticipated results described in
these forward-looking statements. The factors that could cause actual results to
differ materially include, but are not limited to, revision of expansion plans,
availability of financing, changes in laws and regulations, the number of
potential customers in a target market, the existence of strategic alliances or
relationships, technological or other developments in our business, changes in
the competitive climate in which we operate, overall economic trends including
interest rate and foreign currency trends, stock market activity, litigation,
the emergence of future opportunities and other factors more fully described
under the caption "Risk Factors" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed with the SEC on March 30, 2000 and
which is incorporated herein by reference. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in our exposure to certain market risks have
occurred from the discussion contained in Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," filed as part of our annual report on Form 10-K
for the year ended December 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in claims or litigation that
arise in the normal course of business. We are not a party to any legal
proceedings which, if decided adversely, would have a material adverse effect on
our business or financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period April 1, 2000 through June 30, 2000, we have issued
and sold unregistered securities as follows:
o In March 2000, BTI, an affiliate of KKR, our largest stockholder,
exercised its options to purchase an additional 5,263,158 shares
of series F preferred stock at $4.75 per share and 5,000,000
shares of series F preferred stock at $5.00 per share, totaling
$50.0 million. The transaction was funded and the associated
shares were issued in April 2000. In connection with the private
placement of series F preferred stock to BTI, which closed on
August 5, 1999, and the related exercise of options in March
2000, our placement agent earned compensation which included
646,316 shares of series D preferred stock; and
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o In March 2000, our board of directors approved a 1.795-for-1
split of our common stock with an April 6, 2000 effective date.
In connection with the stock split, we amended our Certificate of
Incorporation to authorize 208,403,275 shares of capital stock,
with 150,000,000 allocated to common stock and 58,403,275
allocated to preferred stock.
All sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were made
without general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to us that the shares were being acquired for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the second quarter of 2000, the following matters were submitted
to a vote of our securities holders:
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herein:
3.1 Certificate of amendment of restated certificate of
incorporation of Birch Telecom, Inc. (incorporated by
reference to Exhibit 3.1 to Birch Telecom Inc.'s
quarterly report on Form 10-Q for the period ended
March 31, 2000, filed May 15, 2000).
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).
10.10 Amendment No. 1 dated February 1, 2000 to Missouri
Interconnection Agreement.
10.32 Amendment No. 2 dated May 20, 2000 to Missouri
Interconnection Agreement.
10.33 Interconnection agreement under Sections 251 and 252
of the Telecommunications Act of 1996 by and between
Southwestern Bell Telephone Company and Birch Telecom
of Oklahoma, Inc.
10.34 Amendment No. 1 dated April 7, 2000 to the
interconnection agreement under Sections 251 and 252
of the Telecommunications Act of 1996 by and between
Southwestern Bell Telephone Company and Birch Telecom
of Kansas, Inc.
10.35 Amendment No. 1 dated May 15, 2000 to 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 (Texas Interconnection Agreement).
10.36 Amendment No. 2 dated May 15, 2000 to Texas
Interconnection Agreement.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the three months ended
June 30, 2000.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BIRCH TELECOM, INC.
(REGISTRANT)
DATE: AUGUST 14, 2000
BY: /s/ BRADLEY A. MOLINE
---------------------------
BRADLEY A. MOLINE, SENIOR VICE
PRESIDENT - CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
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