<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
BIRCH TELECOM, INC.
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1766929
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(STATE OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER
IDENTIFICATION NO.)
2020 BALTIMORE AVENUE, KANSAS CITY, MISSOURI 64108
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
If this form relates to the If this form relates to the
registration of a class of registration of a class of
securities pursuant to Section securities pursuant to Section
12(b) of the Exchange Act and 12(g) of the Exchange Act and
is effective pursuant to is effective pursuant to the
General Instruction A(c) General Instruction A(d)
please check the following please check the following
box. (TM) box. (TM)
Securities Act registration Statement file number to which this form relates:
333-33156
---------------
(If Applicable)
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
COMMON STOCK, $.001 PAR VALUE NASDAQ NATIONAL MARKET
- - ------------------------------------------- -----------------------------------
- - ------------------------------------------- -----------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
NONE
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(TITLE OF CLASS)
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(TITLE OF CLASS)
<PAGE>
ITEM 1. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
For a description of the common stock, $.001 par value per share (the
"Common Stock") of the Registrant, see the information under the caption
"Description of Capital Stock" in the Registration Statement on Form S-1 (File
No. 333-33156) of the Registrant (the "Registration Statement"), which
description is hereby incorporated by reference herein. In addition, any
prospectus contained in the Registration Statement that is filed pursuant to
Rule 424(b) under the Securities Act of 1933 shall be deemed incorporated by
reference herein. Application has been made to list the Common Stock on the
Nasdaq National Market.
ITEM 2. EXHIBITS.*/
EXHIBIT NO. DESCRIPTION
---------- --------------------------------------------------------------
1.1 Registration Statement on Form S-1 (File No. 333-33156) of the
Registrant
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Amended and Restated Bylaws of the Registrant
3.3 Form of Restated Certificate of Incorporation of the
Registrant (to be filed in Delaware immediately prior to
completion of the offering described in the Registration
Statement)
4.1 Specimen certificate of common stock
- - ----------
* Not filed with or incorporated by reference in copies of this
registration statement filed with the Securities and Exchange
Commission pursuant to Instruction II of the Instructions as to
Exhibits.
2
<PAGE>
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereto duly authorized.
/s/ Bradley A. Moline
-------------------------------------------------
Bradley A. Moline
March 31, 2000 Senior Vice President and Chief Financial Officer
3
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 2000
REGISTRATION NO. 333-33156
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- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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.
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<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.
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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
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<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
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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 2,823,179
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 79,906,030 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 27,068,525 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.
17
<PAGE>
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.
18
<PAGE>
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 1,000,000 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 $8.2 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.
29
<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>
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<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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<PAGE>
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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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
Verigate 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
Verigate.
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 VERIGATE
Verigate 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. Verigate 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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<PAGE>
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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<PAGE>
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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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 $0.0006 per share.
The shares issued under these options vest over a four-year period, at a
rate of 6.25% per quarter. Options issued during 1999 were also granted
under our 1998 stock option plan and vest 25% at the first anniversary of
the grant, then 6.25% per quarter thereafter. All stock options have been
adjusted to reflect a stock dividend made on June 23, 1998. Holders of
exercised options have voting power with respect to all shares of common
stock underlying the options. Upon termination of employment, we have the
right to repurchase all options which have not vested as of that date,
subject to some exceptions.
(2) Reflects matching contributions made by us under our 401(k) plan.
(3) Reflects compensation paid to Messrs. Scott and Lawhon commencing in
January 1997.
(4) Mr. Goldman joined us in March 1998 as senior vice president of Internet
services. In August 1999 Mr. Goldman was named senior vice president of
operations and chief operating officer.
(5) Reflects compensation paid to Mr. Vranicar commencing in March 1997.
(6) Mr. Sauder joined us after the Valu-Line acquisition and currently serves as
vice president. Compensation listed was paid by Valu-Line from January 1997
to February 1998.
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OPTIONS GRANTS
The following table sets forth summary information regarding option grants
made during 1999 to our chief executive officer and each of our four other
highly paid executive officers. The exercise price per share is equal to the
fair market value of our common stock on the date of grant as determined by our
board of directors:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF STOCK
--------------------------------------------------------- PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(3)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/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
We intend to adopt prior to the closing of the offering 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
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common stock will be reserved for issuance 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 1,000,000 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
We intend to adopt prior to the closing of the offering the 2000 Employee
Stock Purchase Plan, 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 will be 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 January 1 through
December 31 of that year, and the second is July 1 of that year through June 30
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 December 31,
2000. 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
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employed for less than five months during a calendar year and any employee who
owns stock 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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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 designate 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.
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<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 58.8
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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<PAGE>
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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<PAGE>
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 82,435,425 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.
77
<PAGE>
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 Principles
F-9
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 financial statements for the
F-10
<PAGE>
BIRCH TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year ending December 31, 2001. We do not expect the impact of SFAS No. 133 to be
material in relation to its 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 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, series C
preferred stock and 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 1.999
==========
</TABLE>
At December 31, 1999, 192,905 options were exercisable with a weighted
average exercise price of $1.212. At December 31, 1998, 9,627 options were
exercisable with a weighted average exercise price of $0.001.
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).
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............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
----------
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 2,530,472 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 March 30, 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.
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.
*** To be filed by amendment.
+ 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. 1 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 March 31, 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 31ST DAY OF MARCH, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- President and Chief Executive March 31, 2000
David E. Scott Officer
*
------------------------------------------- Executive Vice President and March 31, 2000
Donald H. Goldman Chief Operating Officer
Senior Vice President of
/s/ BRADLEY A. MOLINE Finance and Chief Financial
------------------------------------------- Officer (chief accounting and March 31, 2000
Bradley A. Moline financial officer)
*
------------------------------------------- Director March 31, 2000
Henry H. Bradley
*
------------------------------------------- Director March 31, 2000
Adam H. Clammer
*
------------------------------------------- Director March 31, 2000
James H. Greene, Jr.
*
------------------------------------------- Director March 31, 2000
Alexander Navab, Jr.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- Director March 31, 2000
Thomas R. Palmer
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ Bradley A. Moline
--------------------------------------
Name: Bradley A. Moline
TITLE: ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
BIRCH TELECOM, INC.
BIRCH TELECOM, INC., a corporation organized and existing under the laws
of the State of Delaware, certifies as follows:
1. The original Certificate of Incorporation of Birch Telecom, Inc. was
filed with the Delaware Secretary of State on December 23, 1996.
2. This Restated Certificate of Incorporation amends and restates the
provisions of the Certificate of Incorporation of this Corporation, and was duly
adopted in accordance with Sections 245 and 228 of the General Corporation Law
of the State of Delaware by the directors and stockholders of the Corporation.
3. The text of the Certificate of Incorporation is amended and restated to
read in its entirety as set forth below:
First: The name of the Corporation is Birch Telecom, Inc. (the
"Corporation").
Second: The address of the Corporation's initial registered office in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle, and the name of its initial registered agent at such address is the
Corporation Service Company.
Third: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
Fourth:
A. The aggregate number of shares which the Corporation shall have authority to
issue shall be 135,000,000 shares, divided into 80,000,000 shares of common
stock ("Common Stock"), and 55,000,000 shares of preferred stock ("Preferred
Stock"). The Preferred Stock shall have a par value of one-tenth of one cent
($.001) each, and the Common Stock shall have a par value of one-tenth of one
cent ($.001) each.
B. The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Restated Certificate of Incorporation, to fix or
alter the dividend rights, dividend rate, conversion rate, voting rights, rights
and terms of redemption (including sinking fund provisions), the redemption
price or prices, the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but
1
<PAGE>
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
Of the authorized shares of Preferred Stock, 8,750,000 shares are hereby
designated "Series B Preferred Stock"; 8,500,000 shares are hereby designated
"Series C Preferred Stock"; 3,000,000 shares are hereby designated "Series D
Preferred Stock"; 1,904,898 shares are hereby designated "Series E Preferred
Stock"; and 30,000,000 shares are hereby designated "Series F Preferred Stock."
C. The powers, preferences, rights, restrictions and other matters relating to
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock are as follows:
(1) Dividends.
(a) Series B Preferred Stock. The holders of Series B Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to $1.52 plus all
unpaid dividends accrued on such shares of Series B Preferred Stock, on
each outstanding share of Series B Preferred Stock (as adjusted for any
stock dividends, combinations, splits and the like with respect to such
shares), when and as declared by the Board of Directors out of the funds
legally available for that purpose. Such dividends shall be cumulative
from the date of issuance of the Series B Preferred Stock, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not declared by the Board, but
such dividends shall be payable only when, as, and if declared by the
Board. So long as any shares of Series B Preferred Stock shall be
outstanding, no dividend, whether in cash, stock or property, shall be
paid or declared, nor shall any other distribution be made, on any shares
of Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock or Common Stock, nor shall more than 2,225,000 shares of Series C
Preferred Stock or any shares of Series D Preferred Stock or Common Stock
be purchased, redeemed or otherwise acquired for value by the Corporation
(except for acquisitions of Common Stock by the Corporation pursuant to
agreements which permit the Corporation to repurchase such shares upon
termination of services to the Corporation or in exercise of the
Corporation's right of first refusal upon a proposed transfer) until all
dividends set forth in this Section (1)(a) on the Series B Preferred Stock
shall have been paid or declared and set apart.
(b) Series C Preferred Stock. The holders of Series C Preferred
Stock shall be entitled to receive dividends in cash at the rate of ten
percent (10%) per annum on an amount equal to $1.52 on each outstanding
share of Series C Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares), when and
as declared by the Board of Directors out of funds legally available for
that purpose. Notwithstanding anything to the contrary herein, such
dividends shall be payable only when, as and if declared by the Board of
Directors and shall not be cumulative. So long as any shares of Series C
Preferred Stock shall be outstanding, no dividend, whether in cash, stock
or property, shall be paid or declared, nor shall any other distribution
be made, on any shares of Common Stock, nor shall any shares of Common
Stock be purchased, redeemed or
2
<PAGE>
otherwise acquired for value by the Corporation (except for acquisitions
of Common Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or in exercise of the Corporation's right of first refusal
upon a proposed transfer) until all dividends set forth in this Section
(1)(b) on the Series C Preferred Stock shall have been paid or declared
and set apart.
(c) Series D Preferred Stock. The holders of Series D Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to $4.50 plus all
unpaid dividends accrued on such shares of Series D Preferred Stock, on
each outstanding share of Series D Preferred Stock (as adjusted for any
stock dividends, combinations, splits and the like with respect to such
shares), when and as declared by the Board of Directors out of the funds
legally available for that purpose. Such dividends shall be cumulative
from the date of issuance of the Series D Preferred Stock, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not declared by the Board, but
such dividends shall be payable only when, as, and if declared by the
Board. So long as any shares of Series D Preferred Stock shall be
outstanding, no dividend, whether in cash, stock or property, shall be
paid or declared, nor shall any other distribution be made, on any shares
of Series B Preferred Stock (other than in shares of Series E Preferred
Stock), Series C Preferred Stock, Series E Preferred Stock or Common
Stock, nor shall more than 2,225,000 shares of Series C Preferred Stock or
any shares of Series B Preferred Stock or Common Stock be purchased,
redeemed or otherwise acquired for value by the Corporation (except for
acquisitions of Common Stock by the Corporation pursuant to agreements
which permit the Corporation to repurchase such shares upon termination of
services to the Corporation or in exercise of the Corporation's right of
first refusal upon a proposed transfer) until all dividends set forth in
this Section (1)(c) on the Series D Preferred Stock shall have been paid
or declared and set apart.
(d) Series E Preferred Stock. The holders of Series E Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to $4.50 plus all
unpaid dividends accrued on such shares of Series E Preferred Stock, on
each outstanding share of Series E Preferred Stock (as adjusted for any
stock dividends, combinations, splits and the like with respect to such
shares), when and as declared by the Board of Directors out of the funds
legally available for that purpose. Such dividends shall be cumulative
from the date of issuance of the Series E Preferred Stock, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not declared by the Board, but
such dividends shall be payable only when, as, and if declared by the
Board. So long as any shares of Series E Preferred Stock shall be
outstanding, no dividend, whether in cash, stock or property, shall be
paid or declared, nor shall any other distribution be made, on any shares
of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Common Stock, nor shall more than 2,225,000 shares of Series C
Preferred Stock or any shares of Series B Preferred Stock, Series D
Preferred Stock or Common Stock be purchased, redeemed or otherwise
acquired for value by the Corporation (except for acquisitions of Common
Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or in exercise of the Corporation's
3
<PAGE>
right of first refusal upon a proposed transfer) until all dividends set
forth in this Section (1)(d) on the Series E Preferred Stock shall have
been paid or declared and set apart.
(e) Series F Preferred Stock. The holders of Series F Preferred
Stock shall be entitled to receive dividends in cash at the rate of
fifteen percent (15%) per annum on an amount equal to the purchase price
for such shares (the "Purchase Price") plus all unpaid dividends accrued
on such shares of Series F Preferred Stock, on each outstanding share of
Series F Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares), payable on
March 31, June 30, September 30 and December 31 of each year, when and as
declared by the Board of Directors out of the funds legally available for
that purpose. Such dividends shall be cumulative from the date of issuance
of the Series F Preferred Stock, whether or not earned, whether or not
funds of the Corporation are legally available for the payment of
dividends and whether or not declared by the Board, but such dividends
shall be payable only when, as, and if declared by the Board. The Purchase
Price for the Series F Preferred Stock is $4.50 per share for the initial
purchase of 13,333,334 shares by BTI Ventures L.L.C. or its affiliates
("BTI"). In addition, BTI retains the option (the "Option") to acquire
5,263,158 shares of Series F Preferred Stock at a Purchase Price of $4.75
per share and 5,000,000 shares of Series F Preferred Stock at a Purchase
Price of $5.00 per share. So long as any shares of Series F Preferred
Stock shall be outstanding, no dividend, whether in cash or property,
shall be paid or declared, nor shall any other distribution be made, on
any shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Common Stock or any other class
or series of capital stock of the Corporation, nor shall more than
2,225,000 shares of Series C Preferred or any shares of Series B Preferred
Stock, Series D Preferred Stock, Common Stock or any other class or series
of capital stock of the Corporation be purchased, redeemed or otherwise
acquired for value by the Corporation (except for the redemption of the
Series E Preferred Stock or acquisitions of Common Stock by the
Corporation pursuant to agreements which permit the Corporation to
repurchase such shares upon termination of services to the Corporation)
until all dividends set forth in this Section (1)(e) on the Series F
Preferred Stock shall have been paid or declared and set apart. In
addition to the 15% quarterly dividend payable on the Series F Preferred
Stock, the shares of Series F Preferred Stock shall be entitled to receive
the amount of any cash or non-cash dividends or distributions declared and
paid on the shares of Common Stock, as if the shares of Series F Preferred
Stock had been converted immediately prior to the record date for the
payment of such dividend or distribution.
(2) Liquidation Rights.
(a) Series F Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment
shall be made to the holders of Series B Preferred Stock, Series C
Preferred Stock or Common Stock, the holders of Series F Preferred Stock
shall be entitled to be paid out of the assets of the Corporation an
amount equal to the greater of (i) the sum of (a) the applicable Purchase
Price per share of Series F Preferred Stock (as adjusted for any stock
dividends, combinations, splits and the like with respect to such shares)
plus (b) an amount equal to all unpaid dividends accrued on such shares of
Series F Preferred Stock to the date of payment of such preference,
whether or not earned, whether or not funds of the Corporation are legally
available for the payment of
4
<PAGE>
dividends and whether or not such dividends have been declared by the
Board; or (ii) the amount the holders of Series F Preferred Stock would
have received upon liquidation, dissolution or winding up of the
Corporation had such shares of Series F Preferred Stock and all shares of
Series D Preferred Stock and Series E Preferred Stock been converted to
Common Stock immediately prior to such liquidation, dissolution or winding
up (such greater amount, the "Series F Liquidation Preference"), for each
share of Series F Preferred Stock held by them. If the assets of the
Corporation shall be insufficient to make payment in full to all holders
of Series F Preferred Stock, Series E Preferred Stock and Series D
Preferred Stock of the liquidation preference set forth in Sections (2)(a)
through (c), inclusive, then such assets shall be distributed among the
holders of Series F Preferred Stock, Series E Preferred Stock and Series D
Preferred Stock at the time outstanding ratably in proportion to the full
amounts to which they would otherwise be respectively entitled.
(b) Series E Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment
shall be made to the holders of Series B Preferred Stock, Series C
Preferred Stock or Common Stock, the holders of Series E Preferred Stock
shall be entitled to be paid out of the assets of the Corporation an
amount equal to the greater of (i) the sum of (a) $4.50 per share of
Series E Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares) plus (b) an
amount equal to all unpaid dividends accrued on such shares of Series E
Preferred Stock to the date of payment of such preference, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not such dividends have been
declared by the Board; or (ii) the amount the holders of Series E
Preferred Stock would have received upon liquidation, dissolution or
winding up of the Corporation had such shares of Series E Preferred Stock
and all shares of Series D Preferred Stock and Series F Preferred Stock
been converted to Common Stock immediately prior to such liquidation,
dissolution or winding up (such greater amount, the "Series E Liquidation
Preference"), for each share of Series E Preferred Stock held by them. If
the assets of the Corporation shall be insufficient to make payment in
full to all holders of Series F Preferred Stock, Series E Preferred Stock
and Series D Preferred Stock of the liquidation preference set forth in
Sections (2)(a) through (c), inclusive, then such assets shall be
distributed among the holders of Series F Preferred Stock, Series E
Preferred Stock and Series D Preferred Stock at the time outstanding
ratably in proportion to the full amounts to which they would otherwise be
respectively entitled.
(c) Series D Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and before any distribution or payment
shall be made to the holders of Series B Preferred Stock, Series C
Preferred Stock or Common Stock, the holders of Series D Preferred Stock
shall be entitled to be paid out of the assets of the Corporation an
amount equal to the greater of (i) the sum of (a) $4.50 per share of
Series D Preferred Stock (as adjusted for any stock dividends,
combinations, splits and the like with respect to such shares) plus (b) an
amount equal to all unpaid dividends accrued on such shares of Series D
Preferred Stock to the date of payment of such preference, whether or not
earned, whether or not funds of the Corporation are legally available for
the payment of dividends and whether or not such dividends have been
declared by the Board; or (ii) the amount the holders of Series D
Preferred Stock would have received upon liquidation, dissolution or
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winding up of the Corporation had such shares of Series D Preferred Stock
and all shares of Series E Preferred Stock and Series F Preferred Stock
been converted to Common Stock immediately prior to such liquidation,
dissolution or winding up (such greater amount the "Series D Liquidation
Preference"), for each share of Series D Preferred Stock held by them. If
the assets of the Corporation shall be insufficient to make payment in
full to all holders of Series F Preferred Stock, Series E Preferred Stock
and Series D Preferred Stock of the liquidation preference set forth in
Sections (2)(a)-(c), then such assets shall be distributed among the
holders of Series F Preferred Stock, Series E Preferred Stock and Series D
Preferred Stock at the time outstanding ratably in proportion to the full
amounts to which they would otherwise be respectively entitled.
(d) Series B Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and after the payment of the full
liquidation preference of the Series F Preferred Stock as set forth in
Section 2(a) above, the Series E Preferred Stock as set forth in Section
2(b) above, and the Series D Preferred Stock as set forth in Section
(2)(c) above, and before any distribution or payment shall be made to the
holders of Series C Preferred Stock or Common Stock, the holders of Series
B Preferred Stock shall be entitled to be paid out of the assets of the
Corporation an amount equal to the sum of (i) $1.52 for each share of
Series B Preferred Stock held by them (as adjusted for any stock
dividends, combinations, splits and the like with respect to such shares)
plus (ii) an amount equal to all unpaid dividends accrued on such shares
of Series B Preferred Stock to the date of payment of such preference,
whether or not earned, whether or not funds of the Corporation are legally
available for the payment of dividends and whether or not such dividends
have been declared by the Board (the "Series B Liquidation Preference"),
for each share of Series B Preferred Stock held by them. If the remaining
assets of the Corporation shall be insufficient to make payment in full to
all holders of Series B Preferred Stock of the liquidation preference set
forth in this Section (2)(d), then such remaining assets shall be
distributed among the holders of Series B Preferred Stock at the time
outstanding ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
(e) Series C Preferred Stock. Upon any liquidation, dissolution, or
winding up of the Corporation, and after the payment of the full
liquidation preference of the Series F Preferred Stock as set forth in
Section 2(a) above, the Series E Preferred Stock as set forth in Section
2(b) above, and the Series D Preferred Stock as set forth in Section
(2)(c) above and the Series B Preferred Stock as set forth in Section
(2)(d) above, and before any distribution or payment shall be made to the
holders of Common Stock, the holders of Series C Preferred Stock shall be
entitled to be paid out of the assets of the Corporation an amount equal
to the sum of (i) $1.52 per share of Series C Preferred Stock (as adjusted
for any stock dividends, combinations, splits and the like with respect to
such shares), plus (ii) an amount equal to all declared and unpaid
dividends for each share of Series C Preferred Stock held by them (the
"Series C Liquidation Preference"). If the remaining assets of the
Corporation shall be insufficient to make payment in full to all holders
of Series C Preferred Stock of the liquidation preference set forth in
this Section (2)(e), then such remaining assets shall be distributed among
the holders of Series C Preferred Stock at the time outstanding ratably in
proportion to the full amounts to which they would otherwise be
respectively entitled.
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(f) Common Stock. Upon any liquidation, dissolution, or winding up
of the Corporation, and after the payment in full of the Series F
Liquidation Preference, Series E Liquidation Preference, Series D
Liquidation Preference, the Series B Liquidation Preference and the Series
C Liquidation Preference, then the remaining assets of the Corporation
legally available for distribution, if any, shall be distributed ratably
to the holders of the Common Stock.
(g) Deemed Liquidations. The following events will be deemed a
liquidation under this section: (i) consolidation, reorganization, share
exchange, recapitalization, business combination, merger or similar
transaction involving the Corporation in which the stockholders of the
Corporation immediately prior to such transaction in the aggregate cease
to own at least 50% of the voting securities of the entity surviving or
resulting from such transaction (or the ultimate parent thereof), or any
transaction or series of related transactions in which in excess of 50% of
the Corporation's voting power is transferred (in any case, an
"Acquisition"), but not including the purchase of Series F Preferred Stock
by BTI; and (ii) the sale, lease, transfer or other disposition of all or
substantially all of the assets of the Corporation (an "Asset Transfer").
(h) Payments in Property. Whenever the distribution provided for in
this Section (2) shall be payable in securities or other property other
than cash, the value of that distribution shall be the fair market value
of those securities or other property.
(i) Determinations of Fair Market Value. Whenever a determination of
fair market value is required under this Restated Certificate of
Incorporation, the fair market value shall be determined based upon the
price that would be paid by a willing buyer of the assets or shares at
issue, in a sale process designed to attract all possible participants and
to maximize value. The determination of fair market value shall be made
(i) by the Board of Directors or (ii) if a majority in interest of the
Series F Preferred Stock object to such determination by the Board of
Directors, by a nationally recognized investment banking firm mutually
agreeable to the Corporation and a majority in interest of the shares of
Series F Preferred Stock. The fees and expenses of such investment banking
firm shall be paid by the Corporation.
(3) Voting Rights.
(a) Series B, C, D, E and F Preferred Stock. Except as set forth in
Sections (3)(b) and (3)(c), the holders of Series B Preferred Stock shall
be entitled to cast one vote for each share of Series B Preferred Stock
held by them on an as-converted basis, the holders of Series C Preferred
Stock shall be entitled to cast one vote for each share of Series C
Preferred Stock held by them on an as-converted basis, the holders of
Series D Preferred Stock shall be entitled to cast one vote for each share
of Series D Preferred Stock held by them on an as-converted basis, the
holders of Series E Preferred Stock shall be entitled to cast one vote for
each share of Series E Preferred Stock held by them on an as-converted
basis, and the holders of Series F Preferred Stock shall be entitled to
cast one vote for each share of Series F Preferred Stock held by them on
an as-converted basis. Such votes shall be cast together with those cast
by the holders of Common Stock and not as a separate class, except as
otherwise provided herein or required by applicable law. The Series B
Preferred Stock, the
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Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock and the Series F Preferred Stock shall not have cumulative
voting rights.
(b) Restrictions and Limitations.
(i) So long as the outstanding shares of Series B Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock
represent at least five percent (5%) or more of the outstanding
shares of Common Stock of the Corporation (on an as-converted to
Common Stock basis), the approval by the vote or written consent of
the holders of at least a majority of the then outstanding shares of
Series B Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, voting together as a single class, shall be
necessary for effecting or validating the following actions:
(A) Any action that results in the payment or
declaration of a dividend on any shares of Common Stock; or
(B) The purchase or other acquisition (or payment into
or set aside for a sinking fund for such purpose) of any
Series C Preferred Stock or Common Stock; provided, however,
that this restriction shall not apply to: (x) the repurchase
of shares of Common Stock by the Corporation pursuant to
agreements which permit the Corporation to repurchase such
shares upon termination of services to the Corporation; or (y)
the exercise of the Corporation's right of first refusal with
the approval of the Board of Directors upon a proposed
transfer.
(ii) So long as the outstanding shares of Series B Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock,
represents at least five percent (5%) or more of the outstanding
shares of Common Stock of the Corporation (on an as-converted to
Common Stock basis), the approval by the vote or written consent of
the holders of at least seventy-five percent (75%) of the then
outstanding shares of Series B Preferred Stock, Series D Preferred
Stock, and Series E Preferred Stock, voting together as a single
class, shall be necessary for effecting or validating the following
actions:
(A) Any amendment, alteration, or repeal of any
provision of the Restated Certificate of Incorporation or
Bylaws of the Corporation (including the filing of a
Certificate of Designation), that adversely affects the voting
powers, preferences or other special rights or privileges,
qualifications, limitations, or restrictions of the Series B
Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, or
(B) Any amendment, alteration, or repeal of Section
(3)(b)(i) or Section 3(b)(ii).
(iii) So long as the outstanding shares of Series F Preferred
Stock represents at least five percent (5%) or more of the
outstanding shares of Common Stock of the Corporation (on an
as-converted to Common Stock basis), the approval by the vote or
written consent of the holders of at least seventy-five percent
(75%)
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of the then outstanding shares of Series F Preferred Stock shall be
necessary for effecting or validating the following actions with
respect to the Corporation:
(A) Any amendment, alteration, or repeal of any
provision of the Restated Certificate of Incorporation or
Bylaws of the Corporation (including the filing of a
Certificate of Designation), that adversely affects the voting
powers, preferences or other special rights or privileges,
qualifications, limitations, or restrictions of the Series F
Preferred Stock;
(B) Any authorization, creation, or increase in the
authorized number of any class or series of capital stock
ranking senior to or on parity with the Series F Preferred
Stock as to dividends, voting rights or liquidation, or any
issuance of any shares of such class or series of capital
stock (or any securities convertible into, or exchangeable or
exerciseable for such shares);
(C) Any payment of any cash or non-cash dividends or
other distributions with respect to its capital stock;
(D) Any reclassification, combination, split,
subdivision, redemption, repurchase or other acquisition of
any shares of capital stock (except for (x) acquisitions of
Common Stock by the Corporation pursuant to agreements which
permit the Corporation to repurchase such shares upon the
termination of services to the Corporation or in exercise of
the Corporation's right of first refusal upon a proposed
transfer, (y) any redemption of the Series E Preferred Stock
pursuant to Section (5)(b) and (z) the redemption by the
Corporation of up to 2,225,000 shares of Series C Preferred
Stock);
(E) Any agreement by the Corporation or its stockholders
regarding an Acquisition or an Asset Transfer (as defined in
Section 2(g));
(F) Any acquisition of assets or securities of any other
person or entity, except for acquisitions involving cash with
an aggregate value of less than five percent (5%) of the
Corporation's assets for any single acquisition or series of
related transactions;
(G) Any joint venture or similar profit sharing
arrangement involving material assets or the payment or
receipt of more than five percent (5%) of the Corporation's
assets;
(H) Any liquidation, dissolution or winding up of the
Corporation; or
(I) An amendment, alteration, or repeal of this Section
(3)(b).
(c) Election of Board of Directors.
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(i) For so long as 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, voting as a separate class, shall be entitled to elect that number
of directors to the Corporation's Board of Directors equal to (A) the
authorized size of the Corporation's Board of Directors, multiplied by (B)
(I) the total number of shares of the Corporation's Common Stock
represented by the shares of Series F Preferred Stock then outstanding (on
an as-converted basis), divided by (II) the total number of shares of the
Corporation's Common Stock then outstanding (assuming conversion of all
Preferred Stock then outstanding), rounding up so that the nominees of the
holders of Series F Preferred Stock will not represent less than such
proportionate interest in (B) above, at each meeting or pursuant to each
consent of the Corporation's shareholders for the election of directors;
provided, however, that for purposes of this Section (3)(c)(i) only, the
calculation of the total number of shares outstanding shall exclude any
equity securities issued by the Company after the Series F Original Issue
Date (other than the shares issued pursuant to the Option) if at such time
(x) BTI has not exercised any part of the Option and the outstanding
shares of Series F Preferred Stock represent twenty percent (20%) or more
of the outstanding Common Stock of the Company (on an as-converted to
Common Stock basis), or (y) BTI has exercised any part of the Option and
the outstanding shares of Series F Preferred Stock represent thirty
percent (30%) or more of the outstanding Common Stock of the Company (on
an as-converted to Common Stock basis). Only the holders of the Series F
Preferred Stock shall be entitled to remove from office such directors or
to fill any vacancy caused by the resignation, death or removal of such
directors.
(ii) 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 two (2) members of the Board of Directors at each
meeting or pursuant to each consent of the Corporation's shareholders for
the election of directors, and only the holders of the of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, voting together a single class, shall be
entitled to remove from office such directors or to fill any vacancy
caused by the resignation, death or removal of such directors.
(iii) For so long as the conditions set forth in 3(c)(i) and (ii)
are satisfied the holders of Common Stock, voting as a separate class,
shall be entitled to elect one (1) member of senior management of the
Corporation to the Board of Directors at each meeting or pursuant to each
consent of the Corporation's shareholders for the election of directors,
and only the holders of the Common Stock shall be entitled to remove from
office such director and to fill any vacancy caused by the resignation,
death or removal of such director.
(iv) Except as provided in 3(c)(i), (ii) and (iii) above, the
holders of Common
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<PAGE>
Stock and Preferred Stock, voting together as a single class, shall be
entitled to elect all members of the Board of Directors.
(4) Conversion Rights. The holders of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock shall have the following rights with
respect to 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 into shares of Common Stock (the "Conversion
Rights"):
(a) Optional Conversion. Subject to and in compliance with the
provisions of this Section (4), any shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series F Preferred
Stock may, at the option of the holder, be converted at any time into
fully paid and nonassessable shares of Common Stock. Subject to and in
compliance with the provisions of this Section (4), any shares of Series E
Preferred Stock may, at the option of the holder, be converted at any time
after October 1, 1999 into fully paid and nonassessable shares of Common
Stock. The number of shares of Common Stock to which a holder of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock shall be entitled
upon conversion shall be the product obtained by multiplying the
applicable Preferred Stock Rate then in effect (determined as provided in
Section (4)(c)) by the number of shares of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock being converted by such holder.
(b) Automatic Conversion. Subject to and in compliance with the
provisions of this Section (4), all outstanding shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock shall be
automatically converted into shares of Common Stock immediately prior to
the closing of a firmly underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of
the Company in which the gross proceeds to the Corporation (before
underwriting discounts, commissions and fees) are at least $60,000,000.
The number of shares of Common Stock to which a holder of Series B
Preferred Stock shall be entitled upon conversion shall be the product
obtained by multiplying the applicable Preferred Stock Rate then in effect
by the number of shares of Series B Preferred Stock being converted by
such holder. The number of shares of Common Stock to which a holder of
Series C Preferred Stock shall be entitled upon conversion shall be the
product obtained by multiplying the applicable Preferred Stock Rate then
in effect by the number of shares of Series C Preferred Stock being
converted by such holder. The number of shares of Common Stock to which a
holder of Series D Preferred Stock shall be entitled upon conversion shall
be the product obtained by multiplying the applicable Preferred Stock Rate
then in effect by the number of shares of Series D Preferred Stock being
converted by such holder. The number of shares of Common Stock to which a
holder of Series E Preferred Stock shall be entitled upon conversion shall
be the product obtained by multiplying the applicable Preferred Stock Rate
then in effect by the number of shares of Series E Preferred Stock being
converted by such holder. The number of shares of Common Stock to which a
holder of Series F Preferred Stock shall be entitled upon conversion shall
be the product obtained by multiplying the applicable Preferred Stock Rate
then in effect by the
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<PAGE>
number of shares of Series F Preferred Stock being converted by such
holder.
(c) Preferred Stock. The conversion rate of the applicable series of
Preferred Stock in effect at any time for conversion of the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock (the "Preferred
Stock Rate") shall be the quotient obtained by dividing the Original Issue
Price of the applicable series of Preferred Stock by the applicable
Preferred Stock Price, calculated as provided in Section (4)(d). The
"Original Issue Price" for the Series B Preferred Stock and Series C
Preferred Stock shall initially equal $1.52 per share. The "Original Issue
Price" of the Series D Preferred Stock and Series E Preferred Stock shall
initially equal $4.50 per share. The "Original Issue Price" of the Series
F Preferred Stock shall initially equal the Purchase Price with respect to
each share.
(d) Conversion Price. The conversion price for the applicable series
of Preferred Stock shall initially be the Original Issue Price of the
applicable series of Preferred Stock (the "Preferred Stock Price"). Such
initial Preferred Stock Price shall be adjusted from time to time after
the Series F Original Issue Date (as defined below) in accordance with
this Section (4). All references to the Preferred Stock Price herein shall
mean the Preferred Stock Price as applicable and as so adjusted.
(e) Mechanics of Conversion. Each holder of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock who desires to convert the
same into shares of Common Stock pursuant to this Section (4) shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or any transfer agent for the Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock, and shall give written
notice to the Corporation at such office that such holder elects to
convert the same. Such notice shall state the number of shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock being converted.
Thereupon, the Corporation shall promptly issue and deliver at such office
to such holder a certificate or certificates for the number of shares of
Common Stock to which such holder is entitled. Such conversion shall be
deemed to have been made at the close of business on the date of such
surrender of the certificates representing the shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock to be converted, and
the person entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder of
such shares of Common Stock on such date.
(f) Adjustment for Stock Splits and Combinations. If the Corporation
shall at any time or from time to time after August 5, 1999 (the "Series F
Original Issue Date") effect a subdivision of the outstanding Common Stock
without a corresponding subdivision of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock, the Preferred Stock Price for each
series of Preferred Stock in effect immediately before that subdivision
shall be proportionately decreased. Conversely, if the Corporation shall
at any time or from time to time after the Series F Original Issue Date
combine the outstanding shares of Common Stock into a smaller number of
shares without a corresponding combination of the Series B Preferred
Stock, Series C Preferred Stock, Series
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D Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock,
the Preferred Stock Price for each series of Preferred Stock in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this Section (4)(f) shall become effective at the close
of business on the date the subdivision or combination becomes effective.
(g) Adjustment for Common Stock Dividends and Distributions. If the
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common
Stock, in each such event the Preferred Stock Price of each applicable
series of Preferred Stock that is then in effect shall be decreased as of
the time of such issuance or, in the event such record date is fixed, as
of the close of business on such record date, by multiplying the Preferred
Stock Price for each applicable series of Preferred Stock then in effect
by a fraction (i) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (ii) the
denominator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not fully
paid or if such distribution is not fully made on the date fixed therefor,
the applicable Preferred Stock Price shall be recomputed accordingly as of
the close of business on such record date and thereafter the applicable
Preferred Stock Price shall be adjusted pursuant to this Section (4)(g) to
reflect the actual payment of such dividend or distribution.
(h) Adjustments for Other Dividends and Distributions. If the
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Corporation
other than shares of Common Stock, in each such event provision shall be
made so that the holders of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of other securities of the Corporation which they would have
received had their Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred
Stock been converted into Common Stock on the date of such event and had
they thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them
as aforesaid during such period, subject to all other adjustments called
for during such period under this Section (4)(h) with respect to the
rights of the holders of the Preferred Stock or with respect to such other
securities by their terms.
(i) Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Series F Original Issue Date,
the 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 is changed into the same or a
different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than an Acquisition
or Asset Transfer as defined in Section (2)(g) or a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section
(4)), in any such event
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each holder of Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall have the right thereafter to convert such stock into the kind and
amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change by holders of the
maximum number of shares of Common Stock into which such shares of Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock could have been
converted immediately prior to such recapitalization, reclassification or
change, all subject to further adjustment as provided herein or with
respect to such other securities or property by the terms thereof.
(j) Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time after the Series F Original Issue Date,
there is a capital reorganization of the Common Stock, merger,
consolidation or sale of assets (other than an Acquisition or Asset
Transfer as defined in Section (2)(g) or a recapitalization, subdivision,
combination, reclassification, exchange or substitution of shares provided
for elsewhere in this Section (4)), as a part of such capital
reorganization, merger, consolidation or sale of assets, provision shall
be made so that the holders of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock the number of shares of stock or other securities or property of the
Corporation or third party entity to which a holder of the number of
shares of Common Stock deliverable upon conversion would have been
entitled on such capital reorganization, merger, consolidation or sale of
assets, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section (4) with respect to
the rights of the holders of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock after the capital reorganization, merger, consolidation or
sale of assets to the end that the provisions of this Section (4)
(including adjustment of the Preferred Stock Price then in effect and the
number of shares issuable upon conversion of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock) shall be applicable after that event
and be as nearly equivalent as practicable.
(k) Sale of Shares Below Preferred Stock Price.
(i) If at any time or from time to time after the Series F
Original Issue Date, the Corporation issues or sells, or is deemed by
the express provisions of this Section (4)(k) to have issued or sold,
Additional Shares of Common Stock (as defined in Section (4)(k)(iv)
below), other than as a dividend or other distribution on any class of
stock as provided in Section (4)(g) above, and other than a subdivision
or combination of shares of Common Stock as provided in Section (4)(f)
above, for an Effective Price (as defined in Section (4)(k)(iv) below)
less than the then effective Preferred Stock Price with respect to the
applicable series of Preferred Stock, then and in each such case the
then existing Preferred Stock Price with respect to the applicable
series of Preferred Stock shall be reduced, as of the opening of
business on the date of such issue or sale, to a price determined by
multiplying the applicable Preferred Stock Price by a fraction (i) the
numerator of which shall be (A) the number of shares of Common Stock
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deemed outstanding (as defined below) immediately prior to such issue
or sale, plus (B) the number of shares of Common Stock which the
aggregate consideration received (as defined in Section (4)(k)(ii)
below) by the Corporation for the total number of Additional Shares of
Common Stock so issued would purchase at such applicable Preferred
Stock Price, and (ii) the denominator of which shall be the number of
shares of Common Stock deemed outstanding (as defined below)
immediately prior to such issue or sale plus the total number of
Additional Shares of Common Stock so issued. For the purposes of the
preceding sentence, the number of shares of Common Stock deemed to be
outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock actually outstanding, (B) the number of shares
of Common Stock into which the then outstanding shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock could be
converted if fully converted on the day immediately preceding the given
date, and (C) the number of shares of Common Stock which could be
obtained through the exercise or conversion of all other rights,
options and convertible securities on the day immediately preceding the
given date.
(ii) For the purpose of making any adjustment required
under this Section (4)(k), the consideration received by the
Corporation for any issue or sale of securities shall (A) to the extent
it consists of cash, be computed at the net amount of cash received by
the Corporation after deduction of any underwriting or similar
commissions, compensation or concessions paid or allowed by the
Corporation in connection with such issue or sale but without deduction
of any expenses payable by the Corporation, (B) to the extent it
consists of property other than cash, be computed at the fair value of
that property as determined in good faith by the Board of Directors,
and (C) if Additional Shares of Common Stock, Convertible Securities
(as defined in Section (4)(k)(iii) below) or rights or options to
purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities
or other assets of the Corporation for a consideration which covers
both, be computed as the portion of the consideration so received that
may be reasonably determined in good faith by the Board of Directors to
be allocable to such Additional Shares of Common Stock, Convertible
Securities or rights or options.
(iii) For the purpose of the adjustment required under this
Section (4)(k), if the Corporation issues or sells any rights or
options for the purchase of, or stock or other securities convertible
into, Additional Shares of Common Stock (such convertible stock or
securities being herein referred to as "Convertible Securities") and if
the Effective Price of such Additional Shares of Common Stock is less
than the applicable Preferred Stock Price, in each case the Corporation
shall be deemed to have issued at the time of the issuance of such
rights or options or Convertible Securities the maximum number of
Additional Shares of Common Stock issuable upon exercise or conversion
thereof and to have received as consideration for the issuance of such
shares an amount equal to the total amount of the consideration, if
any, received by the Corporation for the issuance of such rights or
options or Convertible Securities, plus, in the case of such rights or
options, the minimum amounts of consideration, if any, payable to the
Corporation upon the exercise of such rights or options, plus, in the
case of Convertible Securities, the minimum amounts of consideration,
if any, payable to the Corporation
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(other than by cancellation of liabilities or obligations evidenced by
such Convertible Securities) upon the conversion thereof; provided that
if in the case of Convertible Securities the minimum amounts of such
consideration cannot be ascertained, but are a function of antidilution
or similar protective clauses, the Corporation shall be deemed to have
received the minimum amounts of consideration without reference to such
clauses; provided further that if the minimum amount of consideration
payable to the Corporation upon the exercise or conversion of rights,
options or Convertible Securities is reduced over time or on the
occurrence or non-occurrence of specified events other than by reason
of antidilution adjustments, the Effective Price shall be recalculated
using the figure to which such minimum amount of consideration is
reduced; provided further that if the minimum amount of consideration
payable to the Corporation upon the exercise or conversion of such
rights, options or Convertible Securities is subsequently increased,
the Effective Price shall be again recalculated using the increased
minimum amount of consideration payable to the Corporation upon the
exercise or conversion of such rights, options or Convertible
Securities. No further adjustment of the applicable Preferred Stock
Price, as adjusted upon the issuance of such rights, options or
Convertible Securities, shall be made as a result of the actual
issuance of Additional Shares of Common Stock on the exercise of any
such rights or options or the conversion of any such Convertible
Securities. If any such rights or options or the conversion privilege
represented by any such Convertible Securities shall expire without
having been exercised, the applicable Preferred Stock Price as adjusted
upon the issuance of such rights, options or Convertible Securities
shall be readjusted to the applicable Preferred Stock Price which would
have been in effect had an adjustment been made on the basis that the
only Additional Shares of Common Stock so issued were the Additional
Shares of Common Stock, if any, actually issued or sold on the exercise
of such rights or options or rights of conversion of such Convertible
Securities, and such Additional Shares of Common Stock, if any, were
issued or sold for the consideration actually received by the
Corporation upon such exercise, plus the consideration, if any,
actually received by the Corporation for the granting of all such
rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually
converted, plus the consideration, if any, actually received by the
Corporation (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) on the conversion of such
Convertible Securities, provided that such readjustment shall not apply
to prior conversions of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock.
(iv) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Corporation or deemed to be issued
pursuant to this Section (4)(k), whether or not subsequently reacquired
or retired by the Corporation other than (A) shares of Series E
Preferred Stock,; (B) shares of Common Stock issued upon conversion of
the Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock;
(C) Common Stock and/or options, warrants or other Common Stock
purchase rights, and the Common Stock issued pursuant to such options,
warrants or other rights to employees, officers or directors of, or
consultants or advisors to the Corporation or any subsidiary
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pursuant to stock purchase or stock option plans or other arrangements
that are approved by the Board; (D) shares of Common Stock issued
pursuant to the exercise of options, warrants or convertible securities
outstanding as of the Series F Original Issue Date; and (E) warrants to
purchase Common Stock, and the Common Stock issued pursuant to such
warrants, that are issued to holders of the Senior Notes due 2008
issued by the Corporation pursuant to an indenture between the
Corporation and Norwest Bank, N.A. (the "Senior Notes"). The "Effective
Price" of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common
Stock issued or sold, or deemed to have been issued or sold by the
Corporation under this Section (4)(k), into the aggregate consideration
received, or deemed to have been received by the Corporation for such
issue under this Section (4)(k), for such Additional Shares of Common
Stock.
(l) Certificate of Adjustment. In each case of an adjustment or
readjustment of the applicable Preferred Stock Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock, if the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock is then
convertible pursuant to this Section (4), the Corporation, at its expense,
shall compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail,
postage prepaid, to each registered holder of Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock at the holder's address as shown in the
Corporation's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (i) the consideration
received or deemed to be received by the Corporation for any Additional
Shares of Common Stock issued or sold or deemed to have been issued or
sold, (ii) the Preferred Stock Price at the time in effect, (iii) the
number of Additional Shares of Common Stock and (iv) the type and amount,
if any, of other property which at the time would be received upon
conversion of the Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred
Stock.
(m) Notices of Record Date. Upon (i) any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend
or other distribution, or (ii) any Acquisition (as defined in Section
(2)(g)) or other capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation with or into
any other corporation, or any Asset Transfer (as defined in Section
(2)(g)), or any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the Corporation shall mail to each holder
of Preferred Stock at least twenty (20) calendar days prior to the record
date specified therein a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend or distribution and
a description of such dividend or distribution, (B) the date on which any
such Acquisition, reorganization, reclassification, transfer,
consolidation, merger, Asset Transfer, dissolution, liquidation or winding
up is expected to become effective, and (C) the date, if any, that is to
be fixed as to when the holders of record of Common Stock (or other
securities) shall be entitled
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to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such Acquisition,
reorganization, reclassification, transfer, consolidation, merger, Asset
Transfer, dissolution, liquidation or winding up.
(n) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result
in the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of any fractional
share, the Corporation shall, in lieu of issuing any fractional share, pay
cash equal to the product of such fraction multiplied by the Common
Stock's fair market value (as determined in accordance with Section
(2)(i)) on the date of conversion.
(o) Reservation of Stock. The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Common
Stock such number of its shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock and the exercise of
all outstanding options and warrants of the Corporation. If at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock or the
exercise of all outstanding options and warrants, the Corporation will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such purposes.
(p) Notices. Any notice required by the provisions of this Section
(4) shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed
telex or facsimile if sent during normal business hours of the recipient;
if not, then on the next business day, (iii) five (5) business days after
having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (iv) one (1) business day after deposit
with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing
on the books of the Corporation.
(q) Payment of Taxes. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock
upon conversion of shares of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock, excluding any tax or other charge imposed in connection
with any transfer involved in the issue and delivery of shares of Common
Stock in a name other than that in which the shares of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock so converted were registered.
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(5) Redemption.
(a) Series F Preferred Stock.
(i) Generally. In the event of (a) a breach by the Corporation of
any of the terms of this Restated Certificate of Incorporation, the Bylaws
of the Corporation, or the Amended and Restated Purchaser's Rights
Agreement, dated July 2, 1999 by and among the Corporation and certain
holders of its capital stock, as the same may be amended from time to time
(including in connection with the issuance of Series F Preferred Stock),
which has a material adverse effect on the holders of the Series F
Preferred Stock that is not cured within fifteen (15) days of receipt of
written notice by the Corporation from a holder of Series F Preferred
Stock, or (b) the voluntary resignation (other than due to death or
disability) prior to February 10, 2001 of (i) David E. Scott or (ii) any
two of Jeffrey D. Shackelford, Bradley A. Moline, or Gregory C. Lawhon
within six (6) months of one another (in the case of (a) or (b), a
"Redemption Event"), a majority in interest of the Series F Preferred
Stock may elect to demand in writing ("Redemption Demand") the redemption
of all or any portion of the shares of Series F Preferred Stock, from any
source of funds legally available therefor, at a redemption price per
share (the "Series F Redemption Price") equal to the amount of the Series
F Liquidation Preference. The redemption under this Section (5)(a) shall
take place on a date (the "Series F Redemption Date") that is no later
than thirty (30) days after the receipt by the Corporation of the
Redemption Demand.
(ii) Indenture Restriction. Notwithstanding the foregoing, the
Corporation shall not be obligated to redeem the shares of Series F
Preferred Stock for cash pursuant to Section (5)(a)(i), if such redemption
or the existence of the redemption provision would violate the terms of
the Indenture, dated as of June 23, 1998, by and between the Corporation
and Norwest Bank Minnesota, National Association (as trustee), as amended,
pursuant to which the Senior Notes were issued, until 91 days after the
date on which the Senior Notes mature. If the Corporation is unable to
redeem the Series F Preferred Stock for cash as set forth above, a
majority in interest of the Series F Preferred Stock may elect to receive
shares of Common Stock with a fair market value (as determined in
accordance with Section (2)(i)) equal to the Series F Redemption Price.
(iii) Procedure. At least 15 days prior to a Series F Redemption
Date, written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the business day next
preceding the day on which notice is given) of the Series F Preferred
Stock to be redeemed, at the address last shown on the records of the
Corporation for such holder, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder,
the Series F Redemption Date, the Series F Redemption Price, whether or
not the Corporation may redeem the shares for cash, or if not, the number
of shares of Common Stock issuable in lieu of cash as set forth in Section
(5)(a)(ii) above, the place at which payment or delivery may be obtained
and calling upon such holder to surrender to the Corporation, in the
manner and at the place designated, his
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certificate or certificates representing the shares to be redeemed (the
"Series F Company Redemption Notice"). Except as provided in Section
(5)(c), on or after the applicable Series F Redemption Date, each holder
of Series F Preferred Stock to be redeemed shall surrender to the
Corporation the certificate or certificates representing such shares, in
the manner and at the place designated in the Series F Redemption Notice,
and thereupon the Series F Redemption Price of such shares (in cash or
shares of Common Stock, as applicable) shall be payable to the order of
the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. In the
event less than all the shares represented by any such certificate are
redeemed, a new certificate shall be issued representing the unredeemed
shares.
(iv) Deposit of Redemption Price or Shares of Common Stock. Subject
to the provisions set forth above, on or prior to each Series F Redemption
Date, the Corporation shall deposit the Series F Redemption Price of all
shares of Series F Preferred Stock designated for redemption in the Series
F Redemption Notice and not yet redeemed with a bank or trust corporation
as a trust fund for the benefit of the respective holder or holders of the
shares designated for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust corporation to pay the
Series F Redemption Price for such shares to their respective holder or
holders on or after the applicable Series F Redemption Date upon receipt
of notification from the Corporation that such holder has surrendered his
share certificate to the Corporation pursuant to Section (5)(a)(iii). As
of the applicable Series F Redemption Date, the deposit shall constitute
full payment of the shares to the holder or holders, and from and after
the applicable Series F Redemption Date the shares so called for
redemption shall be redeemed and shall be deemed to be no longer
outstanding, and the holder or holders thereof shall cease to be
stockholders with respect to such shares and shall have no rights with
respect thereto except the rights to receive from the bank or trust
corporation payment of the Series F Redemption Price of the shares,
without interest, upon surrender of their certificates therefor. The
balance of any moneys deposited by the Corporation pursuant to this
Section (5)(a)(iv) remaining unclaimed at the expiration of two years
following the applicable Series F Redemption Date shall thereafter be
returned to the Corporation upon its request expressed in a resolution of
its Board of Directors. In the event that the Corporation must issue new
shares of Common Stock instead of cash pursuant to the provisions set
forth in Section (5)(a)(ii), shares of Common Stock shall be delivered to
the bank or trust corporation in lieu of such cash.
(b) Series E Preferred Stock.
(i) Generally. The Corporation, at any time and from time to time
(each a "Series E Redemption Date"), may redeem all or any portion of the
shares of Series E Preferred Stock, from any source of funds legally
available therefor, at a redemption price per share (the "Series E
Redemption Price") equal to (A) $4.50 per share for shares of Series E
Preferred Stock redeemed pursuant to a Series E Redemption Date occurring
on or before October 1, 1999, or (B) the Series E Liquidation Preference
for shares of Series E Preferred Stock redeemed pursuant to
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a Series E Redemption Date occurring after October 1, 1999.
(ii) Procedure. On each Series E Redemption Date, written notice
shall be mailed, first class postage prepaid, to each holder of record (at
the close of business on the business day next preceding the day on which
notice is given) of the Series E Preferred Stock to be redeemed, at the
address last shown on the records of the Corporation for such holder,
notifying such holder of the redemption to be effected, specifying the
number of shares to be redeemed from such holder, the Series E Redemption
Date and the Series E Redemption Price (the "Series E Company Redemption
Notice").
(iii) Deposit of Redemption Price. As of the applicable Series E
Redemption Date, the Corporation shall deposit the Series E Redemption
Price of all shares of Series E Preferred Stock designated for redemption
in the Series E Redemption Notice with a bank or trust corporation as a
trust fund for the benefit of the respective holder or holders of the
shares designated for redemption, with irrevocable instructions and
authority to the bank or trust corporation to pay to the holders of record
of the Series E Preferred Stock to be redeemed As of the applicable Series
E Redemption Date, the deposit shall constitute full payment of the shares
to the holder or holders, and from and after the applicable Series E
Redemption Date the shares so called for redemption shall be redeemed and
shall be deemed to be no longer outstanding, and the holder or holders
thereof shall cease to be stockholders with respect to such shares and
shall have no rights with respect thereto except the rights to receive
from the bank or trust corporation payment of the Series E Redemption
Price of the shares, without interest. The balance of any moneys deposited
by the Corporation pursuant to this Section (5)(b)(iii) remaining
unclaimed at the expiration of two years following the applicable Series E
Redemption Date shall thereafter be returned to the Corporation upon its
request expressed in a resolution of its Board of Directors.
(c) Rights of Redeemed Stock; Default.
(i) From and after the applicable Redemption Date, unless there
shall have been a default in payment of the applicable Redemption Price
(in cash or shares of Common Stock, as applicable), all rights of the
holders of shares of Preferred Stock designated for redemption in the
Company Redemption Notice as holders of Series E Preferred Stock or Series
F Preferred Stock, as applicable (except the right to receive the
applicable Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and
such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever.
(ii) If the Corporation fails to redeem for any reason, including,
but not limited to, the insufficiency of funds legally available for the
redemption of shares, the total number of shares of Preferred Stock to be
redeemed on such Redemption Date, those funds which are legally available
will be used to redeem the maximum possible number of such shares ratably
among the holders of such shares to be
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redeemed based upon their holdings of Series E Preferred Stock or
Series F Preferred Stock, as applicable. The shares of Preferred Stock
not redeemed shall remain outstanding and be entitled to all the rights
and preferences provided herein or, with respect to the Series F
Preferred Stock, may be otherwise converted into shares of Common Stock
pursuant to the provisions set forth in Section (5)(a)(ii). At any time
thereafter when additional funds of the Corporation are legally
available for the redemption such shares of Preferred Stock such funds
will immediately be used to redeem the balance of the shares which the
Corporation has become obliged to redeem on any applicable Redemption
Date, but which it has not redeemed.
(6) Increasing Common Stock. Subject to the provisions of this
Restated Certificate of Incorporation, the number of authorized shares of
Common Stock may be increased or decreased (but not below the number of
shares of Common Stock then outstanding, issuable upon the conversion of
the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and any other
convertible securities of the Corporation, and issuable upon the exercise
of all outstanding options and warrants), by the affirmative vote of the
holders of a majority of the Common Stock and Preferred Stock, voting
together as a single class.
(7) No Reissuance of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock. No share or shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock acquired by the Corporation by reason of
redemption, purchase, or otherwise shall be reissued, and all such shares
shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
Fifth: The number of directors which shall constitute the whole Board of
Directors of the Corporation shall be no less than seven (7) nor more than
eleven (11), which number shall be fixed by the Board of Directors of the
Corporation from time to time.
Sixth: The Board of Directors shall have power to make, and from time to
time alter, amend, or repeal the Bylaws of the Corporation; provided, however,
that (a) the stockholders shall have the paramount power to alter, amend and
repeal the Bylaws or adopt new Bylaws, exercisable by a majority vote of the
stockholders present in person or by proxy at any annual or special meeting of
stockholders, and (b) if and to the extent the stockholders exercise such power,
the Board of Directors shall not thereafter suspend, alter, amend or repeal the
Bylaws, or portions thereof, adopted by the stockholders, unless, in adopting
such Bylaws, or portions thereof, the stockholders otherwise provide.
Seventh: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under the provisions of Section 174 of the Delaware
General Corporation Law and
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amendments thereto, or (d) for any transaction from which the director derived
an improper personal benefit. If the Delaware General Corporation Law is amended
to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended. No amendment, repeal or adoption of any
provision of this Restated Certificate of Incorporation inconsistent with this
Article Seventh shall apply or have any effect on the liability of any director
of the Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment, repeal, or adoption of any inconsistent
provision.
Eighth: The directors of the Corporation need not be elected by written
ballot.
Ninth:
(a) Subject only to the exclusions set forth in paragraph (c) of this
Article Ninth, the Corporation shall hold harmless and indemnify, to the fullest
extent permitted by applicable law as it presently exists or may hereafter be
amended, each director or officer of the Corporation (each, an "Indemnitee")
against any and all liability and loss suffered and expenses (including
attorneys' fees), judgments, fines, excise taxes assessed with respect to any
employee benefit plan, or penalties and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Corporation), to
which Indemnitee is, was or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Indemnitee is, was or at any time
becomes a director or officer of the Corporation, or is, or was serving, or at
any time serves at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise.
(b) The expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in defending any proceeding and any judgments, fines or
amounts to be paid in settlement shall be advanced by the Corporation at the
request of the Indemnitee and upon delivery to the Corporation of an undertaking
by such Indemnitee to repay all amounts so advanced if it shall ultimately be
determined that Indemnitee was not entitled to be indemnified or was not to be
fully indemnified.
(c) No indemnity pursuant to this Article Ninth shall be paid by the
Corporation (i) for which payment is actually made to Indemnitee under a valid
and collectible insurance policy, except in respect of any excess beyond the
amount of payment under such insurance; (ii) for which Indemnitee is indemnified
by the Corporation pursuant to applicable law or otherwise than pursuant to this
Article Ninth; (iii) for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Corporation within the meaning of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any state statutory law or common law; (iv) on account of
Indemnitee's conduct which is finally adjudged by a court to have been knowingly
fraudulent, deliberately dishonest or willful misconduct; or (v) if a final
decision by a court having jurisdiction in the matter shall determine that such
indemnity is not lawful.
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(d) All obligations of the Corporation contained herein shall continue
during the period Indemnitee is a director or officer of the Corporation (or is,
or was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise) and
shall continue thereafter so long as Indemnitee shall be subject to any possible
claim or threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative, by reason of the fact that Indemnitee was a
director or officer of the Corporation or serving in any other capacity referred
to herein.
(e) Promptly after receipt by Indemnitee of notice of the commencement of
any action, suit or proceeding, Indemnitee will, if a claim in respect thereof
is to be made against the Corporation under this Article Ninth, notify the
Corporation of the commencement thereof; but the omission so to notify the
Corporation will not relieve it from any liability which it may have to
Indemnitee otherwise than under this Article Ninth. With respect to any such
action, suit or proceeding as to which Indemnitee notifies the Corporation of
the commencement thereof, the Corporation will be entitled to participate
therein at its own expense.
(f) Except as otherwise provided below, to the extent that it may wish,
the Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof with counsel reasonably
satisfactory to the Indemnitee. After notice from the Corporation to Indemnitee
of its election so to assume the defense thereof, the Corporation will not be
liable to Indemnitee under this Article Ninth for any legal or other expenses
subsequently incurred by Indemnitee in connection with the defense thereof other
than reasonable costs of investigation or as otherwise provided below.
Indemnitee shall have the right to employ its counsel in such action, suit or
proceeding, but the fees and expenses of such counsel, incurred after notice
from the Corporation of its assumption of the defense thereof, shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Corporation, (ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Corporation and
Indemnitee in the conduct of the defense of such, subject to the approval of the
Corporation, which approval shall not be unreasonably withheld, or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of counsel shall be at
the expense of the Corporation. The Corporation shall not be entitled to assume
the defense of any action, suit or proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall have made the conclusion provided
for in (ii) above.
(g) The Corporation shall not be liable to indemnify Indemnitee under this
Article Ninth for any amounts paid in settlement of any action or claim effected
without its written consent. The Corporation shall not settle any action or
claim in any manner which would impose any penalty or limitation on Indemnitee
without Indemnitee's written consent. Neither the Corporation nor Indemnitee
will unreasonably withhold their consent to any proposed settlement.
(h) In the event Indemnitee is required to bring any action to enforce
rights or to collect moneys due under this Article Ninth and is successful in
such action, the Corporation shall promptly
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reimburse Indemnitee for all of Indemnitee's reasonable fees and expenses in
bringing and pursuing such action.
(i) The provisions of this Article Ninth shall inure to the benefit of and
be enforceable by the Indemnitee's personal or legal representatives, executors,
administrators, heirs, devises and legatees.
(j) The Corporation shall have power to purchase and maintain insurance,
at its expense, on behalf of any person who is or was an officer, director,
employee or agent of the Corporation or a subsidiary thereof, or is or was
serving at the request of the Corporation as an officer, director, partner,
member, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including any employee benefit plan, against
any expense, liability or loss asserted against such person and incurred by such
person in any such capacity, or arising out of such person's status as such,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Bylaws, the provisions of this
Article Ninth or the Delaware General Corporation Law.
(k) The indemnification provided by this Article Ninth shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any statute, the Bylaws, other provisions of this Restated
Certificate of Incorporation, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity and
as to action in any other capacity while holding such office, and shall continue
as to a person who has ceased to be an officer or director of the Corporation or
a subsidiary thereof or an officer, director, partner, member, employee, trustee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including any employee benefit plan, and shall inure to the benefit
of the heirs, executors and administrators of such person.
(l) This Article Ninth may be hereafter amended or repealed; provided,
however, that no amendment or repeal shall reduce, terminate, or otherwise
adversely affect the right of a person entitled to obtain indemnification
hereunder with respect to acts or omissions of such person occurring prior to
the effective date of such amendment or repeal.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed on behalf of the Corporation this 17th day of March, 2000.
BIRCH TELECOM, INC.
By: /s/ Gregory C. Lawhon
________________________________________
Gregory C. Lawhon, Senior Vice President
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Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
BIRCH TELECOM, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1 DELAWARE OFFICE. The principal office of the Corporation in
the State of Delaware shall be located in the City of Wilmington, County of
New Castle, and the name and address of its registered agent is 1013 Centre
Road, in the City of Wilmington, County of New Castle.
SECTION 1.2. OTHER OFFICES. The Corporation may have such other offices,
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time
require.
SECTION 1.3. BOOKS AND RECORDS. The books and records of the
Corporation may be kept at the Corporation's headquarters in Kansas City,
Missouri, or at such other locations outside the State of Delaware as may
from time to time be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
SECTION 2.1 ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held at such date, place and/or time as may be fixed by
resolution of the Board of Directors.
SECTION 2.2. SPECIAL MEETING. Subject to the rights of the holders of any
series of preferred stock, par value $.001 per share, of the Corporation (the
"Preferred Stock") or any other series or class of stock as set forth in the
Certificate of Incorporation to elect additional directors under specified
circumstances, special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer of the Corporation, the
President of the Corporation or by a majority of the members of the Board of
Directors pursuant to a resolution.
SECTION 2.3. PLACE OF MEETING. The Board of Directors may designate the
place of meeting for any meeting of the stockholders. If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation.
SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the
place, day and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be
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prepared and delivered by the Corporation not less than ten days nor more than
sixty days before the date of the meeting, either personally, or by mail, to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
with postage thereon prepaid, addressed to the stockholder at his address as it
appears on the stock transfer books of the Corporation. Such further notice
shall be given as may be required by law. Meetings may be held without notice if
all stockholders entitled to vote are present (except as otherwise provided by
law), or if notice is waived by those not present. Any previously scheduled
meeting of the stockholders may be postponed and (unless the Certificate of
Incorporation otherwise provides) any special meeting of the stockholders may be
cancelled, by resolution of the Board of Directors upon public notice given
prior to the time previously scheduled for such meeting of stockholders.
SECTION 2.5. QUORUM AND ADJOURNMENT. Except as otherwise provided by law or
by the Certificate of Incorporation, the holders of a majority of the voting
power of the outstanding shares of the Corporation entitled to vote generally in
the election of directors (the "Voting Stock"), represented in person or by
proxy, shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series voting separately as a
class or series, the holders of a majority of the voting power of the shares of
such class or series shall constitute a quorum for the transaction of such
business. The chairman of the meeting or a majority of the shares of Voting
Stock so represented may adjourn the meeting from time to time, whether or not
there is such a quorum (or, in the case of specified business to be voted on by
a class or series, the chairman or a majority of the shares of such class or
series so represented may adjourn the meeting with respect to such specified
business). No notice of the time and place of adjourned meetings need be given
except as required by law. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or as may be permitted by
law, or by his duly authorized attorney-in-fact. Such proxy must be filed with
the Secretary of the Corporation or his representative at or before the time of
the meeting.
SECTION 2.7 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election
to the Board of Directors of the Corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders
only (a) pursuant to the Corporation's notice of meeting (or any supplement
thereto) delivered pursuant to Section 2.4 of these Bylaws, (b) by or at the
direction of the Chairman of the Board or the Board of Directors or (c) by any
stockholder of the Corporation who is entitled to vote at the meeting, who
complied with the notice procedures set forth in clauses (2) and (3) of this
paragraph (A) of this Bylaw and who was a stockholder of record at the time such
notice is delivered to the Secretary of the Corporation.
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(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not less than ninety days nor more than one hundred and twenty days
prior to the first anniversary of the preceding year's annual meeting, PROVIDED,
HOWEVER, that in the event that the date of the annual meeting is advanced by
more than thirty days, or delayed by more than seventy days, from such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the one hundred and twentieth day
prior to such annual meeting and not later than the close of business on the
later of the ninetieth day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice shall set forth (a) as to each person whom
the stockholder proposes to nominate for election or reelection as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11
thereunder, including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected; (b) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
text of the proposal or business (including the text of any resolutions proposed
for consideration and in the event that such business includes a proposal to
amend the Bylaws of the Corporation, the language of the proposed amendment) the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner, (ii) the class and number of
shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner, (iii) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business or nomination, and (iv) a representation whether the
stockholder or the beneficial owner, if any, intends or is part of a group which
intends to (a) deliver a proxy statement and/or form of proxy to holders of at
least the percentage of the Corporation's outstanding capital stock required to
approve or adopt the proposal or elect the nominee and/or (b) otherwise solicit
proxies from stockholders in support of such proposal or nomination. The
Corporation may require any proposed nominee to furnish such other information
as it may reasonably require to determine the eligibility of such proposed
nominee to serve as a director of the Corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of
this Bylaw to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation at an annual meeting is
increased and there is no public
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announcement naming all of the nominees for director or specifying the size of
the increased Board of Directors made by the Corporation at least one hundred
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Bylaw shall also be considered timely, but
only with respect to nominees for any new positions created by such increase, if
it shall be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting pursuant to Section 2.4
of these Bylaws. Nominations of persons for election to the Board of Directors
may be made at a special meeting of stockholders at which directors are to be
elected pursuant to the Corporation's notice of meeting (a) by or at the
direction of the Board of Directors or (b) provided that the Board of Directors
has determined that directors shall be elected at such meeting, by any
stockholder of the Corporation who is entitled to vote at the meeting, who
complies with the notice of procedures set forth in this Bylaw and who is a
stockholder of record at the time such notice is delivered to the Secretary of
the Corporation. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as are specified in the Corporation's
Notice of Meeting, if the stockholder's notice as required by paragraph (A)(2)
of this Bylaw shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the one
hundred and twentieth day prior to such special meeting and not later than the
close of business on the later of the ninetieth day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
(C) GENERAL. (1) Only persons who are nominated in accordance with the
procedures set forth in this Bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Bylaw. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Bylaw and if any proposed
nomination or business is not in compliance with this Bylaw (including whether
the stockholder or beneficial owner, if any, on whose behalf the nomination or
proposal is made solicits (or is part of a group which solicits), or fails to so
solicit (as the case may be), proxies in support of such stockholder's proposal
in compliance with such stockholder's representation as required by clause
(c)(iv) of Section (A)(2) of this Bylaw), to declare that such defective
proposal or nomination shall be disregarded or that such proposed business shall
not be transacted.
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(2) For purposes of this Bylaw, "public announcement" shall mean disclosure
in a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of (a)
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (b) of the holders of
any series of Preferred Stock to elect directors under specified circumstances.
SECTION 2.8 PROCEDURE FOR ELECTION OF DIRECTORS. Election of directors at
all meetings of the stockholders at which directors are to be elected shall be
by written ballot, and, except as otherwise set forth in the Certificate of
Incorporation with respect to the right of the holders of any series of
Preferred Stock or any other series or class of stock to elect additional
directors under specified circumstances, a plurality of the votes cast thereat
shall elect directors. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, all matters other than the election of directors
submitted to the stockholders at any meeting shall be decided by the affirmative
vote of a majority of the voting power of the outstanding Voting Stock present
in person or represented by proxy at the meeting and entitled to vote thereon.
SECTION 2.9 INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS.
(A) The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may include individuals who serve the
Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate has been appointed to act, or if all inspectors or alternates who
have been appointed are unable to act, at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by the General Corporation Law of the State of
Delaware.
(B) The chairman of the meeting shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the stockholders will vote at a meeting.
SECTION 2.10 UNANIMOUS CONSENT OF STOCKHOLDERS IN LIEU OF MEETING.
(a) Any action required to be taken at any annual or special meeting of
stockholders of the Corporation, or any action which may be taken at any annual
or special meeting of the stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
for the action so taken, shall be signed by the
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holders of 100% of the Corporation's outstanding stock and shall be
delivered to the Corporation by delivery to its registered office in Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be made by
hand or by certified or registered mail, return receipt request.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the date the earliest dated consent is delivered to the Corporation, a written
consent or consents signed by a sufficient number of holders to take action are
delivered to the Corporation in the manner prescribed in paragraph (c) of this
Section.
(c) In order that the Corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. Any
stockholder of record seeking to have the stockholders authorize or take
corporate action by written consent shall, by written notice to the Secretary,
request the Board of Directors to fix a record date. The Board of Directors
shall promptly, but in all events within ten (10) days after the date on which
such a request is received, adopt a resolution fixing the record date. If no
record date has been fixed by the Board of Directors within ten (10) days of the
date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by
applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation in accordance with paragraphs (a) and (b) of this Section. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by applicable law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board of Directors adopts the resolution taking such prior action.
(d) Within five (5) business days after receipt of the earliest dated
consent delivered to the Corporation in the manner provided in this Section, the
Corporation, shall retain nationally recognized independent inspectors of
elections for the purposes of performing a ministerial review of the validity of
consents and any revocations thereof. The cost of retaining inspectors of
election shall be borne by the Corporation.
(e) At any time that stockholders soliciting consents in writing to
corporate action have a good faith belief that the requisite number of valid and
unrevoked consents to authorize or take the action specified has been received
by them, the consents shall be delivered by the soliciting stockholders to the
Corporation's registered office in the State of Delaware or principal place of
business or to the Secretary of the Corporation, together with a certificate
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stating their belief that the requisite number of valid and unrevoked consents
has been received as of a specific date, which date shall be identified in the
certificate. In the event that delivery shall be made to the Corporation's
registered office in Delaware, such delivery shall be made by hand or by
certified or registered mail, return receipt requested. Upon receipt of such
consents, the Corporation shall cause the consents to be delivered promptly to
the inspectors of election. The Corporation also shall deliver promptly to the
inspectors of election any revocations of consents in its possession, custody or
control as of the time of receipt of the consents.
(f) As promptly as practicable after the consents and revocations are
received by them, the inspectors of election shall issue a preliminary report to
the Corporation stating: (i) the number of shares represented by valid and
unrevoked consents; (ii) the number of shares represented by invalid consents;
(iii) the number of shares represented by invalid revocations; and (iv) the
number of shares entitled to submit consents as of the record date. Unless the
Corporation and the soliciting stockholders agree to a shorter or longer period,
the Corporation and the soliciting stockholders shall have five (5) days to
review the consents and revocations and to advise the inspectors and the
opposing party in writing as to whether they intend to challenge the preliminary
report. If no timely written notice of an intention to challenge the preliminary
report is received, the inspectors shall certify the preliminary report (as
corrected or modified by virtue or the detection by the inspectors of clerical
errors) as their final report and deliver it to the Corporation. If the
Corporation or the soliciting stockholders give timely written notice of an
intention to challenge the preliminary report, a challenge session shall be
scheduled by the inspectors as promptly as practicable. A transcript of the
challenge session shall be recorded by a certified court reporter. Following
completion of the challenge session, the inspectors shall issue as promptly as
practicable their final report and deliver it to the Corporation. A copy of the
final report shall be included in the book in which the proceedings of meetings
of stockholders are required.
(g) The Corporation shall give prompt notice to the stockholders of the
results of any consent solicitation or the taking of corporate action without a
meeting by less than unanimous written consent.
(h) This Section shall in no way impair or diminish the right of any
stockholder or director, or any officer whose title to office is contested, to
contest the validity of any consent or revocation thereof, or to take any other
action with respect thereto.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1 GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors. In
addition to the powers and authorities by these Bylaws expressly conferred upon
them, the Board of Directors may exercise all such powers of the Corporation and
do all such lawful acts and things as are not by law, by the Certificate of
Incorporation or by these Bylaws required to be exercised or done by the
stockholders.
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SECTION 3.2. NUMBER, TENURE AND QUALIFICATIONS. Subject to the rights of the
holders of any series of Preferred Stock, or any other series or class of stock
as set forth in the Certificate of Incorporation, to elect directors under
specified circumstances, the number of directors shall be fixed from time to
time exclusively pursuant to a resolution adopted by a majority of the total
number of directors which the Corporation would have if there were no vacancies
(the "Whole Board"), but shall consist of not more than fifteen nor less than
nine directors.
SECTION 3.3. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without notice other than this Bylaw immediately after, and at the
same place as, each annual meeting of stockholders. The Board of Directors may,
by resolution, provide the time and place for the holding of additional regular
meetings without notice other than such resolution.
SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be called at the request of the Chairman of the Board, the President or a
majority of the Board of Directors. The person or persons authorized to call
special meetings of the Board of Directors may fix the place and time of the
meetings.
SECTION 3.5. NOTICE. Notice of any special meeting shall be given to each
director at his business or residence in writing or by telegram or by telephone
communication. If mailed, such notice shall be deemed adequately delivered when
deposited in the United States mails so addressed, with postage thereon prepaid,
at least five days before such meeting. If by telegram, such notice shall be
deemed adequately delivered when the telegram is delivered to the telegraph
company at least twenty-four hours before such meeting. If by facsimile
transmission, such notice shall be transmitted at least twenty-four hours before
such meeting. If by telephone, the notice shall be given at least twelve hours
prior to the time set for the meeting. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Board of Directors
need be specified in the notice of such meeting, except for amendments to these
Bylaws as provided under Section 8.1 of Article VIII hereof. A meeting may be
held at any time without notice if all the directors are present (except as
otherwise provided by law) or if those not present waive notice of the meeting
in writing, either before or after such meeting.
SECTION 3.6. CONFERENCE TELEPHONE MEETINGS. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.7. QUORUM. A whole number of directors equal to at least a
majority of the Whole Board shall constitute a quorum for the transaction of
business, but if at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of the directors present may adjourn the
meeting from time to time without further notice. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
SECTION 3.8. VACANCIES. Subject to the rights of the holders of any series
of Preferred Stock, or any other series or class of stock as set forth in the
Certificate of Incorporation, to elect
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additional directors under specified circumstances, and unless the Board of
Directors otherwise determines, vacancies resulting from death, resignation,
retirement, disqualification, removal from office or other cause, and newly
created directorships resulting from any increase in the authorized number of
directors, may be filled only by the affirmative vote of a majority of the
remaining directors, though less than a quorum of the Board of Directors, and
directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of office of the class to which they have been
elected expires and until such director's successor shall have been duly elected
and qualified. No decrease in the number of authorized directors constituting
the Whole Board shall shorten the term of any incumbent director.
SECTION 3.9. COMMITTEE.
(A) The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. In the absence or disqualification of a member of the
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
(B) Unless the Board of Directors otherwise provides, each committee
designated by the Board of Directors may make, alter and repeal rules for the
conduct of its business. In the absence of such rules each committee shall
conduct its business in the same manner as the Board of Directors conducts its
business pursuant to these Bylaws.
SECTION 3.10 REMOVAL. Subject to the rights of the holders of any series of
Preferred Stock, or any other series or class of stock as set forth in the
Certificate of Incorporation, to elect additional directors under specified
circumstances, any director, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of at least 66 2/3 percent of the voting power of the then
outstanding Voting Stock, voting together as a single class.
ARTICLE IV
OFFICERS
SECTION 4.1 ELECTED OFFICERS. The elected officers of the Corporation shall
be a Chairman of the Board, a President, a Secretary, a Treasurer, and such
other officers as the Board of Directors from time to time may deem proper. The
Chairman of the Board shall be chosen from the directors. All officers chosen by
the Board of Directors shall each have such powers
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and duties as generally pertain to their respective offices, subject to the
specific provisions of this Article IV. Such officers shall also have powers and
duties as from time to time may be conferred by the Board of Directors or by any
committee thereof.
SECTION 4.2. ELECTION AND TERM OF OFFICE. The elected officers of the
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to Section
4.7 of these Bylaws, each officer shall hold office until his successor shall
have been duly elected and shall have qualified or until his death or until he
shall resign.
SECTION 4.3. CHAIRMAN OF THE BOARD. The Chairman of the Board (if one shall
be elected by the Board of Directors) shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors. The Chairman of the
Board shall perform all the duties incident to the office of Chairman of the
Board and such other duties as the Board of Directors may from time to time
determine or as may be prescribed by these Bylaws, provided, however, that such
duties shall not supercede the duties of the President.
SECTION 4.4. PRESIDENT. The President shall act in a general executive
capacity and shall assist the Chairman of the Board in the administration and
operation of the Corporation's business and general supervision of its policies
and affairs. The President shall, in the absence of or because of the inability
to act of the Chairman of the Board, perform all duties of the Chairman of the
Board and preside at all meetings of stockholders and of the Board of Directors.
The President may sign, alone or with the Secretary, or an Assistant Secretary,
or any other proper officer of the Corporation authorized by the Board of
Directors, certificates, contracts, and other instruments of the Corporation as
authorized by the Board of Directors.
SECTION 4.5. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors and all other notices
required by law or by these Bylaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman of the Board or the President, or by the Board of Directors,
upon whose request the meeting is called as provided in these Bylaws. He shall
record all the proceedings of the meetings of the Board of Directors, any
committees thereof and the stockholders of the Corporation in a book to be kept
for that purpose, and shall perform such other duties as may be assigned to him
by the Board of Directors, the Chairman of the Board or the President. He shall
have the custody of the seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the Board of Directors, the
Chairman of the Board or the President, and attest to the same.
SECTION 4.6. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate receipts and
disbursements in books belonging to the Corporation. The Treasurer shall deposit
all moneys and other valuables in the name and to the credit of the Corporation
in such depositaries as may be designated by the Board of Directors. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board of Directors, the Chairman of the Board, or the President, taking proper
vouchers for such
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disbursements. The Treasurer shall render to the Chairman of the Board, the
President and the Board of Directors, whenever requested, an account of all his
transactions as Treasurer and of the financial condition of the Corporation. If
required by the Board of Directors, the Treasurer shall give the Corporation a
bond for the faithful discharge of his duties in such amount and with such
surety as the Board of Directors shall prescribe.
SECTION 4.7. REMOVAL. Any officer elected by the Board of Directors may be
removed by the Board of Directors whenever, in their judgment, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of his successor, his death,
his resignation or his removal, whichever event shall first occur, except as
otherwise provided in an employment contract or an employee plan.
SECTION 4.8. VACANCIES. A newly created office and a vacancy in any office
because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the term at any meeting of the Board of
Directors.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.1 STOCK CERTIFICATES AND TRANSFERS.
(A) The interest of each stockholder of the Corporation shall be evidenced
by certificates for shares of stock in such form as the appropriate officers of
the Corporation may from time to time prescribe. The shares of the stock of the
Corporation shall be transferred on the books of the Corporation by the holder
thereof in person or by his attorney, upon surrender for cancellation of
certificates for the same number of shares, with an assignment and power of
transfer endorsed thereon or attached thereto, duly executed, and with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require.
(B) The certificates of stock shall be signed, countersigned and registered
in such manner as the Board of Directors may by resolution prescribe, which
resolution may permit all or any of the signatures on such certificates to be in
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 RIGHT TO INDEMNIFICATION. Subject to the provisions of the
Amended and Restated Certificate of Incorporation, the Corporation shall
indemnify and hold harmless, to the
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fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director or officer of the Corporation or,
while a director or officer of the Corporation, is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or nonprofit
entity, including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees) reasonably
incurred by such Indemnitee. Notwithstanding the preceding sentence, except as
otherwise provided in Section 6.3, the Corporation shall be required to
indemnify an Indemnitee in connection with a proceeding (or part thereof)
commenced by such Indemnitee only if the commencement of such proceeding (or
part thereof) by the Indemnitee was authorized by the Board of Directors of the
Corporation.
SECTION 6.2. PREPAYMENT OF EXPENSES. The Corporation shall pay the expenses
(including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided, however, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article VI or otherwise.
SECTION 6.3. CLAIMS. If a claim for indemnification or payment of expenses
under this Article VI is not paid in full within sixty days after a written
claim therefore by the Indemnitee has been received by the Corporation, the
Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the burden
of proving that the Indemnitee is not entitled to the requested indemnification
or payment of expenses under applicable law.
SECTION 6.4. NONEXCLUSIVITY OF RIGHTS. The rights conferred on any
Indemnitee by this Article VI shall not be exclusive of any other rights which
such Indemnitee may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders
or disinterested directors or otherwise.
SECTION 6.5. OTHER SOURCES. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Indemnitee who was or is serving at its
request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Indemnitee may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or nonprofit enterprise.
SECTION 6.6. AMENDMENT OR REPEAL. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any
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Indemnitee in respect of any act or omission occurring prior to the time of such
repeal or modification.
SECTION 6.7. OTHER INDEMNIFICATION AND PREPAYMENT OF Expenses. This Article
VI shall not limit the right of the Corporation, to the extent and in the manner
permitted by law, to indemnify and to advance expenses to persons other than
Indemnitees when and as authorized by appropriate corporate action.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 7.1 FISCAL YEAR. The fiscal year of the Corporation shall begin on
the first day of January and end on the thirty-first day of December of each
year.
SECTION 7.2. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its Certificate of
Incorporation.
SECTION 7.3. SEAL. The corporate seal shall have inscribed the name of the
Corporation thereon and shall be in such form as may be approved from time to
time by the Board of Directors.
SECTION 7.4. WAIVER OF NOTICE. Whenever any notice is required to be given
to any stockholder or director of the Corporation under the provisions of the
General Corporation Law of the State of Delaware, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice. Neither the business to be transacted at, nor the purpose of, any annual
or special meeting of the stockholders of the Board of Directors need be
specified in any waiver of notice of such meeting.
SECTION 7.5. AUDITS. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be made annually.
SECTION 7.6. RESIGNATIONS. Any director or any officer, whether elected or
appointed, may resign at any time by serving written notice of such resignation
on the Chairman of the Board, the President or the Secretary, and such
resignation shall be deemed to be effective as of the close of business on the
date said notice is received by the Chairman of the Board, the President, or the
Secretary or at such later date as is stated therein. No formal action shall be
required of the Board of Directors or the stockholders to make any such
resignation effective.
SECTION 7.7. CONTRACTS. Except as otherwise required by law, the Certificate
of Incorporation or these Bylaws, any contracts or other instruments may be
executed and delivered in the name and on the behalf of the Corporation by such
officer or officers of the Corporation as
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the Board of Directors may from time to time direct. Such authority may be
general or confined to specific instances as the Board may determine. The
Chairman of the Board, the President or any Vice President may execute bonds,
contracts, deeds, leases and other instruments to be made or executed for or on
behalf of the Corporation. Subject to any restrictions imposed by the Board of
Directors or the Chairman of the Board, the President or any Vice President of
the Corporation may delegate contractual powers to others under his
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such office of responsibility with respect to the exercise of
such delegated power.
SECTION 7.8. PROXIES. Unless otherwise provided by resolution adopted by the
Board of Directors, the Chairman of the Board, the President or any Vice
President may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation, in the name and on behalf of the Corporation, to cast
the votes which the Corporation may be entitled to cast as the holder of stock
or other securities in any other corporation or other entity, any of whose stock
or other securities may be held by the Corporation, at meetings of the holders
of the stock or other securities of such other corporation or other entity, or
to consent in writing, in the name of the Corporation as such holder, to any
action by such other corporation or other entity, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
ARTICLE VIII
AMENDMENTS
SECTION 8.1 AMENDMENTS. These Bylaws may be amended, altered, added to,
rescinded or repealed at any meeting of the Board of Directors or of the
stockholders, provided notice of the proposed change was given in the notice of
the meeting and, in the case of a meeting of the Board of Directors, in a notice
given no less than twenty-four hours prior to the meeting; PROVIDED, HOWEVER,
that, notwithstanding any other provisions of these Bylaws or any provision of
law which might otherwise permit a lesser vote or no vote, but in addition to
any affirmative vote of the holders of any particular class or series of the
stock required by law, the Certificate of Incorporation or these Bylaws, the
affirmative vote of the holders of at least a majority of the voting power of
the then outstanding Voting Stock, voting together as a single class, shall be
required in order for stockholders to alter, amend or repeal any provision of
these Bylaws or to adopt any additional bylaw.
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Exhibit 3.3
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BIRCH TELECOM, INC.
Birch Telecom, Inc. (the "Corporation"), a corporation organized and
existing under the laws of the State of Delaware, certifies as follows:
A. The original Certificate of Incorporation of Birch Telecom, Inc. was
filed with the Delaware Secretary of State on December 23, 1996.
B. A Restated Certificate of Incorporation of Birch Telecom, Inc., which
amended and restated the provisions of the original Certificate of
Incorporation, was filed with the Delaware Secretary of State on March 17, 2000.
C. An Amendment to the Restated Certificate of Incorporation of Birch
Telecom, Inc., which amended the provisions of the Restated Certificate of
Incorporation, was filed with the Delaware Secretary of State on _____ __,
2000.
D. This Restated Certificate of Incorporation amends and restates the
provisions of the Restated Certificate of Incorporation of this Corporation, and
was duly adopted in accordance with Sections 245 and 228 of the General
Corporation Law of the State of Delaware by the directors and stockholders of
the Corporation.
E. The text of the Restated Certificate of Incorporation is amended and
restated in its entirety as set forth below:
ARTICLE I.
The name of the corporation is:
Birch Telecom, Inc.
ARTICLE II.
The address of the Corporation's initial registered office in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle, and the name of its initial registered agent at such address is The
Corporation Services Company.
<PAGE>
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE IV
(a) The total number of shares that the Corporation shall have
authority to issue is 208,403,275 shares. The total number of shares of
common stock that the Corporation shall have authority to issue is
150,000,000 shares (the "Common Stock"), and the par value of each share of
Common Stock is $0.001. The total number of shares of preferred stock that
the Corporation shall have authority to issue is 58,403,275 shares (the
"Preferred Stock"), and the par value of each share of Preferred Stock is
$0.001.
Effective upon __________, 2000 (the "Effective Date"), each share of
Common Stock outstanding on the Effective Date, par value $.001 per share (the
"Old Common Stock"), shall automatically and without any action on the part of
the holder thereof be reclassified as and changed into 1.795 shares of the
Corporation's Common Stock, par value $.001 per share (the "New Common Stock"),
subject to the treatment of fractional share interests as described below. Each
holder of a certificate or certificates that, immediately prior to the Effective
Date represented outstanding shares of Old Common Stock (the "Old Certificates,"
whether one or more) shall be entitled to receive upon surrender of such Old
Certificates to UMB Bank, n.a. (the "Transfer Agent") for cancellation, a
certificate or certificates (the "New Certificates," whether one or more)
representing the number of whole shares of the New Common Stock formerly
represented by such Old Certificates so surrendered and reclassified under the
terms hereof. From and after the Effective Date, Old Certificates shall
represent only the right to receive New Certificates (and, where applicable,
cash in lieu of fractional shares, as provided below) pursuant to the provisions
hereof. No certificates or scrip representing fractional share interests in New
Common Stock, and no such fractional share interest will entitle the holder
thereof to vote, or to any rights of a stockholder of the Corporation. In lieu
of any fraction of a share, the Corporation shall pay to the Transfer Agent or
its nominee as soon as practicable after the Effective Date, as agent for the
accounts of all holders of Common Stock otherwise entitled to have a fraction of
a share issued to them in connection with the stock split, the amount equal to
the fair market value of the aggregate of all fractional shares otherwise
issuable (rounded, if necessary, to the next highest whole share) (the
"Fractional Share Amount"). The fair market value of the fractional shares shall
be determined in accordance with Article 4(c) hereof.
After the Effective Date and the receipt of payment by the Corporation of
the Fractional Share Amount, the Transfer Agent shall pay to the stockholders
entitled to a fraction of a share their pro rata share of the Fractional Share
Amount upon surrender of their Old Certificates. If more than one Old
Certificate shall be surrendered at one time for the account of the same
stockholder, the number of full shares of New Common Stock for which New
Certificates shall be issued shall be computed on the basis of the aggregate
number of shares represented by the Old Certificates surrendered. In the event
that a holder surrenders Old Certificates after the Effective Date but prior
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to the date on which the Fractional Share Amount is determined and paid to the
Transfer Agent, the Transfer Agent shall carry forward any fractional share of
such holder until the Fractional Share Amount is paid to the Transfer Agent. In
the event that the Corporation's Transfer Agent determines that a holder of Old
Certificates has not tendered all of his certificates for exchange the Transfer
Agent shall carry forward any fractional share until all certificates of that
holder have been presented for exchange so that the payment for fractional
shares to any one person shall exceed the value of one share. If any New
Certificate is to be issued in a name other than that in which the Old
Certificates surrendered for exchange are issued, the Old Certificates so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange shall affix any
requisite stock transfer stamps to the Old Certificate surrendered, or provide
funds for their purchase, or establish to the satisfaction of the Transfer Agent
that such taxes are not payable. From and after the Effective Date, the amount
of capital represented by the shares of New Common Stock into which and for
which the shares of the Old Common Stock are reclassified under the terms hereof
shall be the same as the amount of capital represented by the shares of Old
Common Stock so reclassified, until thereafter reduced or increased in
accordance with applicable law.
(b) The Preferred Stock may be issued in one or more series, each series
to be appropriately designated by a distinguishing letter or title, prior to the
issue of any shares thereof.
The Board of Directors is hereby authorized to fix or alter the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions, if any), the redemption price or
prices, the liquidation preferences, any other designations, preferences and
relative, participating, optional or other special rights, and any
qualifications, limitations or restrictions thereof, of any wholly unissued
series of Preferred Stock, and the number of shares constituting any such
unissued series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
(c) Whenever a determination of fair market vale is required under this
Amended and Restated Certificate of Incorporation, the fair market value shall
be determined based upon the price that would be paid by a willing buyer of the
assets or shares at issue, in a sale process designed to attract all possible
participants and to maximize value. The determination of fair market value shall
be made by the Board of Directors.
ARTICLE V.
The Board of Directors shall have that number of Directors set out in the
Bylaws of the Corporation as adopted or as set from time to time by a duly
adopted amendment thereto by the
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Directors or stockholdersof the Corporation, and, notwithstanding any other
provision of this Amended and Restated Certificate of Incorporation, the
authorized number of Directors may be changed only by a resolution of the Board
of Directors. Vacancies on the Board of Directors resulting from death,
resignation, removal or otherwise and newly created directorships resulting from
any increase in the number of directors may be filled only by a majority of the
directors then in office (although less than a quorum) or by the sole remaining
director, and each director so elected shall hold office until the annual
meeting of stockholders at which the term of office of the class to which such
director has been elected expires and until such director's successor shall have
been duly elected and qualified.
ARTICLE VI.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to adopt, repeal, alter, amend
and rescind Bylaws of the Corporation. Notwithstanding the foregoing, the bylaws
may be rescinded, altered, amended or repealed in any respect by the affirmative
vote of the holders of at least a majority of the outstanding voting stock of
the corporation, voting together as a single class.
ARTICLE VII.
The Board of Directors shall be and is divided into three classes,
Class I, Class II and Class III. The number of directors in each class shall
be the whole number contained in the quotient arrived at by dividing the
number of directors by three, and if a fraction is also contained in such
quotient then if such fraction is one-third (1/3), the extra director shall
be a member of Class III and if the fraction is two-thirds (2/3), one of the
extra directors shall be a member of Class III and the other shall be a
member of Class II. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, HOWEVER, that the directors of the
Corporation on the date of this Amended and Restated Certificate of
Incorporation shall each be assigned to a class on _____________, 2000 and
the directors assigned to Class I shall serve for a term ending on the date
of the first annual meeting next following _________, 2000, the directors
assigned to Class II shall serve for a term ending on the date of the second
annual meeting next following _________, 2000, and the directors assigned to
Class III shall serve for a term ending on the date of the third annual
meeting next following _________, 2000.
In the event of any increase or decrease in the number of directors, (a)
each director then serving as such shall nevertheless continue as a director of
the class of which he is a member until the expiration of his current term, or
his prior death, retirement, resignation or removal, and (b) the newly created
or eliminated directorships resulting from such increase or decrease shall be
apportioned by the Board of Directors to such class or classes as shall, so far
as possible, bring the number of directors in the respective classes into
conformity with the formula in this Article, as applied to the new number of
directors.
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Notwithstanding any of the foregoing provisions of this Article, each
director shall serve until his successor is elected and qualified or until his
death, retirement, resignation or removal. Should a vacancy occur or be created,
the remaining directors (even though less than a quorum) may fill the vacancy
for the full term of the class in which the vacancy occurs or is created.
The Board of Directors as existing on the date of this Amended and Restated
Certificate of Incorporation is as follows:
Adam H. Clammer Class I
Mory Ejabat Class I
Thomas R. Palmer Class I
Henry H. Bradley Class II
Henry R. Kravis Class II
George R. Roberts Class II
James H. Greene, Jr. Class III
Richard A. Jalkut Class III
Alexander Navab, Jr. Class III
David E. Scott Class III
ARTICLE VIII.
Elections of directors at an annual or special meeting of stockholders
need not be by written ballot unless the Bylaws of the Corporation shall so
provide.
ARTICLE IX.
(a) Subject only to the exclusions set forth in paragraph (c) of this
Article IX, the Corporation shall hold harmless and indemnify, to the fullest
extent permitted by applicable law as it presently exists or may hereafter be
amended, each director or officer of the Corporation (each, an "Indemnitee")
against any and all liability and loss suffered and expenses (including
attorneys'
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fees), judgments, fines, excise taxes assessed with respect to any employee
benefit plan, or penalties and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including any action by or in the right of the Corporation), to
which Indemnitee is, was or at any time becomes a party, or is threatened to be
made a party, by reason of the fact that Indemnitee is, was or at any time
becomes a director or officer of the Corporation, or is, or was serving, or at
any time serves at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise.
(b) The expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in defending any proceeding and any judgments, fines or
amounts to be paid in settlement shall be advanced by the Corporation at the
request of the Indemnitee and upon delivery to the Corporation of an undertaking
by such Indemnitee to repay all amounts so advanced if it shall ultimately be
determined that Indemnitee was not entitled to be indemnified or was not to be
fully indemnified.
(c) No indemnity pursuant to this Article IX shall be paid by the
Corporation (i) for which payment is actually made to Indemnitee under a valid
and collectible insurance policy, except in respect of any excess beyond the
amount of payment under such insurance; (ii) for which Indemnitee is indemnified
by the Corporation pursuant to applicable law or otherwise than pursuant to this
Article IX; (iii) for an accounting of profits made for the purchase or sale by
Indemnitee of securities of the Corporation within the meaning of Section 16(b)
of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any state statutory law or common law; (iv) on account of
Indemnitee's conduct which if finally adjudged by a court to have been knowingly
fraudulent, deliberately dishonest or willful misconduct; or (v) if a final
decision by a court having jurisdiction in the matter shall determine that such
indemnity if not lawful.
(d) All obligations of the Corporation contained herein shall continue
during the period Indemnitee is a director or officer of the Corporation (or is,
or was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise) and
shall continue thereafter so long as Indemnitee shall be subject to any possible
claim or threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative, by reason of the fact that Indemnitee was a
director or officer of the Corporation or serving in any other capacity referred
to herein.
(e) Promptly after receipt by Indemnitee of notice of the commencement of
any action, suit or proceeding, Indemnitee will, if a claim in respect thereof
is to be made against the Corporation under this Article IX, notify the
Corporation of the commencement thereof; but the omission so to notify the
Corporation will not relieve it from any liability which it may have to
Indemnitee otherwise than under this Article IX. With respect to any such
action, suit or proceeding as to which Indemnitee notifies the Corporation of
the commencement thereof, the Corporation will be entitled to participate
therein at its own expense.
(f) Except as otherwise provided below, to the extent that it may wish,
the Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof with counsel reasonably
satisfactory to the Indemnitee. After notice from the Corporation to Indemnitee
of its election so to assume the defense thereof, the Corporation will not be
liable to
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Indemnitee under this Article IX for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as other provided below. Indemnitee shall
have the right to employ its counsel in such action, suit or proceeding, but the
fees and expenses of such counsel, incurred after notice from the Corporation of
its assumption of the defense thereof, shall be at the expense of Indemnitee
unless (i) the employment of counsel by Indemnitee has been authorized by the
Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Corporation and Indemnitee in the conduct of
the defense of such, subject to the approval of the Corporation, which approval
shall not be unreasonably withheld, or (iii) the Corporation shall not in fact
have employed counsel to assume the defense of such action, in each of which
cases the fees and expenses of counsel shall be at the expense of the
Corporation. The Corporation shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Corporation or as to
which Indemnitee shall have made the conclusion provided for in (ii) above.
(g) The Corporation shall not be liable to indemnify Indemnitee under
this Article IX for any amounts paid in settlement of any action or claim
effected without its written consent. The Corporation shall not settle any
action or claim in any manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Corporation nor
Indemnitee will unreasonably withhold their consent to any proposed settlement.
(h) In the event Indemnitee is required to bring any action to enforce
rights or to collect moneys due under this Article IX and is successful in such
action, the Corporation shall promptly reimburse Indemnitee for all of
Indemnitee's reasonable fees and expenses in bringing and pursuing such action.
(i) The provisions of this Article IX shall inure to the benefit of and
be enforceable by the Indemnitee's personal or legal representatives, executors,
administrators, heirs, devises and legatees.
(j) The Corporation shall have the power to purchase and maintain
insurance, at its expense, on behalf of any person who is or was an officer,
director, employee or agent of the Corporation or a subsidiary thereof, or is or
was serving at the request of the Corporation as an officer, director, partner,
member, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including any employee benefit plan, against
any expense, liability or loss asserted against such person and incurred by such
person in any capacity, or arising out of such person's status as such, whether
or not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Bylaws, the provisions of this Article
IX or the Delaware General Corporation Law.
(k) The indemnification provided by this Article IX shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any statute, the Bylaws, other provisions of this Amended and
Restated Certificate of Incorporation, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in any other capacity while holding such
office, and shall continue as to a person who has ceased to be an officer or
director of the Corporation or a subsidiary thereof or an officer, director,
partner, member, employee, trustee or agent of another corporation,
7
<PAGE>
partnership, joint venture, trust or other enterprise, including any employee
benefit plan, and shall inure to the benefit of the heirs, executors and
administrators of such person.
(l) This Article IX may be hereafter amended or repealed; provided,
however, that no amendment or repeal shall reduce, terminate, or otherwise
adversely affect the right of a person entitled to obtain indemnification
hereunder with respect to acts or omissions of such person occurring prior to
the effective date of such amendment or repeal.
ARTICLE X.
A director shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that this Article shall not eliminate or limit the liability of a
director (i) for any breach of his duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derives an improper personal benefit.
If the Delaware General Corporation Law is hereafter amended to authorize
corporate action further limiting or eliminating the personal liability of
directors, then the liability of the director to the Corporation shall be
limited or eliminated to the fullest extent permitted by the Delaware General
Corporation Law, as so amended from time to time. Any repeal or modification of
this Article by the stockholders of the Corporation shall be prospective only,
and shall not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE XI.
No action shall be taken by the stockholders except at an annual or
special meeting of stockholders, except if such action is taken by unanimous
written consent.
ARTICLE XII.
Special meetings of the stockholders of the Corporation for any purpose
or purposes may be called at any time only by the Chairman of the Board of
Directors, the Chief Executive Officer of the Corporation, the President of the
Corporation, or a majority of the members of the Board of Directors, and such
special meetings may not be called by any other person or persons; PROVIDED,
HOWEVER, that if and to the extent that any special meeting of stockholders may
be called by any other person or persons specified in any provisions of this
Amended and Restated Certificate of Incorporation or any amendment hereto or any
certificate filed under Section 151(g) of the Delaware General Corporation Law,
then such special meeting may also be called by the person or persons, in the
manner, at the times and for the purposes so specified.
ARTICLE XIII.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation; PROVIDED,
however, that no amendment, alteration, change or repeal may be made to Article
VI, VII, XI or XIII without the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the outstanding voting stock of
the Corporation, voting together as a single class.
ARTICLE XIV.
Each reference in this Amended and Restated Certificate of Incorporation
to any provision of the Delaware General Corporation Law refers to the specified
provision of the General Corporation Law of the State of Delaware, as the same
now exists or as it may hereafter be amended or superseded.
8
<PAGE>
IN WITNESS HEREOF, this Amended and Restated Certificate of Incorporation
has been executed on behalf of the Corporation this __ day of _____, 2000.
---------------------------------------------
Gregory C. Lawhon
Senior Vice President
9
<PAGE>
Delaware
- - ------------------------------------------------------------------------------
\ \ \ \
\ No. ### \ \ ### Shares \
\ \ \ \
- - -------------- --------------
- - ------------------------------------------------------------------------------
BIRCH TELECOM, INC.
Common Stock, Par Value $0.001 Per Share
- - ------------------------------------------------------------------------------
THIS CERTIFIES THAT NAME IS THE OWNER OF
-----------------------------------------
Number (###)
- - ------------------------------------------------SHARES OF THE CAPITAL STOCK OF
BIRCH TELECOM, INC.
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN
PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS DAY OF A.D.
-------------------------------- ----------------------------------
President Secretary
- - ------------------------------------------------------------------------------
$0.001
- - ------------------------------------------------------------------------------
<PAGE>
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 SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPINION SET
FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS
OR HER PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS COMPANY, ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY SHARES
SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF
THE ISSUER OF THESE SHARES.
CERTIFICATE
FOR
###
SHARES
OF THE
CAPITAL STOCK
BIRCH TELECOM, INC.
ISSUED TO
Name
---------------------
DATE
Date
---------------------
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER
---------
UNTO
----------------------------------------------------------------
SHARES
- - --------------------------------------------------------------
OF THE CAPITAL STOCK REPRESENTED BY THE WRITTEN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT ATTORNEY
---------------------------
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED COMPANY WITH FULL
POWER OF SUBSTITUTION IN THE PREMISES.
DATED
------------------------------------
IN PRESENCE OF
----------------------------------------------------
- - ------------------------
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
