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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the transition period from to
Commission file number 333-41723
BTI Telecom Corp.
(Exact name of registrant as specified in its charter)
North Carolina 56-2047220
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4300 Six Forks Road, Suite 500
Raleigh, North Carolina
(Address of principal executive offices)
27609
(Zip Code)
(800) 849-9100
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
No Par Value Common Stock 92,397,661 shares as of May 12, 2000
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BTI TELECOM CORP.
FORM 10-Q
INDEX
Page
Number
------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and March 31,
2000 ............................................................... 3
Consolidated Statements of Operations for the three months ended
March 31, 1999 and 2000............................................. 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 2000............................................. 5
Notes to Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 2. Changes in Securities and Use of Proceeds..................... 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signatures............................................................ 16
Index to Exhibits..................................................... 17
2
BTI TELECOM CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents........................... $ 86,149 $ 48,249
Restricted cash..................................... 28,997 16,207
Accounts receivable, net............................ 34,157 35,646
Accounts and notes receivable from related parties.. 617 611
Other current assets................................ 1,456 2,109
--------- ---------
Total current assets............................... 151,376 102,822
Equipment, furniture and fixtures:
Equipment, furniture and fixtures................... 200,059 228,612
Construction in progress............................ 10,925 11,396
Less: accumulated depreciation...................... (44,410) (50,184)
--------- ---------
Total equipment, furniture and fixtures............ 166,574 189,824
Other assets, net................................... 16,884 17,348
--------- ---------
Total assets......................................... $ 334,834 $ 309,994
========= =========
Liabilities, redeemable preferred stock and
shareholders' deficit
Current liabilities:
Accounts payable.................................... $ 59,546 $ 58,776
Accrued expenses.................................... 3,931 3,993
Accrued interest.................................... 8,203 1,424
Advance billings and other liabilities.............. 5,993 6,131
--------- ---------
Total current liabilities.......................... 77,673 70,324
Long-term debt...................................... 279,000 279,000
Other long-term liabilities......................... 1,747 1,673
--------- ---------
Total liabilities.................................. 358,420 350,997
Redeemable preferred stock, $.01 par value,
authorized 10,000,000 shares: Series A redeemable
convertible preferred stock, 200,000 shares issued
and outstanding (aggregate liquidation preference of
$203,000)........................................... 195,756 198,847
Shareholders' deficit:
Common stock, no par value, authorized 500,000,000
shares, 92,397,661 shares issued and outstanding in
1999 and 2000...................................... 1,864 1,864
Common stock warrants............................... 27,000 27,000
Accumulated deficit................................. (248,206) (268,714)
--------- ---------
Total shareholders' deficit........................ (219,342) (239,850)
--------- ---------
Total liabilities, redeemable preferred stock and
shareholders' deficit............................... $ 334,834 $ 309,994
========= =========
See accompanying notes to consolidated financial statements.
3
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Dollars in thousands, except per share data)
Three Months
Ended March 31,
------------------
1999 2000
-------- --------
Revenue.................................................... $ 56,116 $ 66,677
Cost of services........................................... 37,248 41,656
-------- --------
Gross profit.............................................. 18,868 25,021
Selling, general and administrative expenses............... 19,020 26,407
Depreciation and amortization.............................. 4,099 7,148
-------- --------
Loss from operations....................................... (4,251) (8,534)
Other income (expense):
Interest expense.......................................... (6,632) (7,548)
Other income (expense), net (Note 6)...................... 791 (1,363)
-------- --------
Loss before income taxes................................... (10,092) (17,445)
Income taxes............................................... -- --
-------- --------
Net loss................................................... (10,092) (17,445)
Dividend on preferred stock................................ -- (3,000)
-------- --------
Net loss available for common shareholder.................. $(10,092) $(20,445)
======== ========
Basic and diluted loss per share........................... $ (0.10) $ (0.22)
======== ========
Basic and diluted weighted average shares outstanding...... 100,000 92,398
======== ========
See accompanying notes to consolidated financial statements.
4
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months
Ended March 31,
------------------
1999 2000
-------- --------
Operating Activities:
Net loss.................................................. $(10,092) $(17,445)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 3,394 5,945
Amortization............................................. 705 1,203
Non-cash compensation related to stock options........... 12 85
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,788) (1,490)
Accounts and notes receivable from related parties...... (12) 6
Other assets............................................ (275) (711)
Accounts payable and accrued expenses................... 3,005 (709)
Accrued interest expense................................ (6,442) (6,779)
Advanced billings and other liabilities................. (409) 64
-------- --------
Net cash used in operating activities..................... (11,902) (19,831)
Investing Activities:
Change in restricted cash................................ 12,248 12,790
Purchases of equipment, furniture and fixtures, net...... (22,927) (29,195)
Purchase of other assets................................. (847) (1,555)
-------- --------
Net cash used in investing activities..................... (11,526) (17,960)
Financing Activities:
Net proceeds from long-term borrowings................... 16,163 --
Additional issuance costs of redeemable preferred stock.. -- (60)
Decrease in other long-term liabilities.................. (249) --
Increase in deferred financing costs and other assets.... -- (49)
-------- --------
Net cash provided by (used in) financing activities....... 15,914 (109)
-------- --------
Decrease in cash and cash equivalents..................... (7,514) (37,900)
Cash and cash equivalents at beginning of period.......... 12,767 86,149
-------- --------
Cash and cash equivalents at end of period................ $ 5,253 $ 48,249
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 13,539 $ 14,442
======== ========
See accompanying notes to consolidated financial statements.
5
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (Unaudited)
Note 1: The Company and Significant Accounting Policies
Basis of Presentation
The consolidated financial information includes the accounts of BTI Telecom
Corp. and its wholly owned subsidiaries (the "Company" or "BTITC") after
elimination of intercompany transactions. The consolidated interim financial
statements of BTITC included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial reporting and in accordance with Securities and Exchange Commission
rules and regulations. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (all of which are
of a normal and recurring nature) that are necessary to present fairly the
financial position, results of operations and cash flows for the interim
periods. The results for any interim period are not necessarily indicative of
the results for any other period. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
Preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain amounts in the March 31, 1999 financial statements have been
reclassified to conform to the March 31, 2000 presentation.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." ("SFAS 133"). SFAS 133 will require the recognition
of all derivatives on our consolidated balance sheet at fair value. SFAS 133,
as amended by SFAS 137, is effective for all quarters of fiscal years
beginning after June 15, 2000. We do not anticipate that the adoption of SFAS
133 will have a significant effect on our results of operations or financial
position.
Equipment, Furniture and Fixtures
During the fourth quarter of 1997, the Company commenced construction on
its fiber optic network. Interest costs associated with the construction are
capitalized. The total amount capitalized for the three-month periods ended
March 31, 2000 and 1999 was $0.1 million and $0.5 million, respectively.
Costs associated with the fiber optic network are classified as
"Construction in Progress" in the accompanying consolidated balance sheets.
Upon completion of network segments, these costs will be transferred into
service and depreciated over their useful lives.
Note 2: Long-Term Debt And Credit Facilities
Senior Notes--On September 22, 1997, the Company issued $250.0 million of
10 1/2% Initial Notes which were exchanged for Senior Notes in January 1998.
The entire original principal balance is due September 2007, with interest
payable semi-annually on March 15th and September 15th of each year. The
Senior Notes contain various financial and administrative covenants with which
the Company must comply, including certain restrictions on the incurrence of
additional indebtedness and payment of dividends under circumstances specified
in the indenture governing the Senior Notes.
6
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Credit Facilities--In 1998, the Company amended and restated its existing
$60.0 million revolving credit facility to provide a $30.0 million revolving
credit facility and a $30.0 million capital expenditure facility
(the"Facilities"). Borrowings under the Facilities are based upon a percentage
of eligible accounts receivable and eligible capital expenditures,
respectively, as defined in the loan agreement. Borrowings under the
Facilities can be used for working capital and other purposes. At March 31,
2000, no amounts were outstanding under the Facilities. In addition, there was
$140,000 outstanding in letters of credit at March 31, 2000. The Facilities
agreement expires and amounts outstanding are due in September 2002.
Borrowings under the Facilities are secured by substantially all of the
Company's assets and bear interest, at the Company's option, at either the 30-
, 60- or 90-day LIBOR rate or the prime rate, plus an applicable margin. This
margin varies based on the Company's financial position from 0.0%-1.25% for
borrowings under the prime rate option and from 1.75%-3.0% for borrowings
under the LIBOR option. The Company is also required to pay a fee of 0.375%
per year on the unused commitment. The Facilities contain various financial
and administrative covenants with which the Company must comply on a monthly
and quarterly basis, including certain restrictions on the payment of
dividends.
In September 1999, the Company obtained an additional $60.0 million credit
facility (the "Facility"). Borrowings under the Facility are to be used to
finance segments of the Company's fiber optic network and associated
infrastructure. The Facility agreement expires and amounts outstanding are due
in September 2002. Borrowings under the Facility are secured by a first
security interest in the Company's fiber optic network and associated
infrastructure and a secondary interest in substantially all of the Company's
assets. Outstanding amounts bear interest, at the Company's option, at either
the 30-, 60- or 90-day LIBOR rate or the prime rate, plus an applicable
margin. This margin varies based on the Company's financial position and
additional equity issuances from 2.0%-3.5% for borrowings under the LIBOR
option and from 1.0%-2.5% for borrowings under the prime rate option. The
Company is also required to pay a fee of 1.5% per year on the unused
commitment. As of March 31, 2000, there was a total of $29.0 million available
and outstanding under the facility. The Facility contains various financial
and administrative covenants with which the Company must comply on a monthly
and quarterly basis, including certain restrictions on the payment of
dividends.
Note 3: Income Taxes
For the three-month periods ended March 31, 2000 and 1999, the Company
generated net losses. The Company has established a valuation allowance for
the net deferred tax assets associated with these net operating losses. As
such, there was no impact on the results from operations for net operating
losses generated during the three-month periods ended March 31, 2000 and 1999.
The Company will reduce the valuation allowance when, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will be realized.
Note 4: Commitments
During 1997, the Company signed a contract for the indefeasible right to
use certain optical fibers in a communications system. Commitments to purchase
optical fibers under this contract total approximately $51.0 million, $49.1
million of which was fulfilled through March 31, 2000. Costs associated with
fiber optic network segments under construction are classified as
"Construction in progress" in the accompanying consolidated balance sheets.
Upon completion of network segments, these costs will be transferred into
service and depreciated over their useful lives. The remaining commitments
extend through mid 2000. In addition, the Company has made certain other
commitments for the purchase of equipment in connection with its capital
program.
7
Note 5: Contingencies
In April 2000, the Company was served with a lawsuit filed by Wachovia
Bank, N.A. and Wachovia Securities, Inc. (collectively, "Wachovia"). Wachovia
alleges that the Company breached a letter agreement between Wachovia and the
Company which provided that Wachovia would receive a placement fee of $10
million in exchange for Wachovia's services as financial advisor for the
Company's private equity transactions. The Company disputes Wachovia's claim
and intends to vigorously defend itself in this litigation. Because discovery
is ongoing, and due to the uncertainties inherent in the litigation process,
the Company is unable to predict the likelihood of an unfavorable outcome. If
Wachovia were successful in its claim, any additional fees (paid above the
amount the Company has accrued based on its estimate of the fair market value
of the services provided) would be treated as equity transaction costs and
therefore not be charged against the Company's earnings.
Note 6: Other income (expense), net
Other income (expense), net consisted principally of interest income,
offset by an accrual for the full amount of the agreement to settle the
lawsuit with Gulf Communications, LLC, including the estimated legal costs to
complete this transaction.
ITEM 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The matters discussed throughout this Form 10-Q, except for historical
facts contained herein, may be forward-looking in nature, or "forward-looking
statements." Actual results may differ materially from the forecasts or
projections presented. Forward-looking statements are identified by such words
as "expects," "anticipates," "believes," "intends," "plans" and variations of
such words and similar expressions. BTI Telecom Corp. and its wholly owned
susidiaries (the "Company") believes that its primary risk factors include,
but are not limited to: high leverage; the ability to service debt;
significant capital requirements; ability to manage growth; business
development and expansion risks; competition; and changes in laws and
regulatory policies. Any forward-looking statements in the March 31, 2000 Form
10-Q should be evaluated in light of these important risk factors. For
additional disclosure regarding risk factors refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Business of the Company
Overview
BTI Telecom Corp., which began operations in 1983 as Business Telecom, Inc.
("BTI"), is a provider of telecommunications services in the southeastern
United States. We currently offer (1) integrated retail voice services,
including local, long distance, paging AIN applications, operator and other
enhanced services; (2) data services, which include dial-up and dedicated
Internet Service, digital subscriber line ("DSL") high-speed Internet access,
private line, wholesale fiber capacity, frame relay and ATM services; and (3)
wholesale voice services including switched/dedicated access and prepaid
calling card services. As of March 31, 2000, we had 23 sales offices in the
southeastern United States.
We operate long distance switching centers in Atlanta, Dallas, New York,
Orlando and Raleigh, and began offering local exchange services in November
1997 primarily on a resale basis. However, we are transitioning customers onto
our own facilities and have installed Lucent 5E2000 local switches in Raleigh,
Charlotte, Greensboro and Wilmington, North Carolina; Columbia and Greenville,
South Carolina; Orlando, Tampa and Jacksonville, Florida; and Atlanta,
Georgia. In addition to these local switches, we have co-located digital loop
carriers in 48 incumbent local exchange carrier central offices and we have
two digital loop carriers in stand-alone locations to provide more cost-
effective local services to our business customers. These co-locations also
facilitate our data service product offerings, as they allow for more rapid
deployment of DSL services. As of March 31, 2000 we had sold over 102,250
access lines, of which 96,200 were in service. Approximately 35% of these
lines in service were facilities-based. In addition, over 98% of BTI's access
lines are non-Internet service provider lines. As of March 31, 2000 we had
also sold 330 DSL lines, 220 of which were in service.
8
We operate a fiber optic network, consisting of owned and leased
transmission capacity, concentrated in the southeastern United States. In
October 1997, we entered into an agreement with Qwest Communications to
acquire an indefeasible right to use approximately 3,375 route miles of fiber
optic network from New York to Miami and Atlanta to Nashville. As of March 31,
2000, more than 3,100 route miles of this network were operational, and we
expect the remainder to be completed during the second quarter 2000. In
addition to carrying our own traffic, this network allows us to market excess
fiber capacity to other telecommunication companies.We also have approximately
350 miles of additional fiber optic network in North Carolina, resulting in
approximately 3,500 total miles of network in service. We have also installed
16 frame relay switches within our network to enhance our current and future
data service offerings.
Results of Operations
For the Three Months Ended March 31, 2000 and 1999
Revenue
Revenue for the first quarter of 2000 was $66.7 million, representing an
increase of 18.8% as compared to the same period in 1999, when revenue was
$56.1 million. This $10.6 million increase is primarily attributable to
increases in integrated voice services and data services.
Total integrated voice services revenue increased $6.4 million, or 18.7%,
from $34.4 million in the first quarter of 1999 to $40.8 million in the first
quarter of 2000. Growth of 81.3% in local service revenue accounted for the
majority of this increase, combined with an increase of 1.4% in retail long
distance revenue. Although retail long distance revenue only increased by
1.4%, customer minutes of usage actually increased by 10.9% over the first
quarter of 1999, demonstrating the strong demand that continues to be
partially offset by price compression. We continue to experience success in
bundling our retail products, as evidenced by the fact that approximately 90%
of our new local service customers also purchase our long distance services.
Local lines in service increased 66.7% from 57,700 at the end of first quarter
1999 to approximately 96,200 at the end of first quarter of 2000.
Our total data services revenue increased $3.2 million, or 56.2%, from the
first quarter of 1999 to the first quarter of 2000. Retail data revenue
increased 62.2% while wholesale data/private line revenue increased 53.5%
period over period. Strong demand from both retail and wholesale customers for
increasing amounts of data services is evident through our revenue growth and
our current backlog of approximately $2.5 million in annual revenue.
Additionally, the continued expansion of our network infrastructure will allow
us to provide a greater percentage of these data services on our network,
resulting in improved customer service and higher margins.
Wholesale voice service revenue increased $0.9 million, or 5.6%, from $15.9
million in the first quarter of 1999 to $16.8 million in the first quarter of
2000. Growth in wholesale voice services is due largely to increased revenue
from our domestic switched wholesale product, which was $11.0 million in the
first quarter of 2000 as compared to $7.9 million in the first quarter of
1999. While this represents a 38.0% increase in revenue, domestic wholesale
long distance minutes increased 62.4% between the same periods, demonstrating
the continuing effects of access charge reform on pricing of these services.
The increase in domestic wholesale revenue was partially offset by a decrease
of $1.8 million in prepaid card services revenue, which was a result of
strategic pricing changes we made to preserve certain minimum margins in this
product.
Cost of Services
Cost of services represented 62.5% of total revenue for the three-month
period ended March 31, 2000, as compared to 66.4% of total revenue for the
same period during 1999. Our lower cost of services during the first quarter
of 2000 reflects the effects of various improvements in our underlying cost
components, including improved margins as we have installed more local
switches and converted local resale customers to facilities-based services.
9
Expansion of our fiber optic network, the continuing effect of access
charge reform and rate decreases from our underlying service providers have
improved our margin percentages. In addition to adding revenue from capacity
sales of other telecommunication providers, our fiber optic network provides
for cost savings throughout our network by reducing payments we make to other
carriers for the use of their transport facilities. At March 31, 2000, we had
deployed approximately 3,500 miles of our fiber optic network.
As a result of the growth of our fiber optic network and other
infrastructure, we are able to offer a bundled suite of retail products, which
combines lower long distance rates with facilities-based local service.
Overall gross margins on customers purchasing our bundled suite of products
are maintained or improved over customers purchasing individual or non-bundled
products despite a lower rate per minute for long distance. These improved
margins are achieved because we avoid access charges on long distance calls
placed by our customers and have the ability to bill other telecommunication
carriers access charges for the use of our local network. The success of this
concept is demonstrated by the fact that we are providing long distance
service to almost 90% of our local service customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2000
were $26.4 million, or 39.6% of total revenue, as compared to $19.0 million,
or 33.9% of total revenue, for the first quarter of 1999. The increase in the
amount of our selling, general and administrative expenses is largely
attributable to the significant investment in human resources and increased
marketing and advertising efforts associated with the accelerated expansion of
our local and data services and deployment of additional fiber optic network.
As we continue to introduce new data services, such as DSL and frame relay, we
incur significant advance marketing and sales costs to insure the successful
launch of these products. We are increasing the pace at which we are deploying
services and network infrastructure in new markets, in addition to increasing
the number of switches located throughout our existing markets. Our larger
infrastructure and quickened rate of expansion create more demand for
personnel,and the need for more qualified, technically advanced personnel is
rising as we sell and service more technically advanced products. These
increases in selling, general and administrative expenses as a percent of
revenue are designed to provide us with the ability to expand into new
markets, maximize customer retention and provide for continuing growth.
Depreciation and amortization was $7.1 million for the three months ended
March 31, 2000, representing an increase of 74.4% over the same period in the
previous year. The increase is primarily attributable to capital expenditures
related to the expansion of our network operations centers, fiber optic
network and support infrastructure to accommodate increased traffic volume and
expanded service offerings.
Other Income (Expense)
Interest expense was $7.5 million for the three month ended March 31, 2000,
compared to $6.6 million in the same period of the previous year. The $0.9
million increase is primarily attributable to increased borrowings under our
credit facilities during the first quarter of 2000 compared to the first
quarter of 1999.
Other income (expense), net, for the three months ended March 31, 2000
included higher interest income primarily as a result of increased cash
balances from the sale of $200 million in redeemable preferred stock in
December, 1999. In addition, the three months ended March 31, 2000 also
included an expense accrual for the full amount of the agreement to settle a
pending lawsuit filed by Gulf Communications, L.L.C., including the estimated
legal costs to complete this transaction.
EBITDA
EBITDA consists of income (loss) before interest, income taxes,
depreciation, amortization, other non-cash charges, and certain non-recurring
items included in other income/expense. EBITDA is a common measurement of a
company's ability to generate cash flow from operations. EBITDA is not a
measure of financial performance
10
under generally accepted accounting principles and should not be considered an
alternative to net income as a measure of performance or to cash flows as a
measure of liquidity.
Our EBITDA loss for the three months ended March 31, 2000, was $1.3 million
as compared to a $0.1 million loss for the same period in 1999. The greater
EBITDA loss was primarily attributable to a 38.8% increase in selling, general
and administrative expenses for the first quarter of 2000 over the first
quarter of 1999. Higher selling, general and administrative expenses are
largely linked to the acceleration of our growth program.
Income Taxes
We generated net losses for the three-month periods ended March 31, 2000
and 1999. Based upon management's plans to expand the business through the
construction and expansion of its networks, customer base and product
offerings, this trend is expected to continue. Given these circumstances, we
have established a valuation allowance for the net deferred tax assets
associated with these net operating losses. As such, there was no impact on
the results from operations for net operating losses generated during the
three-month periods ended March 31, 2000 and 1999. We will reduce the
valuation allowance when, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
be realized.
Throughout the period of time that BTI was an S corporation, income, losses
and credits were passed through directly to shareholders and the shareholders
were provided, in the form of dividends, the funds necessary to meet tax
obligations arising from income earned by BTI. We have indemnified those
shareholders for any additional tax obligations arising from the income earned
by BTI while it was an S corporation. We believe that any such reimbursements
will not have a material effect on our financial condition or results of
operations.
Liquidity and Capital Resources
Review of Cash Flow Activity
We have funded our operations and growth primarily from operating cash
flows, borrowings and the proceeds from the sale of our redeemable preferred
stock. During the first three months of 2000 we used $19.8 million for
operating activities as compared to $11.9 million used in the same period in
1999. The primary driver of this change is the net loss of $17.4 million
experienced during the first three months of 2000 compared to the net loss of
$10.1 million in the first quarter of 1999. In addition to this change, cash
used in operating activities was increased by greater net changes in accounts
payable during the three months ended March 31, 2000.
Cash used for investing activities during the first three months of 2000
was $18.0 million compared to $11.5 million in the first three months of 1999.
The net investment in capital expenditures was $29.2 million and $22.9 million
during the three-month periods ended March 31, 2000 and 1999, respectively.
These investments were primarily related to the deployment of the fiber optic
network and purchases of equipment for the continuing development of our
facilities-based local exchange services and the deployment of additional data
service offerings. Cash used for investments was offset in part by the
provision of $12.8 million and $12.2 million of cash from the restricted cash
accounts for the three months ending March 31, 2000 and 1999, respectively, to
fund the interest payments on the Senior Notes.
Cash used in financing activities in the first three months of 2000 was
$0.1 million compared to cash provided by financing activities of $15.9
million in the first three months of 1999. During the three-month period ended
March 31, 1999, we received net proceeds of $16.2 million from borrowings
under our credit facilities discussed below.
Debt
10 1/2% Senior Notes. On September 22, 1997, we issued $250.0 million
principal amount of 10 1/2% Senior Notes (the "Senior Notes") due 2007.
Interest on the Senior Notes is payable semiannually, on March 15 and
September 15.
11
The Senior Notes are unsubordinated indebtedness equal in right of payment
with all of our existing and future unsubordinated indebtedness. Approximately
$74.1 million of the net proceeds from the sale of the Senior Notes was used
to purchase U.S. government securities to secure and fund the first six
interest payments on the Senior Notes, which are held as restricted cash. As
of March 31, 2000, our restricted cash balance was $16.2 million, available to
fund the interest payment due on September 15, 2000. The Senior Notes will
mature on September 15, 2007.
Upon a change in control, as defined in the indenture governing the Senior
Notes, we will be required to make an offer to purchase the Senior Notes at a
purchase price equal to 101% of their principal amount, plus accrued interest.
The indenture governing the Senior Notes contains certain covenants that
affect, and in certain cases significantly limit or prohibit, among other
things, our ability to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations. If we fail to comply with these
covenants, our obligation to repay the Senior Notes may be accelerated.
However, these limitations are subject to a number of important qualifications
and exceptions. In particular, while the indenture restricts our ability to
incur additional indebtedness by requiring compliance with specified leverage
ratios, it permits us to incur an unlimited amount of additional indebtedness
to finance the acquisition of equipment, inventory and network assets and up
to $100.0 million of additional indebtedness.
GE Capital Credit Facilities. Our wholly owned subsidiary, BTI, has a
credit agreement with GE Capital (the "GE Capital Facilities") providing for
the following facilities:
. A $30.0 million revolving credit facility; and
. A $30.0 million note facility.
Effective June 30, 1998, we amended and restated the GE Capital Facilities.
Borrowings under the GE Capital Facilities are based upon a percentage of
eligible accounts receivable and eligible capital expenditures, as defined in
the loan agreement. These borrowings can be used for working capital and other
purposes. Borrowings under the GE Capital Facilities are secured by
substantially all of our assets and guaranteed by us. The borrowings bear
interest at the 30-, 60- or 90- day London Interbank Offered Rate ("LIBOR") or
the prime rate, plus an applicable spread which varies, based upon our
financial position, from 0.0% to 1.25% for borrowings at prime and from 1.75%
to 3.0% for borrowings at LIBOR. We are also required to pay a fee of 0.375%
per year on the unused portion of the GE Capital Facilities. At March 31,
2000, no amounts were outstanding under the GE Capital Facilities, other than
$140,000 in letters of credit. The GE Capital Facilities require our
compliance with various financial and administrative covenants, including,
among others, covenants limiting our ability to incur debt, create liens, make
distributions or stock repurchases, make capital expenditures, engage in
transactions with affiliates, sell assets and engage in mergers and
acquisitions. In addition, the GE Capital Facilities contain affirmative
covenants, including, among others, covenants requiring maintenance of
corporate existence, licenses and insurance, payments of taxes and the
delivery of financial and other information. We are currently in compliance
with these covenants, as amended or waived, but there can be no assurance that
we will be able to continue meeting these covenants or, if required, obtain
additional financing on acceptable terms, and the failure to do so may have a
material adverse impact on our business and operations.
Bank of America Credit Facility. On September 8, 1999, we obtained a $60.0
million credit facility from Bank of America (the "Bank of America Facility").
Availability under this facility is based on the amount of fiber optic network
purchased from Qwest Communications and purchases of related equipment from
Nortel Networks, Inc. As of March 31, 2000, there was a total of $29.0 million
available and outstanding under the Bank of America Facility. Borrowings are
secured by a first security interest in the fiber optic network and related
equipment and a second security interest in substantially all of our assets.
These borrowings bear interest, at our option, at either the 30-, 60- or 90-
day LIBOR rate or the prime rate plus an applicable margin. This margin
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varies, based on our financial position and additional equity issuances, from
1.00% to 2.50% for borrowings under the prime rate option and from 2.00% to
3.50% for borrowings under the LIBOR option. We are also required to pay of
fee of 1.5% per year on the unused commitment. The Bank of America Facility
contains various financial covenants with which we must comply on a monthly
and quarterly basis. We are currently in compliance with these covenants, as
amended or waived, but there can be no assurance that we will be able to
continue meeting these covenants or, if required, obtain additional financing
on acceptable terms, and the failure to do so may have a material adverse
impact on our business and operations.
Preferred Equity Investment
WCAS Preferred Investment. On December 28, 1999, Welsh, Carson, Anderson &
Stowe VIII, L.P. and two affiliated funds (together, "WCAS"), all of which are
accredited investors, purchased an aggregate of 200,000 shares of our Series A
preferred stock and warrants to purchase 4,500,000 shares of our common stock
for a purchase price of $200.0 million. Each share of Series A preferred stock
is initially convertible into 116.959 shares of common stock, subject to
adjustment for certain dilutive issuances of our common stock. If not
converted, the Series A preferred stock has a 6% accrued dividend payable upon
conversion in cash or in kind at our election. The purchasers of the Series A
preferred stock can redeem the stock at a price equal to the greater of
liquidation value or fair market value upon the later of December 28, 2006, or
six months after the date on which all amounts due on our Senior Notes are
paid in full. The warrants to purchase 4,500,000 shares of common stock,
subject to adjustment for certain dilutive issuances, have an exercise price
of $0.01 per share and are exercisable for a period of ten years beginning on
the earlier of change in control of BTI Telecom, Inc. or December 28, 2002.
The warrants are cancelable in the event we undertake a public offering of our
common stock and our stock achieves certain price levels.
We plan to use the proceeds from this investment to expand our current
operations. Specifically, we plan to add to our telecommunications network and
fiber optic infrastructure, open sales offices in new markets, and enhance our
data services such as DSL high-speed Internet access. In addition, we used
$65.0 million of the proceeds to repurchase a portion of our outstanding
shares of common stock at a price of $8.55 per share.
Capital Spending
We incurred total capital expenditures of $29.6 million during the three
months ended March 31, 2000, including $10.6 million related to our fiber
optic network and $18.4 million in other telecommunications equipment and
corporate infrastructure, primarily for the continued expansion of our
competitive local exchange carrier (CLEC) operations. We spent $22.9 million
on capital expenditures during the same period in 1999. Based on our current
business plan and the availability of future financings, we estimate capital
requirements through the year 2001 to be between $200 million and $250
million. Capital requirements include the projected costs of:
. expanding our fiber optic network,
. adding sales offices in new geographic locations,
. expanding our local service infrastructure, and
. accelerating our data service offerings.
The actual amount and timing of our capital requirements might differ
materially from the foregoing estimate as a result of regulatory,
technological or competitive developments (including market developments and
new opportunities) in the telecommunications industry. Although there can be
no assurance, we believe that proceeds from future financing transactions,
together with cash on hand, borrowings expected to be available under our
credit facilities, and cash flow from operations will be sufficient to expand
our business as currently planned. We expect cash flow from operations during
2000 to remain at or near breakeven as we continue to expand our CLEC
offerings and complete the deployment of our fiber optic network. In the event
our plans change or our forecasts prove to be inaccurate, the foregoing
sources of funds may prove to be insufficient to fund our planned growth and
operations. We might also require additional capital in the future (or sooner
than
13
currently anticipated) for new business activities related to our current and
planned businesses, or in the event we decide to make additional acquisitions
or enter into joint ventures and strategic alliances. Sources of additional
capital may include public or private debt and equity offerings, subject to
compliance with the provisions in the indenture governing the Senior Notes,
the GE Capital Facilities and the Bank of America Facility. Additional
financing might not be available to us, or might not be available on terms
acceptable to us and within the restrictions contained in our financing
arrangements.
Year 2000 Issues
Beginning in 1996, we conducted a thorough review of our information
technology and operating systems and non-information technology systems as
well as the systems of our major customers, vendors (including major suppliers
of switching equipment, fiber optic electronics, and billing and customer care
systems), suppliers, and third-party network service providers to ensure that
the systems would properly recognize the Year 2000. We also reviewed
internally developed software. As a result of this assessment, we developed a
detailed plan to address the Year 2000 issue.
To date, we have experienced no significant negative effects due to Year
2000 issues. We believe our program was effective in resolving the Year 2000
issues to date and that it will continue to be in the future. However, it is
not possible to anticipate all possible future outcomes, especially when third
parties are involved. Failure by us and/or our major vendors, third-party
network service providers or other material service providers or customers to
continue to adequately address their respective Year 2000 issues could have a
material adverse effect on our business, results of operations and financial
condition.
Effects of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." ("SFAS 133"). SFAS 133 will require the recognition
of all derivatives on our consolidated balance sheet at fair value. SFAS 133,
as amended by SFAS 137, is effective for all quarters of fiscal years
beginning after June 15, 2000. We do not anticipate that the adoption of SFAS
133 will have significant effect on our results of operations or financial
position.
ITEM 3 -- Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
Although we invest our short-term excess cash balances, the nature and
quality of these investments are restricted under the terms of the indenture
for the Senior Notes and our internal investment policies. These investments
are limited primarily to U.S. Treasury securities, certain time deposits, and
high-quality repurchase agreements and commercial paper (with restrictions on
the rating of the companies issuing these instruments). We do not invest in
any derivative or commodity type instruments. In addition, the restricted cash
balance available to fund the next scheduled interest payment on the Senior
Notes is invested in U.S. Treasury securities in accordance with the terms of
the related agreements. Accordingly, we are subject to minimal market risk on
any of our investments.
The majority of our debt, which consists of $250 million of the Senior
Notes, bears interest at a fixed rate. Although the actual service
requirements of this debt are fixed, changes in interest rates generally could
put us in a position of paying interest that differs from then existing market
rates. The remainder of our debt consists of the GE Capital Facilities and the
Bank of America Facility, which bear interest at variable rates based upon
market conditions and our financial position. As of March 31, 2000, borrowings
under these credit facilities were $29.0 million. Management believes that
this debt does not currently create a significant amount of interest rate risk
and, as such, has not engaged in any related hedging transactions. However, as
market conditions and outstanding borrowings under this debt change,
management intends to continue to evaluate our business risk, and we might
enter into hedging transactions if conditions warrant.
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PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings
We have reached a settlement of our lawsuit with Gulf Communications,
L.L.C., and fully accrued the expense, including estimated legal costs to
complete this transaction, as an item of other income (expenses), net.
In April 2000, we were served with a lawsuit filed by Wachovia Bank, N.A.
and Wachovia Securities, Inc. Wachovia alleges that we breached a letter
agreement between Wachovia and us which provided that Wachovia would receive a
placement fee of $10 million in exchange for Wachovia's services as financial
advisor for the Company's equity transaction. We dispute Wachovia's claim and
intend to vigorously defend ourselves in this litigation. Because discovery is
ongoing, and due to the uncertainties inherent in the litigation process, we
are unable to predict the likelihood of an unfavorable outcome. If Wachovia
were successful in its claim, any additional fees (above the amount we have
accrued based on our estimate of the fair market value the services provided),
would be treated as equity transaction costs and therefore would not be
charged against our earnings.
Except as described above, we are not a party to any pending legal
proceedings that we believe would, individually or in the aggregate, have a
material adverse effect on our financial condition or results of operations.
ITEM 2 -- Changes in Securities and Use of Proceeds
For the three months ended March 31, 2000, we granted options to purchase
an aggregate of 329,280 shares of our common stock to 76 employees and
directors. The offering of these securities was deemed to be exempt from
registration under Section 4(2) of, or Rule 701 promulgated under, the
Securities Act as transactions by an issuer not involving a public offering.
ITEM 6 -- Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K filed during the quarter: On January 12, 2000, we
filed a Form 8-K to report our $200 million private placement to Welsh,
Carson Anderson & Stowe VIII, L.P.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BTI Telecom Corp.
____________________________________
(Registrant)
Dated: May 15, 2000
/s/ Brian Branson
By: _________________________________
Brian Branson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
17