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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 333-41723
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BTI Telecom Corp.
(Exact name of registrant as specified in our charter)
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56-2047220
North Carolina
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
4300 Six Forks Road 27609
Suite 500 (Zip Code)
Raleigh, North Carolina
(Address of principal executive
offices)
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Registrant's telephone number, including area code: 800-849-9100
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
No stock is held by non-affiliates of the registrant. As of February 28,
2001, the registrant had outstanding 92,542,036 shares of Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
None
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NOTE RELATING TO FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report that are not historical
facts, including some statements made in the sections of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," are statements of future expectations and other
forward-looking statements pursuant to Section 21E of the Securities Exchange
Act of 1934. These statements are based on management's current views and
assumptions and involve known and unknown risks and uncertainties that could
cause actual results, performance or events to differ materially from those
expressed or implied in those statements, including:
. the rate of expansion of our network and/or customer base;
. inaccuracies in our forecasts of telecommunications traffic or customers;
. loss of a customer that provides us with significant revenues;
. loss of sales representatives, dealers or agents;
. highly competitive market conditions;
. changes in or developments under laws, regulations, licensing requirements or
telecommunications standards;
. changes in technology;
. changes in the availability of transmission facilities;
. changes in retail or wholesale telecommunications rates;
. loss of the services of key officers, such as Peter T. Loftin, the chairman
and chief executive officer, or R. Michael Newkirk, the president and chief
operating officer; and
. general economic conditions.
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PART I
Item 1. Business
Overview
We are a facilities-based integrated communications provider, or ICP,
located in Raleigh, North Carolina. We were founded in 1983, originally as a
facilities-based provider of long distance services. As a full service
provider, our products now also include local exchange service, data services,
Internet access and other enhanced services. Since our inception, we have grown
to include the geographic area from Washington D.C. to Miami, Florida. The
majority of our customers are located in six states: Florida; Georgia; North
Carolina; South Carolina; Tennessee; and Virginia. Our direct sales presence
includes 28 offices located throughout this region. We primarily serve small
and medium sized businesses, those with one to 499 employees, which represent
the dominant business size within our geographic area. We are one of the
largest privately held ICPs in the United States. Our management team has an
average of 16 years of telecommunications experience and average over seven
years of tenure with our company.
We began offering local exchange services in November 1997 and have
successfully deployed 14 Lucent 5E2000 local switches. As of December 31, 2000,
we operate 16 network operations centers, which include five long distance
switches and 14 local switches. We are transitioning local customers onto our
own facilities and have colocated digital loop carriers, or DLC's, in 73
incumbent local exchange carrier's central offices. In addition to these
colocated DLCs we have deployed two stand-alone DLC locations to provide more
cost-effective local services to our business customers. As of December 31,
2000, we had sold approximately 139,000 local access lines, of which 125,000
were in service. Approximately 44.0% of these in-service lines were facilities
based and our local customers have an average of ten local lines.
Since 1997, we have also successfully deployed five ATM switches and 24
frame relay switches throughout the Southeast, enabling us to expand our on-net
data services offerings. Our 73 colocations combined with these ATM and frame
switches have provided us with a facilities-based data network to sell and
market to our customers. Our data revenue stream increased over 64% in 2000 as
we focused our sales and marketing efforts on our data services in response to
customer demand. This has allowed us to continue diversifying our revenue mix
as we effectively provide a bundled solution to our customers.
Business Strategy
Our objective is to strengthen our market position as a leading integrated
communications provider in the southeastern United States.
Key aspects of our business strategy include:
. Focus on the southeastern United States. We currently provide over 90% of
our voice and data services to six southeastern states--Florida, Georgia,
North Carolina, South Carolina, Tennessee and Virginia. We plan to
continue to focus the expansion of our customer base in the high-growth
southeastern United States in order to leverage our existing market
presence, brand name and telecommunications network facilities.
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. Continue to penetrate the local exchange market. We began deploying our
own local switches and colocating digital loop carriers ("DLCs") in ILEC
central offices in the first quarter of 1998. As of December 31, 2000, we
offered local services over our own facilities in 14 of our 28 existing
sales markets. We will continue deploying our own infrastructure in key
southeastern markets as warranted by customer demand.
. Accelerate the development of our data offerings. During 2000, we
deployed ten additional frame relay switches and five ATM switches to
meet the needs of existing and new business customers. These switching
technologies provide more efficient and secure transmission of large
volumes of data, while allowing development of a wider array of data
services for our customers.
. Offer an integrated suite of retail services. We currently offer our
customers a bundled suite of telecommunications services, including
local, long distance, data services, Internet access, paging and other
enhanced services. As of December 31, 2000, we were selling 36% of our
retail business customers a bundled product offering, an increase from
28% at the end of 1999.
. Build a capital-efficient network. Our strategy is to build and/or
acquire additional network capacity as we add customers. Since 1997, we
have developed a network infrastructure that includes 14 local switches,
24 frame relay switches, five long distance switches, as well as
approximately 3,800 fiber route miles and 75 DLC locations. The network
expansion has resulted in higher gross margins as a greater percentage of
our traffic is carried over our own network. Our gross margins have
increased from 29% in 1998 to 39% in 2000.
. Leverage our existing customer base and brand name. We currently have
over 31,000 small and medium-sized business customers. As a result of
our 17-year history of providing high-quality telecommunications
services, we are recognized as a premier provider of a full suite of
integrated voice and data services. Our large customer base and widely
recognized name provide the opportunity to further penetrate our
existing customer base with additional services and attract new
customers.
. Build market share through personalized sales, marketing and customer
service. We provide our customers with personalized contact for sales,
marketing and customer service that improves customer acquisition and
retention. We contact a customer a minimum of four times from the time
of sale to installation to assure customer satisfaction. Regardless of
our sales channel, we employ a face-to-face sales approach which we
believe is most effective for our target market.
. Leverage our local network infrastructure to exploit the DSL services
opportunity. As of December 31, 2000, we had 75 DLC locations. With our
infrastructure and extensive technical expertise, we are well positioned
to rapidly deploy DSL to meet the growing demand for high-speed data
services, as we are able to efficiently overlay the required equipment
in these existing collocations.
. Leverage our network infrastructure to service the wholesale
marketplace. We plan to continue to leverage our network capacity by
providing a full complement of broadband services to wholesale
customers, which allows us to more efficiently use our network
facilities.
. Expand through strategic acquisitions and alliances. As part of our
expansion strategy, we plan to consider strategic acquisitions of, and
alliances with, related or complementary businesses, although we have no
current understanding, commitment or agreement with respect to any
material transactions.
Services
We offer (1) integrated retail voice services, which include local, long
distance, paging services, advanced intelligent network, or AIN applications,
operator and other enhanced services; (2) data services, which include frame
relay, private line and fiber sales, ATM, enhanced internet services, advanced
network services, DSL and web site and e-commerce development; and (3)
wholesale voice services, including switched/dedicated access, private line,
dark fiber capacity sales and prepaid calling card services.
As of December 31, 2000, we provided integrated retail services to over
31,000 small and medium-sized business customers as well as to more than 5,000
residential and 18,500 collegiate customers.
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Integrated Retail Voice Services
Our integrated retail voice services include the following:
. Local Services: We provide local services in Florida, Georgia, North
Carolina, South Carolina, Tennessee and Virginia, along with five other
states, and have authority to provide local services in 11 other states
and the District of Columbia. We offer a full range of local service
features, including central exchange (Centrex) services, ISDN services,
voice mail, universal messaging services, directory assistance, call
forwarding, return call, hunting services, call pick-up, and repeat
dialing and speed dialing.
. Long Distance: We offer both domestic and international switched and
dedicated long distance services, including "1+" outbound dialing,
inbound toll-free and calling card services.
. Paging Services: We offer advanced, facilities-based wireless paging
services, including digital and alphanumeric paging, personal
identification number services, voice mail, out-dial capability, locator
service, fax-on-demand and broadcast faxing.
. Advanced Intelligent Network Applications: We offer AIN functionality
and custom services tailored to customer needs. These include virtual
private networks, which allow customers to carve out their own dedicated
network, NPA/NXX routing, which routes calls based upon the first six
digits of the calling party's telephone number, along with interactive
voice response applications, menu routing and expanded account codes.
. Operator Services: We offer live or automated operators to owners of pay
telephones and multi-telephone facilities, such as hotels, hospitals and
universities to assist in placing outbound long distance calls and to
transmit the calls over our network.
. Other Enhanced Services: We offer conference calling services, including
toll-free and operator-assisted access, sub-conferencing and
transcription services; prepaid calling cards and enhanced calling card
services, including features such as voice and fax mail, voice-activated
speed dialing, conference calling and network voice messaging. We also
provide customized solutions on customer needs through an intelligent
peripheral, or IP, platform. We believe that these types of custom
applications are seldom offered to our target customer profile.
Data Services
Our data services include the following:
. Frame Relay: We offer frame relay services on the Lucent STDX-9000
switching platform. Such services offer customers an efficient method of
data transport of up to T-1 speeds. Frame relay allows our customers to
more efficiently meet their data transfer needs for such applications as
Internet access, local area network interconnection and complex systems
network architectures.
. Private Line and Fiber Sales: Our private line services provide
telecommunication connectivity between a customer's different locations
to transmit voice, video or data in a variety of bandwidths from DS-0 to
OC-48. We also offer leases of dark fiber to other telecommunication
carriers on certain segments of our fiberoptic network.
. DSL: We offer xDSL technologies utilizing Alcatel and Copper Mountain
DSL products. DSL technology provides "always on" high-speed local
connections to the Internet and to private and local area networks. We
have agreements with other DSL providers to resell their DSL services in
markets where we have not yet installed our own equipment.
. Internet Access: We offer both dial-up and dedicated Internet access via
private line and frame relay connectivity that provide high-performance,
cost-efficient interconnection of multiple local area networks or legacy
systems.
. ATM: We offer ATM services, which are high-bandwidth, low-delay,
connection-oriented switching and multiplexing techniques for data
transfer. ATM allows for the simultaneous high-speed transfer of voice,
data and video in a more efficient manner than traditional methods.
These services are typically targeted to our larger customers and other
telecommunications providers.
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. Enhanced Internet Services: We offer website development, design and
hosting services, e-commerce integration, Internet marketing, multimedia
and business-to-business services or "software".
. Advanced Network Services: We offer enterprise services or "software"
for local and wide area networks, or LANs and WANs, data network design,
network management and security and Internet integration.
Wholesale Services
Our wholesale voice services include the following:
. Switched/Dedicated Services: We offer 1+ domestic origination and
termination services over our network, as well as both inbound and
outbound international services. We also provide toll-free number
origination services and local access and transport area, or LATA
services.
. Prepaid Calling Card Services: We provide prepaid calling card services,
including such features as private label branding, recharge capabilities,
multilingual instructions and 24-hour customer support.
As of December 31, 2000, we provided wholesale services to more than 100
telecommunications carriers and other end-user customers, including BellSouth
Mobility, Cable & Wireless USA, Verizon, Intermedia, ITC-DeltaCom, McLeod,
Nextel, NEXTLINK, Sprint, UUNet, Williams Communications and MCI Worldcom.
Implementation Of Local Services
We began offering local exchange services in selected markets in November
1997. Since then we have installed 14 Lucent 5E 2000 local switches and also
colocated digital loop carriers in ILEC central offices in selected markets to
facilitate cost-effective service to smaller customers. We also had 75 DLC
locations at year end December 31, 2000. We focus on utilizing DLCs to realize
the cost and network advantages associated with unbundled network elements, or
UNE. With DLCs in place and connected directly to our network, we are able to
more profitably serve a smaller local service customer. As more of these
facilities become operational, we should be able to provide a greater
percentage of our local service via our own facilities, which should continue
to enhance margins. We believe that this network structure provides us with a
competitive advantage in better servicing our customers' needs.
Implementation Of Data Services
The rapid growth of the Internet, expansion of electronic commerce and
introduction of new business applications have fueled increasing demand from
small and medium-sized businesses for access to high-speed data services. We
are positioning to meet this demand in our target markets by deploying frame
relay, DSL and ATM technologies to meet the needs of existing and new business
customers. As of December 31, 2000, we had installed 24 Lucent frame relay
switches. These switches allow for a more cost-effective solution for our
customers while providing us with a higher operating margin. We have colocated
network equipment in 73 ILEC central offices throughout the southeastern United
States, in addition to owning two stand-alone DLC sites.
Our DSL service is offered under the brand name D.S.Lynx(TM). We launched
D.S.Lynx in October 1999, and have continued to expand the network and
facilities over which our DSL service is offered. In addition to the previously
existing D.S. Lynx distribution channels, in 2000 we established relationships
with 150 retail
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computer hardware and software stores in the Southeast to market our DSL
services. As of December 31, 2000, BTI had sold over 1,300 DSL lines and had
995 lines installed.
Our Network
We operate a fiber optic network, consisting of owned and leased
transmission capacity. In October 1997, we entered into an agreement with a
national service provider to acquire an indefeasible right to use approximately
3,400 route miles of fiber optic network stretching from New York to Miami and
Atlanta to Nashville. We obtained an additional 200 miles in various locations
throughout the Southeast. In addition to carrying our own traffic, this network
also allows us to market excess fiber capacity to other telecommunication
companies. In addition, we have approximately 170 miles of fiber optic network
deployed in certain metropolitan areas primarily the Raleigh-Durham-Research
Triangle Park area in North Carolina, resulting in approximately 3,800 total
miles of network in service at the end of 2000. During the second quarter of
2000, we commenced the construction of a 500-mile coastal Carolina fiber optic
network extending from Raleigh to Wilmington, North Carolina and ultimately to
Savannah, Georgia. The construction was completed during the first quarter of
2001, bringing our total operational fiber network to over 4,300 miles.
We believe that owning our own network facilities is a key factor for
continued growth of our customer base and service offerings. This
infrastructure allows us to:
. more effectively offer higher margin services, such as data and private
line services;
. improve margins by transitioning portions of our traffic onto our
network; and,
. heighten the quality of service and improve the delivery of services to
our customers.
As of December 31, 2000, our network was comprised of:
. approximately 3,800 route miles of fiber optic network in operation,
equipped with Nortel OC-48 and DWDM, or dense wavelength division
multiplexing, a technology which allows for more cost effective expansion
of capacity;
. 14 Lucent 5E 2000 local switches in Jacksonville, Orlando and Tampa,
Florida; Atlanta, Georgia; Charlotte, Greensboro, Greenville, Raleigh and
Wilmington, North Carolina; and Charleston, Columbia and Greenville,
South Carolina; Knoxville and Nashville, Tennessee;
. five long distance Alcatel MegaHub 600E/ES Tandem switching systems
located in Atlanta, Dallas, New York, Orlando and Raleigh;
. Alcatel network equipment colocated in 73 ILEC central offices and at two
stand-alone sites which facilitates our local service offerings;
. five ATM switches located in Orlando, Florida; Atlanta, Georgia; and
Charlotte, Raleigh and Wilmington, North Carolina;
. 24 Lucent frame relay switches located in Washington, DC; Jacksonville,
Orlando, Tallahassee and Tampa, Florida; Atlanta, Georgia; New York, New
York; Charlotte, Greensboro, Greenville, Raleigh(2), Rocky Mount,
Wilmington and Winston-Salem, North Carolina; Philadelphia, Pennsylvania;
Charleston, Columbia and Greenville, South Carolina; Chattanooga,
Knoxville and Nashville, Tennessee; Dallas, Texas; and Richmond,
Virginia; and
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. 13 stand-alone point of presence, or POP sites located in Washington, DC;
Jacksonville, Florida; Savannah, Georgia; Indianapolis, Indiana; Newark,
New Jersey; Fayetteville, Morrisville, Myrtle Beach, Rocky Mount and
Winston-Salem, North Carolina; Philadelphia, Pennsylvania; Chesapeake and
Richmond, Virginia, utilized for more efficient concentration of our
network traffic.
We lease additional network capacity primarily under contracts negotiated
through our membership in the Associated Communication Companies of America, or
ACCA, a 10-member trade association that we co-founded in 1993. The ACCA
negotiates with carriers for bulk transmission capacity for its members. The
collective buying power of its members enables the ACCA to negotiate as if it
were one of the larger telecommunications service providers in the United
States.
Sales and Marketing
We have made significant investments in personnel and have increased
marketing and advertising efforts associated with the expansion of our sales
offices, local and data services and the expansion of our fiber optic network.
Since the third quarter of 1999, we have opened eight new sales offices, a 40%
increase, for a total of 28 as of the end of 2000. Currently, sales offices in
the states of Florida, Georgia, North Carolina, South Carolina, Tennessee and
Virginia produce approximately 90% of BTI's revenues.
Our retail sales efforts target small and medium-sized businesses in the
southeastern United States. Historically, we believe that the large providers
have not focused their sales and marketing efforts on these customers. Our
sales teams utilize a face-to-face sales and service approach to build long-
term business relationships with our customers. Our goal is to become the
single-source provider of all communications services for our customers. To
support this effort, our sales personnel have access to BTI's customer resource
management, or CRM software and network architecture, which gives them access
to customer data, allowing for a quick and effective response to their needs.
BTI markets its integrated retail services primarily through two channels:
our direct sales force and a network of independent dealers and agents, which
we call the Corporate Partner Program. We also market local and long distance
services through our Association and Academic Edge affinity programs.
We support both our direct and Corporate Partner sales forces with a group
of skilled product specialists. This group provides technical sales support for
the following:
. local service;
. frame relay services;
. private line services;
. Internet services;
. paging and personal messaging;
. conference calling services; and
. operator services.
Across both our direct and indirect sales channels, our product specialists
support sales efforts by:
. meeting with customers and prospects;
. conducting competitive analysis;
. providing preliminary pricing services;
. providing continued training for the sales forces; and
. preparing proposals and providing technical support for complex sales
presentations.
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We compensate our product specialists based on the acquisition and retention
of the customers for which they are responsible, typically determined by the
region or market they are serving.
Direct Sales and Support
Our direct sales and support staff market integrated retail communication
services directly to end users. As of December 31, 2000, BTI employed
approximately 220 direct sales representatives working in 28 sales offices
located throughout the southeastern United States. For 2000, the direct sales
channel was responsible for approximately 80% of our total integrated retail
revenue.
We have sales offices located in the following 28 cities:
Birmingham, AL Alpharetta, GA Greensboro, NC Greenville, SC
Washington, DC Atlanta, GA Greenville, NC Chattanooga, TN
Ft. Lauderdale, FL Savannah, GA Raleigh, NC Knoxville, TN
Jacksonville, FL Louisville, KY Wilmington, NC Nashville, TN
Orlando, FL Charlotte, NC Winston-Salem, NC Norfolk, VA
Miami, FL Durham, NC Charleston, SC Richmond, VA
Tampa, FL Fayetteville, NC Columbia, SC Roanoke, VA
Each of our sales offices is staffed with at least one sales manager,
depending on the size of the market, with each manager overseeing a team of
direct sales personnel and product specialists. Each office has at least one
sales administrator and one field support specialist, or FSS. A sales
administrator tracks sales and order flow for their respective sales office
while an FSS focuses on customer care. Our field support specialists manage
customers by region to resolve service and billing issues and maintain a single
point of contact for the customer. An FSS will also handle term renewals and
cross selling of additional services needed by the customer. Also, as of
December 31, 2000, we had employed over 25 data sales specialists to market and
provide support to Direct sales representatives as a means to enhance the
growth of our data services business. All data sales specialists are
experienced technical sales support specialists able to address complex data
communication issues.
All new sales representatives receive formal training, in which we expect
them to gain a thorough knowledge of our services. We train the sales force
with a customer-focused program that promotes increased sales through customer
attraction and retention. After formal training, sales representatives
participate in a continuing mentoring program. We believe this sales training
system gives us a competitive advantage in attracting and retaining sales
personnel.
We base our marketing strategy on the belief that our target customers want
to have their telecommunications needs met by a single company. Moreover, they
want to have a single point of contact for all of their product, billing and
service requirements. BTI assigns a dedicated FSS to each customer above a
specified billing level. FSS's regularly contact and meet with customers to
satisfy their telecommunication needs. In addition, BTI provides 24-hour, toll-
free access to a centralized customer service center.
Our sales force compensation strategy provides significant incentives for
customer retention. We compensate all sales personnel with a salary as well as
a commission structure for new and residual business. We believe that our
compensation structure motivates each salesperson to remain actively involved
with customers and participate in the customer support process. It also
provides for incentives tied to the sale of higher margin products such as data
services and facilities-based local service. To encourage new business, sales
personnel are encouraged to identify potential business customers by several
methods, including customer referral, market research, and networking
alliances, such as endorsement agreements with trade associations and local
chambers of commerce. Our sales personnel also work closely with product
specialists to design comprehensive solutions for customers.
We enhance our direct and Corporate Partner sales with the BTI Association
Program. We pay a share of the revenue generated under the program to
participating organizations and provide discounts to their members in return
for being endorsed as a preferred telecommunications vendor. As of December 31,
2000, more than 200 organizations were participating in this program.
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In order to capitalize on the excess capacity of our network during off peak
hours, we also market local and long distance services through our Academic
Edge Program for colleges and universities. By using off-peak network capacity
and existing infrastructure, this program produces incremental revenue without
materially increasing fixed network costs. We pay a share of the revenue
generated under the program to participating colleges and universities in
return for being selected as an official campus telecommunications service
provider. In addition to 35 existing colleges and universities, BTI was
recently selected to provide telecommunications services to the 16-campus
University of North Carolina system.
Independent Dealer and Agent Sales (Corporate Partner Program)
In 1992, we established a network of independent dealers and agents to
market our services. Currently there are 15 corporate partner offices which are
typically located in our direct sales offices. As with our direct sales force,
our independent dealers and agents have access to our product specialists for
sales support. This access enables our independent dealers and agents to be
more effective in their sales efforts ultimately presenting a better solution
for the customer. Our authorized dealers and agents receive commissions based
on services sold, usage volume and customer retention. We employ Corporate
Partner managers who recruit and support dealers and agents. We also support
dealers and agents through an order management and support team located in
Raleigh, North Carolina. In 1999 and 2000, sales through our authorized
independent dealers and agents accounted for approximately 25.9% and 19.8%
respectively, of our integrated retail services revenue.
Wholesale Services
We established a wholesale sales force in November 1995. The wholesale group
is responsible for selling wholesale products and services that include on-net
bandwidth facilities, dark fiber network, domestic and international switched
services, and wholesale local and data products. The wholesale sales channel
markets products to other telecommunications providers, such as interexchange,
local exchange or wireless companies. We also market wholesale services to
internet service providers, application service providers, governmental
agencies, financial institutions and large corporations. We believe we can
compete effectively in these markets based on a combination of price,
reliability, advanced technology, route diversity, efficient order processing
and customer service. Our wholesale group includes 15 direct sales
professionals and seven support specialists located at our corporate
headquarters. The wholesale organization locates potential customers through
trade shows, customer referrals and industry alliances. When contacting
customers, the wholesale sales professional works with network engineers and
executive management to gain insight and information on the customer's
operations and telecommunications needs to develop innovative and application-
specific solutions. Our wholesale business allows us to more effectively
leverage our existing network infrastructure and facilitates the recovery of
our fixed network costs.
Marketing and Advertising
We coordinate with sales in launching aggressive marketing and advertising
programs to generate retail services in specific markets. These campaigns
typically include print ads, mailings, trade shows and focused television and
radio advertisements. We have also negotiated multi-year cooperative
advertising agreements with key customers. BTI sponsors or is otherwise
actively involved in a number of community and charitable events, including the
BTI Center for the Performing Arts in Raleigh, North Carolina. We currently
provide local and long distance services to the Carolina Hurricanes and Tampa
Bay Lightning, two NHL teams, and their home arenas, in return for advertising
rights.
Competition
The telecommunications industry is highly competitive. We believe that we
compete primarily on the basis of customer service, price, reliability and
availability of service offerings. Our ability to compete effectively will
depend on our ability to maintain high quality services at prices generally
equal to or below those charged by our competitors.
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Overall Market
A continuing trend toward business combinations and alliances in the
telecommunications industry might create significant new competitors for us.
Many of these combined entities will have resources far greater than ours.
These combined entities might provide a bundled package of communications
products, including local, long distance and data services that compete
directly with the products we offer. These entities might also offer services
sooner and at more competitive rates than we do.
We also face competition from fixed wireless services, wireless devices that
do not require site or network licensing, cellular, personal communications
services, cable, satellite, other commercial mobile radio service providers and
Internet telephony.
In February 1998, Federal Communications Commission rules that make it
substantially easier for many non-U.S. communications companies to enter the
U.S. market went into effect. This might further increase the number of
competitors.
Long Distance Services Market
One of the key competitive aspects of the long distance industry is customer
retention. Our revenue has been, and is expected to continue to be, affected by
our ability to retain our customers.
AT&T, MCI WorldCom, Sprint and other carriers have implemented price plans
aimed at residential customers with significantly simplified rate structures.
This might lower long distance prices. Long distance carriers have made similar
offerings available to the small and medium-sized businesses we primarily
serve, creating additional pricing competition and creating pressure on gross
margins. If we are unable to reduce costs in a timely manner, our margins might
be significantly reduced.
We anticipate that a number of regional Bell operating companies will seek
authority to provide in-region long distance services in 2001 and beyond. The
regional Bell operating companies already have extensive fiber optic cable,
switching and other network facilities in their respective regions that can be
used for their long distance services. Once regional Bell operating companies
are allowed to offer widespread in-region long distance services, they will be
in a position to offer single-source local and long distance service. The FCC
recently approved Verizon's provision of in-region long distance services in
New York and Southwestern Bell's applications in Texas, Oklahoma and Kansas.
The FCC currently is considering an application from Verizon for
Massachussetts.
We expect continued long distance price declines because some carriers are
expanding their capacity. Broadwing, Qwest, Level 3 and Williams
Communications, for example, are constructing nationwide fiber optic systems
with routes through portions of the southeastern United States. BellSouth is
likely to receive authority to use its excess capacity to market in-region long
distance, and technological advances continue to expand the capacity of
networks. If industry capacity expansion exceeds demand along any of our
routes, we might suffer severe additional pricing pressure.
Local Services Market
In the local communications market, our primary competitor is the incumbent
local exchange carrier serving each geographic area, including BellSouth in
most of our markets. Most incumbent local exchange carriers offer substantially
the same services as we currently offer, excluding long distance. Incumbent
local exchange carriers benefit from:
. long-standing relationships with our target customers;
. greater financial and technical resources;
. the ability to subsidize local services from revenues in unrelated
businesses; and
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. recent regulations that relax price restrictions and decrease regulatory
oversight of incumbent local exchange carriers.
If the incumbent local exchange carriers are allowed additional flexibility
by regulators to offer discounts to large customers, engage in aggressive
discount pricing practices or charge competitors excessive fees for
interconnection to their networks, our revenue could be materially adversely
affected.
We also face competition from new entrants into the local services business,
who might also be better established and have greater financial resources. For
example, AT&T, MCI WorldCom and Sprint have each begun to offer local
communications services in major U.S. markets. Other entities that currently or
might offer local switched services include companies that have previously
operated as competitive access providers, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators, out-of-
region regional Bell operating companies and large customers who build private
networks. These entities, upon entering into appropriate interconnection
agreements or resale agreements with incumbent local carriers, including
regional Bell operating companies, could offer single-source local and long
distance services similar to ours.
Competition in local services has also increased as a result of changing
government regulations. Certain rates we charge our customers must be filed
with the FCC and/or state regulators, which provide transparency to customers
and competitors. The Telecommunications Act of 1996 has increased competition
in the local telecommunications business. The Telecommunications Act:
. requires incumbent local exchange carriers and competitive local
exchange carriers to interconnect their networks with those of
requesting telecommunications carriers and requires incumbent local
exchange carriers to permit such interconnection at any technologically
feasible point and allow requesting carriers to collocate equipment on
their premises;
. requires all local exchange service providers to compensate each other
for calls that originate on the network of one carrier and go to the
network of the other;
. requires all local exchange providers to offer their services for resale
without unreasonable conditions;
. requires incumbent local exchange carriers to offer to requesting
telecommunications carriers certain network elements on an unbundled
basis;
. requires incumbent local exchange carriers to offer to requesting
telecommunications carriers the services they provide to end users to
those other carriers at wholesale rates;
. requires all local exchange providers to permit competing carriers
access to poles, ducts, conduits and rights of way at regulated prices;
and
. requires all local exchange providers to provide dialing parity and
telephone number portability.
Competition might also increase as a result of a recent World Trade
Organization agreement on telecommunications services. As a result of the
agreement, the FCC has made it easier for foreign companies to enter the U.S.
telecommunications market.
Data Services Market
The market for data communications and Internet access services is extremely
competitive and characterized by price declines and rapid technological
innovation. There are no substantial barriers to entry, and we expect that
competition will intensify in the future. We expect significant competition
from a large variety of companies, including long-distance service providers,
cable modem service providers, Internet service providers, online service
providers, wireless and satellite data service providers, and companies
focusing on DSL services. These companies might offer competing products with
prices or other characteristics that are more attractive than our own.
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Regulation
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
federal and state regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which the industry operates. At this
time, we cannot predict the outcome of these proceedings, nor their impact upon
the telecommunications industry or us. This section also sets forth a brief
description of regulatory and tariff issues pertaining to our operations.
Overview
We are subject to federal, state and local regulation. Sometimes, the
authority of the government entity regulating us overlaps with the authority of
other regulators. Local governments may require us to obtain licenses, permits
or franchises regulating the use of public rights-of-way necessary to install
and operate our networks.
Federal Regulation
The Telecommunications Act became effective February 8, 1996. The
Telecommunications Act preempts state and local laws to the extent that they
prevent competitive entry into the provision of any telecommunications service.
Subject to this limitation, however, the state and local governments retain
most of their regulatory authority. The Telecommunications Act imposes a
variety of new duties on incumbent local exchange carriers in order to promote
competition in local exchange and access services. Some duties are also imposed
on non-incumbent local exchange carriers, such as our company. The duties
created by the Telecommunications Act include reciprocal compensation, resale,
interconnection, unbundled network elements, number portability, dialing parity
and access to rights-of-way.
Incumbent local exchange carriers are required to negotiate in good faith
with carriers requesting any or all of the above arrangements. Certain FCC
rules regarding pricing and the unbundling of network elements that must be
made available are subject to further review by the United States Court of
Appeals for the Eighth Circuit and the FCC. However, carriers still may
negotiate agreements, and if the negotiating carriers cannot reach agreement
within a prescribed time, either carrier may request binding arbitration of the
disputed issues by the state regulatory commission.
The Telecommunications Act also eliminates previous prohibitions on the
provision of long distance services by the regional Bell operating companies
and the GTE operating companies. The regional Bell operating companies are now
permitted to provide long distance service outside those states in which they
provide local exchange service upon receipt of any necessary state and/or
federal regulatory approvals that are otherwise applicable to the provision of
intrastate and/or interstate long distance service. Under the
Telecommunications Act, the regional Bell operating companies will be allowed
to provide long distance service within the regions in which they also provide
local exchange service upon specific approval of the FCC and satisfaction of
other conditions, including a checklist of interconnection requirements.
BellSouth has sought such authority in Louisiana and South Carolina. Both
requests were denied by the FCC and the denials were upheld by the United
States Court of Appeals for the D.C. Circuit. In December 1999, the FCC
authorized Verizon to provide in-region long distance services in New York. In
June 2000, the FCC authorized Southwestern Bell to provide in-region long
distance services in Texas. In January 2001, the FCC granted Southwestern Bell
the same authority for Kansas and Oklahoma. Verizon has an application pending
before the FCC to provide long-distance services in Massachusetts. We expect
the Bell Operating Companies to file more applications for authority to provide
long distance service in 2001. Bell operating company provision of in-region
long distance services may have a material adverse impact on our long distance
service operations.
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The Telecommunications Act imposes certain restrictions on the regional Bell
operating companies in connection with the entry into long distance services.
Among other things, the regional Bell operating companies must provide long
distance service within the regions in which they also provide local exchange
service only through separate subsidiaries with separate books and records,
financing, management and employees, and all affiliate transactions must be
conducted on an arm's length and nondiscriminatory basis. The regional Bell
operating companies are also prohibited from jointly marketing local and long
distance services, equipment and certain information services unless
competitors are permitted to offer similar packages of local and long distance
services in their market. Further, the regional Bell operating companies must
obtain authority to provide long distance service within the regions in which
they also provide local exchange service before jointly marketing local and
long distance services in a particular state. US West and Ameritech Corporation
announced marketing arrangements with Qwest whereby they would market Qwest
long distance services in their respective regions. The FCC found these
arrangements to be unlawful. The FCC decision was upheld on appeal.
Prior to the passage of the Telecommunications Act, the FCC had already
established different levels of regulations for dominant and non-dominant
carriers. For domestic common carrier telecommunications regulation, incumbent
local exchange carriers, including the regional Bell operating companies, are
considered dominant carriers for the provision of interstate access and
interexchange services, while other interstate service providers, such as us,
are considered non-dominant carriers. The FCC determined that the regional Bell
operating companies offering interstate long distance services outside those
states in which they provide local exchange service will be regulated as non-
dominant carriers, as long as such services are offered by an affiliate of the
regional Bell operating company that complies with certain structural
separation requirements. The FCC regulates many of the rates, charges and
services of dominant carriers to a greater degree than non-dominant carriers.
Services of non-dominant carriers are subject to relatively limited
regulation by the FCC. Non-dominant carriers are required to file tariffs
listing the rates, terms and conditions of interstate access and international
services provided by the carrier. Periodic reports concerning the carrier's
interstate circuits and deployment of network facilities also are required to
be filed. The FCC generally does not exercise direct oversight over cost
justification and the level of charges for services of non-dominant carriers,
although it has the power to do so. We must offer our interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain subject to
FCC complaint procedures. We have obtained FCC authority to provide
international services. Pursuant to these FCC requirements, we have filed and
maintain with the FCC a tariff for our interstate access and international
services.
On October 29, 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers, such as we, maintain tariffs
on file with the FCC for domestic interstate long distance services. Following
a nine-month transition period, relationships between carriers and their
customers were to be set by contract. Although the FCC order was stayed by the
United States Court of Appeals for the District of Columbia Circuit, that stay
has now been lifted. Accordingly, nondominant interstate services providers
will no longer be able to rely on the filing of tarrifs with the FCC as a means
of providing notice to customers of prices, terms, and conditions under which
they offer their domestic interstate interexchange services. During 2001, we
are required to cancel our FCC tariffs as a result of the FCC's orders. We
believe that the elimination of the FCC's tariff requirement will permit us to
respond more rapidly to changes in the marketplace. In the absence of tariffs,
however, we will be required to obtain agreements with our customers regarding
many of the terms of our existing tariffs, and uncertainties regarding such new
contractual terms could increase the risk of claims against us from our
customers.
On May 8, 1997, the FCC issued an order to implement the provisions of the
Telecommunications Act relating to the preservation and advancement of
universal telephone service. The order requires all telecommunications carriers
providing interstate telecommunications services, including us, to contribute
to universal service support. These contributions are assessed based on certain
interstate and international end user
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telecommunications revenues. The revenues for the high cost and low-income fund
are estimated quarterly based on certain interstate and gross end user
telecommunications revenues. The revenues for the schools and libraries and
rural health-care fund are estimated quarterly on interstate and international
gross end user telecommunications revenues. We may pass these costs on to our
subscribers.
The FCC and many state PUCs have implemented rules to prevent unauthorized
changes in a customer's pre-subscribed local and long distance carrier (a
practice commonly known as "slamming.") Pursuant to the FCC's slamming rules, a
carrier found to have slammed a customer is subject to substantial fines. In
addition, the FCC's slamming rules were revised effective November 2000 to
include new provisions governing liability for slamming, and provisions
allowing state PUCs to elect to administer and enforce the FCC's slamming
rules. These new slamming liability rules substantially increase a carrier's
possible liability for unauthorized carrier changes, and may substantially
increase a carrier's administrative costs in connection with alleged
unauthorized carrier changes (even if the carrier can provide valid proof that
such changes were authorized). Under the new rules, carriers must immediately
remove from the customer's bill all charges incurred within 30 days following
an alleged slam. If the FCC (or the relevant state PUC) determines that the
carrier has slammed the customer, and the customer has not yet paid the bill,
the customer will be absolved from any charges for the first 30 days following
the slam (whereas if the carrier provides clear and convincing proof that the
consumer authorized the change, the carrier may re-bill the customer.) If the
FCC (or relevant state PUC) determines that a carrier has slammed a customer
and the customer has already paid the unauthorized carrier, the unauthorized
carrier must remit to the authorized carrier 150% of all payments received from
a slammed customer. The authorized carrier must in turn remit 50% of the amount
received from the unauthorized carrier back to the slammed customer. The new
slamming liability rules have been appealed to the United States Court of
Appeals for the District of Columbia Circuit. We cannot predict the effect that
these new liability rules will have on our business. It is possible that the
new rules will increase our costs substantially, even in cases where the
carrier changes are not unauthorized. The FCC also issued revised rules in
August 2000 that are expected to become effective in April 2001 or shortly
thereafter, regarding the procedures for changing a subscriber's pre-subscribed
carrier, and establishing new carrier reporting and registration requirements.
Implementation of these new rules may increase our costs of administering long
distance service accounts.
The FCC also imposes prior approval requirements on transfers of control and
assignments of operating licenses. The FCC has the authority to generally
condition, modify, cancel, terminate or revoke operating authority for failure
to comply with federal laws and/or the rules, regulations and policies of the
FCC. Fines or other penalties also may be imposed for such violations. There
can be no assurance that the FCC or third parties will not raise issues with
regard to our compliance with applicable laws and regulations.
The FCC, through decisions announced in September 1992 and August 1993, as
modified by subsequent FCC and court decisions, has ordered the regional Bell
operating companies and all but one of the other local exchange carriers having
in excess of $100 million in gross annual revenue for regulated services to
provide expanded interconnection to local exchange carrier central offices to
any competitive access provider, long distance carrier or end user seeking such
interconnection for the provision of interstate access services. As a result of
these decisions and the Telecommunications Act, once we enter into
interconnection agreements with local exchange carriers, we are able to reach
most business customers in our metropolitan service areas and can expand our
potential customer base. The Telecommunications Act now requires most incumbent
local exchange carriers to offer physical collocation, enabling the
interconnector to place our equipment in the central office space of these
incumbent local exchange carriers.
On August 8, 1996, the FCC adopted rules to implement the interconnection,
resale and number portability provisions of the Telecommunications Act. Certain
provisions of these rules were appealed. The Eighth Circuit Court vacated
certain provisions, including the pricing rules and rules that would have
permitted new entrants to "pick and choose" among various provisions of
existing interconnection agreements between the incumbent local exchange
carriers and other carriers. The Supreme Court reversed most aspects of the
Eighth Circuit's decision and, among other things, decided the FCC has general
authority under the Telecommunications Act to
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promulgate rules governing local interconnection pricing. The Supreme Court
reinstated the FCC's "pick and choose" rules. The Supreme Court remanded to the
FCC for further consideration our identification of the network elements that
must be unbundled. On remand the FCC largely retained its list of unbundled
elements, but it eliminated the requirement that ILECs provide unbundled access
to local switching for customers with four or more lines in the top 50
metropolitan statistical areas, and the requirement to provide unbundled
operator services and directory assistance.
On July 18, 2000, the Eighth Circuit issued its order concerning the issues
left unresolved by the Supreme Court. It vacated the FCC's rules regarding the
discount on retail services that ILECs must provide to CLECs, the costing rules
that must be applied in determining the price of unbundled network elements
from ILECs, and the requirement that ILECs must provision combinations of UNEs
that are not already combined. The Supreme Court will hear the latter two
issues in its coming term. The overall impact of the Eighth Circuit Court and
Supreme Court decisions on us cannot yet be determined and there can be no
assurance that it will not have a material adverse effect on us. In addition,
other FCC rules relating to local service competition are still being
challenged, and there can be no assurance that decisions with respect to such
rules will not be adverse to companies seeking to enter the local service
market.
The FCC has made and is continuing to consider various reforms to the
existing rate structure for charges assessed on long distance carriers for
allowing them to connect to local networks. These reforms are designed to move
these "access charges," over time, to lower, cost-based rate levels and
structures. These changes will reduce access charges and will shift charges,
which had historically been based on minutes-of-use, to flat-rate, monthly per
line charges on end-user customers rather than long distance carriers. On May
31, 2000 the FCC adopted the proposal of the Coalition for Affordable Long
Distance Service ("CALLS") that significantly restructures and, reduces in some
respects, the interstate access charges of the RBOCs, GTE, AT&T, and Sprint.
Among the more significant regulatory changes established by the CALLS Order,
the BOCs and GTE are required to reduce switched access charges to an average
of $0.0055/minute. Price cap ILECs are additionally required to eliminate the
presubscribed interexchange carrier charge ("PICC") as a separate charge and
fold it into an increased subscriber line charge ("SLC"). AT&T and Sprint have
committed in this proceeding to pass on access charge reductions to consumers,
and to eliminate minimum monthly usage charges. Although the CALLS Order will
not apply directly to CLECs, ILEC reductions in switched access charges may
place some downward pressure on CLEC to reduce their own switched access
charges. In addition, IXCs other than AT&T and Sprint are not subject to the
CALLS Order, but may seek to alter their offerings to conform to AT&T's and
Sprint's commitments in this proceeding. A Petition for Reconsideration of the
CALLS Order is currently before the FCC.
In addition, the FCC is currently considering other access charge reform
measures such as Pricing Flexibilty and CLEC Access Charges. The FCC has
granted local exchange carriers additional flexibility in pricing their
interstate special and switched access services on a central office specific
basis. In a series of decisions, the FCC pricing rules restructured local
exchange carrier switched transport rates in order to facilitate competition
for switched access. In addition, the FCC adopted rules that required incumbent
local exchange carriers to substantially decrease the prices they charge for
switched and special access, and changed how access charges are calculated.
These changes were intended to reduce access charges paid by long distance
carriers to local exchange companies and shift certain usage-based charges to
flat-rate, monthly per line charges. On August 5, 1999, the FCC adopted an
order granting price cap local exchange carriers additional pricing
flexibility. The order provides certain immediate regulatory relief of price
cap local exchange carriers and sets forth a framework of "triggers" to provide
those companies with greater flexibility to set rates for interstate access
services. On February 2, 2001, the D.C. Circuit upheld the FCC rules regarding
pricing flexibility. The FCC has recently granted pricing flexibility
applications for switched access services provided by BellSouth in a number of
cities in its service territory, for dedicated transport and special access
services provided by SBC entities in certain cities, and for dedicated
transport and special access services provided by Verizon entities in certain
cities.
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CLEC access charges have become a source of contention for many IXCs. Some
IXCs have refused to pay CLEC access charges that they find to be excessive and
have sought authority to refuse to terminate traffic with CLECs that do not
reduce their access charges to levels that the IXCs deem reasonable. If IXCs
are permitted to refuse to terminate traffic with offending CLECs, end-users
could be denied the ability to complete certain calls. The matter of CLEC
access charges is presently pending before the FCC. (See Legal Proceedings).
On April 10, 1998, the FCC issued a Report to Congress on its implementation
of the universal service provision of the 1996 Telecommunications Act. In that
report, the FCC stated that the provision of transmission capacity to Internet
service providers constitutes the provision of telecommunications and is,
therefore, subject to common carrier regulation. The FCC indicated it would re-
examine its policy of not requiring an Internet service provider to contribute
to the universal service mechanisms when the Internet service provider provides
its own transmission facilities and engages in data transport over those
facilities in order to provide an information service. Any such contribution
would be related to the Internet service provider's provision of the underlying
telecommunications services. The FCC noted it did not have an adequate record
to make a decision at that time on whether certain forms of phone-to-phone
Internet protocol telephony are telecommunications services rather than
information services. It noted that on the record before it, the services
appeared to have the same functionality as non-Internet protocol telephony and
lacked the characteristics that would render the services information services.
The FCC also has been considering whether local carriers are obligated to
pay compensation to each other for the transport and termination of calls to
Internet service providers when a local call is placed from an end user of one
carrier to an Internet service provider served by the competing local exchange
carrier. In February 1999, the FCC issued a declaratory ruling that determined
that dial-up calls from a customer to an Internet service provider are
jurisdictionally mixed but largely interstate calls, and therefore, are subject
to the FCC's jurisdiction. The FCC also ruled that the reciprocal compensation
obligations of the Telecommunications Act were not mandated for dial-up calls
from a customer to an Internet service provider. The FCC issued a notice of
proposed rulemaking to create an applicable federal rule, but in the absence of
a federal rule on the subject, the FCC ruled that state commissions had the
discretion to impose reciprocal compensation obligations on dial-up calls to
Internet service providers. On March 24, 2000, the United States Court of
Appeals for the District of Columbia Circuit vacated the aspect of the
declaratory ruling that said the reciprocal compensation obligations of the
Telecommunications Act were not mandated for dial-up calls to Internet service
providers, and remanded the issue to the FCC for further consideration. As a
result, it is uncertain whether calls terminating to Internet service providers
are subject to the payment of reciprocal compensation, or what form of
intercarrier compensation will be required as the result of a new federal rule.
The FCC and several state public service commissions have initiated proceedings
to consider these issues. If state commissions, the FCC or the courts determine
that inter-carrier compensation does not apply, we may be unable to recover our
costs or will be compensated at a significantly lower rate.
In March 1999, the FCC issued an order requiring incumbent local exchange
carriers to provide unbundled loops and co-location on more favorable terms
than had previously been available. The order permits co-location of equipment
that could be used to more efficiently provide advanced data services such as
high-speed DSL service, and requires less expensive "cageless" co-location. In
August 1998, the FCC determined that advanced services are telecommunications
services subject to regulation under Sections 251 and 252 of the Telecom Act.
In the same order, the FCC issued a notice of proposed rulemaking on terms for
the provision of such services on a separate subsidiary basis. Permitting ILECs
to provision data services through separate affiliates with fewer regulatory
requirements could have a material adverse impact on our ability to compete in
the data services sector. The FCC imposed conditions on the merger of SBC with
Ameritech in October 1999 that permit the provisioning of advanced data
services via separate subsidiaries pursuant to various requirements. The D.C.
Circuit vacated the separate subsidiary requirement on January 9, 2001. We
cannot predict whether these requirements will ultimately prove enforceable,
nor whether they will deter anticompetitive conduct if they are enforceable.
These areas of regulation are subject to change through additional proceedings
at the FCC or judicial challenge.
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State Regulation
We are subject to various state laws and regulations. Most public utilities
commissions subject providers such as us to some form of certification
requirement, which requires providers to obtain authority from the state public
utilities commission prior to the initiation of service. In most states, we are
also required to file tariffs setting forth the terms, conditions and prices
for services that are classified as intrastate. We also are required to update
or amend our tariffs when we adjust our rates or add new products, and we are
subject to various reporting and record-keeping requirements.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply
with state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties
will not raise issues with regard to our compliance with applicable laws or
regulations. States also often require prior approval or ratification for
transfers of certain assets, customers and ownership of common carriers and for
issuance of certain debt and equity.
We have obtained authority to provide intrastate long distance service in
all states outside of our target markets because we believe this capability
enhances our ability to attract business customers that have offices outside of
our target markets. We may also apply for authority to provide local exchange
services in other states in the future. We hold certificates to offer local
services in North Carolina, Alabama, Arkansas, California, Delaware, the
District of Columbia, Florida, Georgia, Kansas, Kentucky, Louisiana, Maryland,
Mississippi, Missouri, New Jersey, New York, Oklahoma, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia and West Virginia. While we expect and
intend to obtain necessary operating authority in each jurisdiction where we
intend to operate, there can be no assurance that each jurisdiction will grant
our request for authority.
Although the Telecommunications Act preempts the ability of states to forbid
local service competition, some states have not yet completed all regulatory
actions to comply with the Telecommunications Act. Furthermore, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements.
We believe that, as the degree of intrastate competition increases, states
will offer incumbent local exchange carriers increasing pricing flexibility.
This flexibility may present incumbent local exchange carriers with an
opportunity to subsidize services that compete with our services with revenues
generated from non-competitive services, thereby allowing incumbent local
exchange carriers to offer competitive services at prices below the cost of
providing the service. We cannot predict the extent to which this may occur or
its impact on our business.
Local Government Authorizations
We are required to obtain street use and construction permits and licenses
and/or franchises to install and expand our fiber optic network using municipal
rights-of-way. In some municipalities where we have installed or anticipate
constructing networks, we will be required to pay license or franchise fees
typically based on a percentage of gross revenues or on a per linear foot
basis. There can be no assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many markets,
incumbent local exchange carriers do not pay such franchise fees or pay fees
that are substantially less than those required to be paid by us. To the extent
that competitors do not pay the same level of fees as us, we could be at a
competitive disadvantage. Termination of the existing franchise or license
agreements prior to their expiration dates or a failure to renew the franchise
or license agreements and a requirement that we remove our facilities or
abandon our network in place could have a material adverse effect on us.
Employees
As of December 31, 2000, we had approximately 1,250 employees. We believe
that our future success will depend on our continued ability to attract and
retain highly skilled and qualified employees. None of our employees is
currently represented by a collective bargaining agreement. We believe that our
relations with our employees are good.
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Item 2. Properties
We lease offices and space in a number of locations, primarily for sales
offices and network equipment installations. We lease approximately 140,000
square feet of office space for our corporate headquarters in Raleigh, North
Carolina, under a lease expiring in April 2005. We lease space for sales
offices in North Carolina, Florida, Georgia, South Carolina, Tennessee,
Virginia, Kentucky and Alabama. The leases for these offices expire between
September 2001 and September 2005. In addition, we lease rights-of-way, office
space and land for our network equipment. The leases for the office space and
land expire between January 2002 and June 2015, and the leases for the rights-
of-way are either perpetual or are renewable through 2023. We believe that our
leased facilities are adequate to meet our current needs and that additional
facilities are available to meet our needs for the foreseeable future.
Item 3. Legal Proceedings
In April 2000, we were served with a lawsuit filed by Wachovia Bank, N.A.
and Wachovia Securities, Inc. Wachovia alleged that we breached a letter
agreement between Wachovia and us and owed Wachovia a placement fee of $10
million in exchange for Wachovia's services as financial advisor. The parties
have agreed in principle to a confidential settlement of this matter. Final
documents are being prepared to include a dismissal with prejudice of all
claims. The full settlement amount, less the amount we originally accrued has
been treated as additional equity transaction costs as of December 31, 2000 and
therefore had no impact on our earnings.
Also in April 2000, we joined 13 other competing local exchange companies to
bring a lawsuit against AT&T and Sprint in federal court in Virginia to collect
access charges that the defendants have ordered and accepted pursuant to our
lawfully filed tariffs. As of December 31, 2000, AT&T owed us approximately
$5.9 million and Sprint owed us approximately $1.9 million for access services.
Proceedings in this case are stayed until July 19, 2001, while the FCC
considers two issues that were referred to it by the Court. In response to the
Court's referral, in January 2001, AT&T and Sprint filed a formal rate
complaint against us at the FCC seeking unspecified damages. Because discovery
is ongoing, and due to the uncertainties inherent in the complaint process, we
are unable to predict the outcome of these complaints.
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 4. Submission of Matters to a Vote of Security Holders
No action was taken by the shareholders of our common stock or Series A
preferred stock in the fourth quarter of 2000.
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PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for either our common stock
or our Series A preferred stock.
Dividend Policy
Since our conversion from an S corporation to a C corporation in September
1997, we have only paid cash dividends on our common stock to fund shareholder
tax liabilities arising from periods when we were an S corporation. During
these periods, the shareholders incurred tax liabilities on our behalf due to
income we reported on their individual income tax returns. Restrictions
imposed by our 10 1/2% Senior Notes and our credit facilities do not allow us
to pay dividends except for those to fund the aforementioned tax liabilities.
We anticipate that, for the foreseeable future, any earnings will be retained
for use in our business and, accordingly, we do not anticipate the payment of
cash dividends on our common stock.
Stock Transactions
As of February 28, 2001, an aggregate of 92,542,036 shares of common stock
was outstanding, 92,397,661 of which was held by our founder, Peter T. Loftin,
and the remainder of which was held by one entity and three individuals. At
February 28, 2001, Welsh Carson Anderson & Stowe VIII, L.P. and two affiliated
funds (together, "WCAS") held all of the 200,000 outstanding shares of our
Series A preferred stock. The Series A preferred stock is convertible into
shares of our common stock at any time at the election of WCAS. The conversion
rate is 116.959 shares of common stock for every share of Series A preferred
stock, subject to adjustment for certain dilutive issuances of our common
stock.
In a series of transactions during the first quarter of 2001, we issued
67,142 shares of Series B preferred stock, warrants to purchase common stock
and a Senior Secured Note in the aggregate principal amount of $50.0 million,
the details of which transactions are set forth under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
57,143 shares of the Series B preferred stock were issued to WCAS and 9,999
shares were issued to Mr. Loftin. There is no established public trading
market for our Series B preferred stock. The Series B preferred stock is
convertible into shares of our common stock. The conversion rate is 800 shares
of common stock for every share of Series B preferred stock, subject to
adjustment for certain dilutive issuances of our common stock.
See Item 12, "Security Ownership of Certain Beneficial Owners and
Management" for a discussion of the possible effects of the Series A and
Series B preferred stock conversion and exercise of warrants.
In May 2000, we issued an aggregate of 125,000 shares of our common stock
pursuant to an Asset Purchase Agreement with Max Commerce, Inc. In June 2000,
we issued an aggregate of 3,334 shares of common stock upon the exercise of
stock options with an exercise price of $3.00 per share. In August 2000, we
issued an aggregate of 16,041 shares of common stock upon the exercise of
stock options with an average exercise price of $4.30 per share. The sales of
common stock under the Asset Purchase Agreement and upon the exercise of the
options were made in reliance on the exemption from registration under Section
4(2) of the Securities Act of 1933 or Rule 701 promulgated thereunder as
transactions by an issuer not involving a public offering.
20
Item 6. Selected Financial and Operating Data
The following selected historical financial and operating data for the five
years ended December 31, 2000 were derived from our audited financial
statements. The selected data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and notes thereto, and other financial
and operating data contained elsewhere herein.
Year Ended December 31,
---------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- --------- --------- ---------
Statement of Operations
Data (in thousands,
except per share data):
Revenues................. $148,777 $194,949 $ 212,554 $ 260,049 $ 271,484
Operating expenses:
Cost of services......... 90,820 139,030 150,901 173,153 166,445
Selling, general and
administrative
expenses................ 53,791 60,131 80,011 105,545 151,135
-------- -------- --------- --------- ---------
Total operating
expenses................ 144,611 199,161 230,912 278,698 317,580
-------- -------- --------- --------- ---------
Income (loss) from
operations.............. 4,166 (4,212) (18,358) (18,649) (46,096)
Interest expense......... (1,695) (8,806) (25,430) (28,531) (30,467)
Other income (expense),
net..................... 4 2,379 5,555 2,454 (868)
Gain on sale of
marketable securities... 131 -- -- -- --
-------- -------- --------- --------- ---------
Income (loss) before
income taxes............ 2,606 (10,639) (38,233) (44,726) (77,431)
Income taxes............. -- -- -- -- --
-------- -------- --------- --------- ---------
Net income (loss)........ 2,606 $(10,639) $ (38,233) $ (44,726) $ (77,431)
======== ======== ========= ========= =========
Proforma income taxes
(a)..................... 1,094 -- -- -- --
======== ======== ========= ========= =========
Proforma net income (a).. $ 1,512 $ -- $ -- $ -- $ --
======== ======== ========= ========= =========
Cash dividends declared
per common share (b).... $ 0.01 $ 0.01 $ 0.01 $ -- $ --
======== ======== ========= ========= =========
Other Data (in thousands,
except ratio data):
Capital expenditures,
including line access
fees.................... $ 8,401 $ 23,479 $ 69,434 $ 85,050 $ 145,888
Depreciation and
amortization............ 4,471 6,613 11,457 19,412 34,376
Net cash provided by
(used in) operating
activities.............. 283 8,211 (6,418) (18,462) (14,936)
Net cash used in
investing activities.... (8,681) (133,248) (49,466) (61,267) (120,807)
Net cash provided by
financing activities.... 8,589 191,542 1,649 153,111 55,164
EBITDA (c)............... 8,637 3,138 (6,854) 1,071 (11,436)
Ratio of earnings to
fixed charges (d)....... 1.8x -- -- -- --
Balance Sheet Data (at
period end and in
thousands):
Working capital
(deficit)............... $ (3,189) $ 76,842 $ 4,599 $ 73,703 $ (74,083)
Property and equipment,
net..................... 21,498 44,577 101,960 166,574 277,649
Total assets............. 48,682 223,550 209,171 334,834 357,362
Debt and capital lease
obligations............. 21,088 251,794 254,882 279,000 338,368
Shareholder's equity
(deficit)............... 2,374 (69,574) (109,842) (219,342) (307,956)
- --------
(a) Historical financial information for the two years in the period ended
December 31, 1997, does not include a provision for income taxes because,
prior to September 1997, we were an S corporation not subject to income
taxes. Net income has been adjusted on a pro forma basis to reflect the tax
that would have been paid by BTI if it had been subject to income tax for
the full period.
21
(b) The dividends were paid in part to provide funds for tax obligations owed
by BTI's shareholders as a result of BTI's S-corporation status prior to
September 1997.
(c) EBITDA consists of income (loss) before interest, income taxes,
depreciation, amortization, other income and expense and non-cash
compensation expense recorded in accordance with APB No. 25. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA is
not a measurement of financial performance under generally accepted
accounting principles and should not be considered an alternative to net
income as a measure of performance or to cash flow as a measure of
liquidity. EBITDA is not necessarily comparable with similarly titled
measures for other companies.
(d) The ratio of earnings to fixed charges is computed by dividing income
before income taxes and fixed charges (other than capitalized interest) by
fixed charges. Fixed charges consist of interest charges, amortization of
debt issuance costs, and discount or premium related to indebtedness,
whether expensed or capitalized, and that portion of rental expense we
believe to be representative of interest (estimated to be 15% of such
expense). For the years ended December 31, 1997, 1998, 1999 and 2000,
earnings were insufficient to cover fixed charges by $10.6 million, $38.2
million, $44.7 million and $77.4 million, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis should be read in conjunction with the financial
statements and notes thereto and the other financial data appearing elsewhere
herein. We have included EBITDA data in the following analysis because it is a
measure commonly used in the telecommunications industry. EBITDA consists of
income (loss) before interest, income taxes, depreciation, amortization, other
income and expense and non-cash compensation expense recorded in accordance
with Accounting Principles Board Opinion No. 25. EBITDA is not a measure of
financial performance 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. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
Overview
BTI Telecom Corp., which began operations in 1983 as Business Telecom, Inc.,
is a leading facilities-based integrated communications provider, or ICP, in
the southeastern United States. We currently offer (1) integrated retail voice
services, including local, long distance, paging, Advanced Intelligent Network
("AIN") applications, operator and other enhanced services; (2) data services,
which include dial-up and dedicated Internet Service, DSL high-speed Internet
access, private line, frame relay and ATM services; and (3) wholesale voice
services including switched/dedicated access and prepaid calling card services.
Our target market for retail services, both voice and data, consists primarily
of the small to mid-sized business customers. As of December 31, 2000, we had
28 sales offices in the southeastern United States.
We operate long distance switching centers in Atlanta, Dallas, New York,
Orlando and Raleigh. To facilitate early market entry, we began offering local
exchange services in November 1997 in selected markets in the southeastern
United States by reselling the services of the incumbent local exchange
carriers. In the first quarter of 1998, we began installing equipment and
infrastructure to support facilities-based local services in key markets. As of
December 31, 2000, we had installed 14 Lucent 5ESS 2000 local switches, digital
loop carriers and associated infrastructure in Raleigh, Charlotte, Greensboro,
Wilmington and Greenville, North Carolina; Columbia, Greenville and Charleston,
South Carolina; Atlanta, Georgia; Orlando, Tampa and Jacksonville, Florida; and
Knoxville and Nashville, Tennessee.
As of December 31, 2000, we had colocated network equipment (primarily
digital loop carriers) in 75 incumbent local exchange carrier central offices
and we had two digital loop carriers in stand-alone locations in order to
provide more cost-effective local services to our customers. These colocations
are also facilitating development of our DSL service offerings. We began
offering DSL high-speed Internet services during August 1999. As of December
31, 2000, we had also installed 24 frame relay switches within our network,
allowing us to offer a wider array of data services to our customers over our
own network.
22
In October 1997, we purchased, pursuant to an indefeasible right of use,
approximately 3,400 route miles of dark fiber from New York to Miami and
Atlanta to Nashville on a fiber optic network being constructed by a national
service provider. As of December 31, 2000, all of this network was operational.
We have 22 points-of-presence deployed along this fiber route with Nortel OC-48
and DWDM technology to insure sufficient capacity to support our planned
growth. We also owned over 100 route miles of fiber in North Carolina's
Raleigh-Durham-Research Triangle Park area. In March of 2001 we completed
construction of a 500 mile fiber network from Raleigh, North Carolina to
Savannah, Georgia, giving us a total of over 4,300 miles of fiber optic
network.
Recent Developments
During the first quarter of 2001, we completed a series of transactions to
provide the funding required for our ongoing operations and continued growth.
These transactions, which consist of both debt and preferred equity, secured a
total of approximately $110 million of incremental capital. In addition, we
restructured our current senior credit facilities into a new term loan with an
extended maturity. Given that the current phase of our network expansion is
substantially complete and that we expect to generate positive EBITDA during
2001, we believe these investments should provide the capital to fully fund our
current business plan. The transactions are more fully described as follows:
Preferred Equity Investments In two transactions during the first
quarter of 2001, we issued 59,999 shares of Series B preferred stock
("Series B") to existing shareholders at a price of $1,000 per share,
providing total proceeds of approximately $60 million. On January 12, 2001
we issued 9,999 shares to our Chairman and Chief Executive Officer (also
our majority common shareholder) and 10,000 shares to existing shareholder
Welsh, Carson, Anderson and Stowe VIII, L.P. and two affiliated funds
(together, "WCAS") to provide interim working capital of approximately $20
million while the remaining transactions were negotiated and closed. On
March 30, 2001, we completed the second transaction, in which we issued an
additional 40,000 shares of Series B to WCAS, also at a price of $1,000 per
share, producing total proceeds of $40 million. All shares of Series B have
customary anti-dilution protections. The closing of the second transaction
was subject to certain conditions, including the restructuring of our
senior credit facilities and the issuance of the Senior Secured Note,
described below, in order to provide for a fully funded business plan. The
Series B terms also require the payment of a $1 million financing fee to
WCAS.
The terms of the Series B transactions also provided for the issuance of
12.6 million warrants to purchase our common stock at a price of $0.01 per
share. The number of warrants outstanding may be reduced to a minimum of
6.6 million, or increased to a maximum of 18.6 million, based upon our
attaining certain financial plan objectives on a quarterly basis through
the end of 2001. The warrants are exercisable for a period of ten years
beginning on January 12, 2001, and are subject to customary anti-dilution
provisions.
Each share of Series B is convertible into 800 shares of our common
stock. The holders are also entitled to dividends equal to the greater of
(i) 6% per annum of the original purchase price of $1,000 per share or (ii)
the amount of dividends that would have been received during such period
had the Series B been converted into shares of our common stock. Such
dividends are payable in cash or stock at our election. The Series B
shareholders may redeem their shares at a price equal to the higher of the
fair market value or liquidation value upon the later of January 12, 2008,
or six months after our 10 1/2% senior notes are refinanced. In the event
of liquidation, dissolution or winding up of the Company, the holders are
entitled to be paid out of the assets of the Company, prior and in
preference to common stockholders or any other class or series of capital
stock, an amount equal to the greatest of (i) $1,000 per share plus accrued
and unpaid dividends thereon, (ii) such amount as would have been payable
had the Series B been converted into shares of our common stock immediately
prior to such an event and (iii) an amount representing an internal rate of
return on the investment of the holders of the Series B of 20%.
The Series B agreement also contains governance provisions whereby WCAS
representatives will constitute a majority of the Board of Directors until
such time as their ownership falls below a specified
23
minimum level. In addition, Peter Loftin entered into an agreement to vote
his common shares in favor of any action approved by the Board of
Directors. The Series B terms also provide approval rights on certain types
of transactions requiring a majority vote of the Series B shareholders. The
holders of a majority of our Series A and Series B shares may also direct
the Board to effect a sale of the company after December 31, 2002, or
sooner, if we fail to meet certain financial performance objectives.
Senior Secured Note Concurrent with the March 30, 2001 Series B
transaction, we also issued a Senior Secured Note (the "Note") to WCAS in
the amount of $50 million. The Note is secured by a second priority lien on
certain of our assets and the stock of our operating subsidiary, and
matures immediately following the repayment of the restructured senior bank
facilities. The Note bears interest at the higher of 10% per annum or the
rate existing on our senior bank facilities, and contains covenants
identical to those contained in our senior bank facilities. The Note also
provides for the issuance to WCAS of 7,143 shares of Series B, and 1.5
million warrants at $.01 per share and have terms identical to the Series B
warrants described above.
The proceeds of the Series B transaction and the Note will be used to
continue building our telecommunications network, to expand our
infrastructure and marketing resources, to make acquisitions, to provide
working capital and for other general corporate purposes.
Restructured Bank Credit Facilities Effective March 30, 2001, we
restructured our existing GE Capital Facilities and Bank of America
Facility. In connection with this restructuring, we entered into a new $89
million loan with GE Capital, Bank of America, and Export Development
Corporation (the "Loan"), which was fully drawn at closing. The Loan
contains a provision to allow its expansion to $100 million if we obtain a
commitment from an additional lender. The Loan begins quarterly
amortization in 2003, and matures on April 30, 2007. The issuance of the
Loan was conditioned upon the closing of the Series B preferred stock and
the Note discussed above.
Interest accrues on the Loan, at our option, at either 1, 2, 3, or 6
month reserve-adjusted LIBOR or an Index Rate (the higher of the Prime rate
or 50 basis points over the Federal Funds Rate) plus an applicable margin.
The applicable margin varies, based upon our financial condition, from
3.50% to 4.50% for LIBOR borrowings and from 2.50% to 3.50% for Index Rate
borrowings. The Loan is secured by a first priority lien on all of our
assets and a pledge of the stock of our operating subsidiary. The Loan also
requires a prepayment penalty of 1% during the first year, and 0%
thereafter. The Loan requires 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, 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.
Revenue
We generate the majority of our revenues from the sale of: (1) integrated
retail voice services, primarily to small and medium-sized businesses; (2)
retail and wholesale data services; and (3) wholesale voice services, largely
to other telecommunications carriers. Our portfolio of integrated retail voice
services includes long distance, local, paging, AIN applications, operator and
other enhanced services. Our data services include dial-up and dedicated
Internet access, Web site design and hosting services, DSL high-speed Internet
access services, ATM data transport services, and private line services ranging
from DS-0 capacity to OC-48 capacity. Our wholesale voice services consists
primarily of switched and dedicated access services and prepaid calling card
services.
24
Operating Expenses
Our primary operating expense categories include cost of services and
selling, general and administrative expenses, or SG&A. Cost of services
consists of the fixed costs of leased facilities and the variable costs of
origination, termination, and access services provided through ILECs and other
telecommunications companies.
SG&A includes all infrastructure costs such as selling expenses, customer
support, corporate administration, personnel, network maintenance, and
depreciation and amortization. Selling expenses include commissions for our
direct sales program, which consist of a large percentage of customers' first
month's billings, plus a residual percentage of ongoing monthly revenues.
Selling expenses also include commissions paid to our dealers, which are based
upon a fixed percentage of the customers' monthly billings. Depreciation and
amortization is primarily related to switching equipment, facilities, computer
equipment and software, and is expected to increase as we incur substantial
capital expenditures to continue the expansion of our network facilities.
Depreciation and amortization also includes the amortization of line access
fees, which represent installation charges paid primarily to ILECs for leased
fiber optic facilities in addition to internal costs for network setup.
Income Taxes
We generated a net loss for 1998, 1999 and 2000. Based upon our plans to
expand the business through the construction and expansion of our networks,
customer base and product offerings, this trend is expected to continue. Given
these circumstances and the level of taxable income expected to be generated
from reversing temporary differences, we have established a valuation allowance
for the deferred tax assets associated with these net operating losses. 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.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue
Although we experienced strong growth of 21.5% in our retail integrated
voice and data services during 2000, total revenue increased by only $11.5
million, or 4.4%, from $260.0 million in 1999 to $271.5 million in 2000. Our
retail integrated voice and data services revenue increased by $22.4 million
and $17.8 million, respectively. However, this growth was largely offset by a
$28.7 million decrease in wholesale long distance revenue. This anticipated
decrease was primarily driven by strategic pricing changes we implemented late
in 1999 in our prepaid calling card services, which were designed to preserve
minimum margins in this product. Excluding prepaid calling card services,
revenues increased from $216.7 million in 1999 to $263.2 million in 2000.
The $22.4 million increase in retail integrated voice services during 2000
consisted of an increase in local services partially offset by a slight
decrease in retail long distance service revenue. Local services revenue grew
by $25.4 million to $64.2 million during 2000, which represents a 65.6%
increase over local services revenue of $38.8 million in 1999. The cumulative
number of local access lines we sold increased from 94,000 at December 31, 1999
to 139,000 at December 31, 2000. In addition, 45.0% of these lines were
facilities-based as of December 31, 2000, an increase of approximately 35,000
lines from the 28.5% that were facilities-based at the end of 1999. The
increase in local services revenue was partially offset by a $3.1 million
decrease in retail long distance services revenue, primarily driven by price
compression. Minutes of retail long distance increased by 7.2% from 839.0
million in 1999 to 899.6 million in 2000.
Data services revenues increased by $17.8 million, or 64.2%, from $27.6
million in 1999 to $45.4 million in 2000. This increase was driven by increases
in retail data services, such as Internet, frame relay and private
25
line revenue of $4.2 million, and increases in wholesale data services of $9.8
million. In addition, we had revenues of $3.8 million from our new product
offerings of web design and development services and data network design and
network management services. The products were added via the second quarter
acquisitions of Max Commerce, a web design company, and US Datacom, a data
network integration company. We anticipate continued increases in wholesale
data services, consisting of data and voice bandwidth sold to other
telecommunications companies, as we continue to expand our in-service fiber
network.
The $28.7 million decrease in wholesale long distance revenues consisted of
decreases of $35.1 million in prepaid calling card revenues and $0.6 million in
wholesale international services. These decreases were partially offset by an
increase of $7.0 million in wholesale domestic services. During 1999, we
changed our prepaid calling card services to ensure their profitability. We
expected these pricing changes to result in significantly reduced prepaid
calling card revenues in 2000. Adjusted wholesale voice revenues, excluding
prepaid debit card services, increased 12.6% from $42.9 million in 1999 to
$48.3 million in 2000.
Cost of Services
Cost of services represented 61.3% of revenue for the year ended December
31, 2000, as compared to 66.6% for 1999. We have continued to realize
improvements in our cost of services percentage primarily through improvements
in our product mix and growth in the percentage of services provided via our
own facilities.
We have migrated traffic from leased facilities to owned facilities on our
operational fiber network between New York and Miami, which has resulted in
approximately $350,000 in monthly savings on previously leased circuits. These
leased facility savings should continue to increase as we complete the 500-
mile fiber network between Raleigh, North Carolina and Savannah, Georgia and
segments of this network are placed into service.
We increased our percentage of facilities-based in service local lines from
28% at the end of 1999 to 42% at the end of 2000 as we grow our local switching
infrastructure in additional markets. Gross margins on our local services
continue to improve as we sell more facilities-based local service and migrate
existing resale customers to our facilities in switch-based markets. This
migration not only improves margins but enables us to better serve our
customers' needs by allowing shorter service provisioning intervals and more
control over service quality and features. Additionally, facilities-based local
service allows us to generate revenue from providing originating and
terminating access to other long distance carriers.
Growth in our data services revenue as a percentage of total revenue has
also contributed to the improvement in our overall gross margin, because these
products tend to have strong gross margins. Data services revenue grew from
10.6% of our total revenue in 1999 to 16.7% in 2000. We expect this percentage
to continue increasing, given the increasing customer demand for higher
bandwidth data transmission.
By marketing our bundled local, long distance and data services solution we
have increased the percentage of our retail customers purchasing multiple
products from 26% at the end of 1999 to 38% at the end of 2000. This bundling
strategy improves our cost of services percentage by eliminating costs, such as
long distance access charges for facilities-based local customers who also buy
long distance services. In addition, service bundling improves the overall
efficiency of our network and our sales process. We offer our customers the
ease of a single point-of-contact and a consolidated monthly bill, and our
experience has shown that we have higher retention rates for those customers
who subscribe to more than one of our bundled services.
We expect the continuing construction and completion of our fiber optic
network, the continuing effect of migrating customers to facilities-based
products, increased sales of our higher margin data services, and the bundling
of an integrated solution to our customers to continue reducing our cost of
services as a percentage of revenue in the future.
26
Selling, General and Administrative Expenses
SG&A expenses in 2000 were $116.8 million, or 43.0% of revenue, as compared
to $86.1 million, or 33.1% of revenue in 1999. The increase in SG&A expenses
during 2000 is largely attributable to the expansion of back office
infrastructure to support our rollout of local and data services as well as
the deployment of our fiber network. This expansion resulted in additional
facilities costs and significant investments in human resources during the
year as our headcount grew from 978 employees as of December 31, 1999, to
1,246 employees as of December 31, 2000. These additional facilities and human
resources investments are intended to provide us with the ability to continue
to expand into new markets, maximize customer retention and provide for growth
in 2001 and beyond. In addition, as we continue to expand our data services
offerings, such as DSL and frame relay, we incur significant advance marketing
and sales costs.
In addition, depreciation and amortization was $34.4 million in 2000,
representing an increase of 77.1% over the prior year. The increase in
depreciation and amortization is primarily due to capital expenditures related
to the expansion of our network operation centers, fiber optic network and
support infrastructure to accommodate expanded service offerings and increased
traffic volume.
Other Income (Expense)
During 2000, interest expense was $30.5 million, compared to $28.5 million
in 1999. During 1999 and 2000, interest expense was primarily attributable to
our September 1997 issuance of the 10 1/2% Senior Notes to finance capital
expenditures, working capital and our introduction of competitive local
exchange carrier and enhanced data services. The $2.0 million increase in
interest expense during 2000 consisted primarily of increased borrowings on
our credit facilities. In addition to the amounts expensed, we capitalized
$2.2 million of interest expense primarily associated with the construction of
our local service facilities and fiber networks during 2000, compared to $1.8
million of capitalized interest in 1999.
Interest income decreased to $2.3 million in 2000 from $2.5 million in
1999, due to lower cash balances.
EBITDA
EBITDA consists of income (loss) before interest, income taxes,
depreciation, amortization and 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 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.
We experienced negative EBITDA of $11.4 million for 2000 compared to
positive EBITDA of $1.1 million for 1999. The decrease in EBITDA we
experienced throughout 2000 is primarily attributable to increases in SG&A
expenses related to the accelerated expansion of our infrastructure and
service offerings. We expect to see positive EBITDA during 2001 as we continue
to expand our local service and data offerings, complete deployment of our
fiber optic network and reduce SG&A expenses as a percentage of revenues.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue
Revenue increased 22.3% from $212.6 million in 1998 to $260.0 million in
1999. This $47.4 million increase was primarily driven by our continuing
success in sales of retail integrated voice services, data services and
wholesale long distance services. These product lines had revenue increases of
$24.5 million, $9.9 million and $13.1 million, respectively, in 1999.
The $24.5 million increase in retail integrated voice services during 1999
consisted of two components. One was a $26.9 million increase in local
services revenues to $38.8 million during 1999, which represented a
27
226.0% increase over local services revenue of $11.9 million in 1998. The
cumulative number of local access lines we sold increased from 48,500 at
December 31, 1998, to 94,000 at December 31, 1999. In addition, 28.5% of these
lines were facilities-based as of December 31, 1999, an increase of
approximately 20,000 lines from the 10.5% that were facilities-based at the end
of 1998. This increase in local services revenue was partially offset by a $2.4
million decrease in retail long distance services revenue.
Data services revenues increased by $9.8 million, or 55.1%, from $17.8
million in 1998 to $27.6 million in 1999. This $9.8 million increase was driven
by increases in retail data services, such as Internet, frame relay and private
line revenue of $2.7 million, and increases in wholesale data services of $7.1
million. We anticipate continued increases in wholesale data services,
consisting of data and voice bandwidth sold to other telecommunications
companies, as we continue to expand our in-service fiber network.
The $13.1 million increase in wholesale voice service revenues consisted of
an increase of $29.6 million in prepaid calling card revenue partially offset
by decreases of $15.5 million and $1.0 million in wholesale international and
domestic services, respectively. We made strategic pricing decisions in 1998 to
maintain minimum margins on our international products, which resulted in the
decreased revenue from these products in 1999. During 1999, we also made
changes to our prepaid calling card products to ensure profitability of this
product.
Cost of Services
Cost of services represented 66.6% of revenue for the year ended December
31, 1999, as compared to 71.0% for 1998. We have continued to realize
improvements in our cost of services percentage through the cost saving
initiatives described below.
We have migrated traffic from leased facilities to owned facilities on the
operational segments of our network. We now have approximately 3,000 miles of
our fiber network completed, which has resulted in approximately $325,000 in
monthly savings on previously leased circuits. These savings should continue to
increase as operational segments of the network are completed and put into
service.
We increased our percentage of facilities-based local lines from 10% at the
end of 1998 to 28% at the end of 1999. Gross margins on our local services
continue to improve as we sell more facilities-based local service and migrate
existing resale customers to our facilities in switched-based markets. This
migration not only improves margins but enables us to better serve our
customers' needs in the local service area. Additionally facilities-based local
service allows us to generate revenue from providing originating and
terminating access to other carriers.
Our data services have inherently high gross margins. During 1999, we sold
58.1% more data services than in 1998 resulting in an increase in percentage of
total revenues from 8.4% in 1998 to 10.6% in 1999. This increase in revenue
from higher margin service has had a positive effect on our gross margin
percentage.
By marketing our bundled local, long distance and data services solution we
have increased the percentage of our retail customers purchasing multiple
products from 18% at the end of 1998 to 26% at the end of 1999. This bundling
strategy improves our cost of services percentage by avoiding certain cost
components, such as long distance access changes for facilities-based local
customers who also buy long distance services. We offer our customers the ease
of a single point-of-contact and a consolidated monthly bill for all of their
telecommunications needs. Our experience has shown that we have higher
retention rates for those customers who subscribe to more than one of our
bundled services.
We expect the continuing construction of our fiber optic networks, the
continuing effect of migrating customers to facilities-based products,
increased sales of our high margin data services, and the bundling of an
integrated solution to our customers to reduce our network costs in the future.
28
Selling, General and Administrative Expenses
SG&A expenses in 1999 were $86.1 million, or 33.1% of revenue, as compared
to $68.6 million, or 32.3% of revenue in 1998. The increase in SG&A expenses
during 1999 is largely attributable to the expansion of back office
infrastructure to support our rollout of local and data services as well as the
deployment of our fiber network. This expansion resulted in additional
facilities costs and large investments in human resources during the year as
our headcount grew from 749 employees as of December 31, 1998, to 978 employees
as of December 31, 1999. These additional facilities and human resources
investments are intended to provide us with the ability to continue to expand
into new markets, maximize customer retention and provide for growth in 2000
and beyond.
In addition, depreciation and amortization was $19.4 million in 1999,
representing an increase of 69.4% over the prior year. The increase in
depreciation and amortization is primarily due to capital expenditures related
to the expansion of our network facilities and support infrastructure to
accommodate expanded service offerings and increased traffic volume.
Other Income (Expense)
During 1999, interest expense was $28.5 million, compared to $25.4 million
in 1998. During 1998 and 1999, interest expense was primarily attributable to
our September 1997 issuance of the 10 1/2% Senior Notes to finance capital
expenditures, working capital and our introduction of competitive local
exchange carrier ("CLEC") and enhanced data services. The $3.1 million increase
in interest expense during 1999 consisted primarily of additional borrowings on
the GE Capital Facilities and the Bank of America Facility. In addition to the
amounts expensed, we capitalized $1.8 million of interest expense associated
with the construction of our local service facilities and fiber networks during
1999, compared to $1.5 million of capitalized interest in 1998.
Interest income decreased to $2.5 million in 1999 from $5.6 million in 1998,
due to lower cash balances remaining from the proceeds of the 10 1/2% Senior
Note offering.
EBITDA
Earnings before interest, taxes, depreciation and amortization and other
non-cash charges, or EBITDA, is a common measurement of a company's ability to
generate cash flow from operations. EBITDA is not a measure of financial
performance 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. We experienced positive EBITDA of $1.1 million
for 1999 compared to negative EBITDA of $6.9 million for 1998. The increase in
EBITDA we experienced throughout 1999 is primarily attributable to increases in
revenue coupled with cost reduction initiatives accompanying our migration to a
facilities-based integrated communications provider.
Liquidity and Capital Resources
As of December 31, 2000, we had approximately $5.5 million in cash and cash
equivalents, in addition to approximately $5.9 million in available borrowing
capacity under our credit facilities. To provide additional liquidity for
ongoing operations and capital expenditures, we closed a series of debt and
equity transactions during the first quarter of 2001 which provided incremental
capital of approximately $110 million. For a description of these transactions,
see Recent Developments. As a result of these transactions, we expect our
available cash and cash equivalents as of March 31, 2001 to be approximately
$90.0 million.
Cash Flows
For the year ended December 31, 2000, we used $14.9 million of cash flow to
fund operating activities. A net loss of $77.4 million was the primary use of
funds in the operation of the business, offset by $34.4 million
29
of depreciation and amortization and a $27.8 million net increase in our
operating assets and liabilities. These items are associated with our capital
expenditures and ongoing operational expansion and include a significant
buildup in our trade accounts payable. Cash used in investing activities in
2000 was $120.8 million, primarily consisting of $139.6 million in net capital
expenditures, partially offset by a decrease in restricted cash of $29.0
million. Capital expenditures during 2000 were primarily related to the
deployment of our local switching infrastructure and fiber optic network
expansion. Construction of our fiber network from Raleigh, North Carolina to
Savannah, Georgia, which accounted for $67.0 million in capital expenditures,
was completed during the first quarter of 2001. In addition, we spent $3.9
million for the acquisition of Max Commerce and US Datacom in the second
quarter of 2000. The $6.2 million increase in other assets consisted entirely
of capitalized expenditures for line access fees and related network
provisioning costs. The decrease in restricted cash resulted from the provision
of $26.3 million to fund the March and September 2000 interest obligations on
the 10 1/2% Senior Notes, net of $2.7 million in related investment earnings.
Net cash provided by financing activities in 2000 was $55.2 million. This
increase consisted primarily of net proceeds from long-term borrowings of $59.4
million, partially offset by $4.2 million in additional issuance costs of our
Series A preferred stock.
For the year ended December 31, 1999, we used $18.5 million of cash flow to
fund operating activities. A net loss of $44.7 million was the primary use of
funds in the operation of the business. The net loss was offset by $19.4
million of depreciation and amortization, as well as a $6.5 million net
increase in our operating assets and liabilities. These items are associated
with our capital expenditures and ongoing operational expansion. Cash used in
investing activities in 1999 was $61.3 million, consisting of $80.5 million in
capital expenditures, partly offset by a decrease in restricted cash of $23.8
million. Capital expenditures during 1999 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. The $4.5 million increase in
other assets consisted entirely of capitalized expenditures for line access
fees and related network provisioning costs. The decrease in restricted cash
resulted from the provision of $26.3 million to fund the March and September
1999 interest obligations on the 10 1/2% Senior Notes, net of $2.2 million in
related investment earnings. Net cash provided by financing activities in 1999
was $153.1 million. Financing of $195.8 million, net of expenses, came from the
WCAS Preferred Investment. Offsetting the $195.8 million investment was a $65.0
million repurchase of a portion of our outstanding shares of common stock, at a
price of $8.55 per share. Net proceeds from long-term borrowings were $24.9
million during 1999.
For the year ended December 31, 1998, we used $6.4 million of cash flow to
fund operating activities. This amount consisted primarily of a net loss of
$38.2 million, offset by depreciation and amortization of $11.5 million, and an
increase in accounts payable and accrued expenses of $20.1 million associated
with our capital expenditures and continued operational expansion. Cash used in
investing activities in 1998 was $49.5 million, including capital expenditures
of $66.3 million and an increase in other assets of $3.1 million, partially
offset by the decrease in restricted cash of $22.3 million. Capital
expenditures during 1998 were primarily related to the deployment of the fiber
optic network and purchases of equipment for the development of our facilities-
based local exchange services. The $3.1 million increase in other assets
consisted of $1.6 million in capitalized expenditures for line access fees, and
the $1.5 million purchase of a multi-media franchise to secure service rights
within the Raleigh, North Carolina market. The decrease in restricted cash
resulted from the provision of $26.3 million to fund the March and September
1998 interest obligations on the 10 1/2% Senior Notes, net of $4.0 million in
related investment earnings. In addition, during 1998 we satisfied stock and
option repurchase obligations that arose in connection with the FiberSouth
acquisition and under the 1994 Stock Plan. We settled these obligations with a
$2.3 million cash payment. The payment, which is reflected as a $1.5 million
adjustment to equity, represents a reallocation of the original FiberSouth
purchase price. Net cash provided by financing activities in 1998 was $1.6
million which consisted primarily of $4.1 million in net borrowings on long-
term debt partially offset by a decrease in other long-term liabilities.
30
Debt
On September 22, 1997, we issued $250.0 million principal amount of 10 1/2%
Senior Notes due 2007. Interest on the 10 1/2% Senior Notes is payable semi-
annually in cash, on each March 15 and September 15. The 10 1/2% 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 10 1/2% Senior Notes was used to purchase
U.S. government securities to secure and fund the balance of the first six
interest payments on the 10 1/2% Senior Notes which are held as restricted
cash. The 10 1/2% Senior Notes will mature on September 15, 2007. Upon a change
of control, as defined in the indenture governing the 10 1/2% Senior Notes, we
will be required to make an offer to purchase the 10 1/2% Senior Notes at a
purchase price equal to 101% of their principal amount, plus accrued interest.
The indenture governing the 10 1/2% Senior Notes contains 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 10 1/2% 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.
Effective March 30, 2001, we restructured our existing GE Capital Facilities
and Bank of America Facility. In connection with this restructuring, we entered
into a new $89 million loan which was fully drawn at closing. See Recent
Developments for a full description of the related terms. The lenders of the
loan are GE Capital, Bank of America, and Export Development Corporation, each
of which committed capital in amounts equal to their commitments under the
previous credit facilities. This transaction was consummated in conjunction
with our sale of Series B preferred stock and related issuance of the Senior
Secured Note.
On January 12, 2001, Standard & Poor's ("S&P") lowered our corporate credit
rating from B to CCC+ and our senior unsecured long term debt rating from B to
CCC-. This rating action reflected concerns regarding our near-term liquidity,
since we did not yet have the funding required to support our business plan.
S&P indicated that our ratings remain on CreditWatch and that further
adjustments were likely if additional funding was not obtained in the very near
term. S&P also adjusted the rating on our senior secured credit facilities from
B+ to B-. Subsequent to this announcement, we closed debt and equity
transactions providing total additional capital of $110 million during the
first quarter of 2001. For a description of these transactions, see "Recent
Developments".
On January 18, 2001, Moody's Investors Service ("Moody's") adjusted the
rating on our $250 million 10% Senior Notes and our issuer rating from B3 to
Caa1, reflecting concerns similar to those cited by S&P regarding our
constrained liquidity situation. Moody's indicated that, given our recent
EBITDA losses and projected capital expenditures, they were concerned that our
January sale of $20 million of Series B preferred stock did not provide
sufficient capital to fund our business plan for 2001. Moody's also adjusted
the rating on our senior secured credit facilities from B2 to B1, and advised
that all ratings had been placed on review for possible further adjustment. On
March 30, 2001, we closed debt and equity transactions providing $90 million of
capital in addition to the $30 million secured in January 2001. For a
description of these transactions, see "Recent Developments".
Preferred Equity Investment
WCAS Preferred Investment. On December 28, 1999, Welsh, Carson, Anderson &
Stowe VII, 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
31
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 owing our 10 1/2% Senior Notes
due 2007 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.
The proceeds from this investment were used 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.
During the first quarter of 2001, we sold 59,999 shares of Series B
preferred stock and warrants to purchase up to a maximum of 18.6 million shares
of our common stock to existing shareholders for total proceeds of
approximately $60 million. In conjunction with this transaction, we also issued
a senior note to WCAS in the amount of $50 million, and 7,143 shares of Series
B preferred stock and warrants to purchase up to a maximum of 2,214,285 shares
of our common stock. See Recent Developments for a description of these
transactions.
Capital Spending
We incurred net capital expenditures of $139.6 million during 2000,
including $67.0 million related to our fiber optic network and $72.6 million in
other telecommunications equipment and corporate infrastructure, primarily for
our continued expansion of CLEC operations. This represented a significant
increase in capital expenditures as compared to 1999, due to our acceleration
of certain network expansion projects. Given that the current phase of our
network expansion is substantially complete, we estimate capital expenditure
requirements for 2001 to be approximately $40 million. The excess initial
capacity of these network expansion projects further supports our ability to
minimize capital expenditures in the near term. Capital requirements primarily
include the projected costs of:
.expanding the capacity of our fiber optic network to meet customer demand;
.expanding our local service infrastructure consistent with access line
growth; and
.enhancing 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. We believe that cash on
hand, borrowings available under the Loan and the Note and cash flow from
operations will be sufficient to expand our business as currently planned. 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 currently anticipated) for new business activities related to
our current and planned businesses, or in the event we decide to make
additional acquisitions, reacquire certain of our outstanding securities, or
enter into joint ventures and strategic alliances. Sources of additional
capital may include public and private debt and equity offerings, subject to
compliance with the provisions in the indenture governing the 10 1/2% Senior
Notes, the Loan, the Note, and the Series A and B preferred stock. 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.
32
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 will require the recognition of all
derivatives on our consolidated balance sheet at fair value. SFAS 133, as
amended by SFAS 137 and SFAS 138, is effective for all quarters of fiscal years
beginning after June 15, 2000. The adoption of SFAS 133, as amended, will not
have an effect on our results of operations or financial position as we do not
have derivative instruments at December 31, 2000.
Effective January 1, 2000, we changed our method of accounting for revenue
recognition in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 provides additional
guidance in applying generally accepted accounting principles to revenue
recognition in financial statements. Through December 31, 1999, we recognized
installation revenue upon completion of the installation. Effective January 1,
2000, in accordance with the provisions of SAB 101, we are recognizing
installation revenue and related costs over the average contract period. The
adoption of SAB 101 did not have a material impact on our results of operations
or financial position.
Inflation
We do not believe inflation has had a significant impact on our operations.
Item 7A. Quantitative and Qualitative Disclosure
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 10 1/2% 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. Accordingly, we are
subject to minimal market risk on any of our investments.
The majority of our debt, which consists of $250.0 million of the 10 1/2%
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 December 31, 2000,
borrowings under these credit facilities were $81.8 million, in addition to
$1.3 million of outstanding letters of credit. 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.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements begin on page F-1 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
33
PART III
Item 10. Directors and Executive Officers of the Registrant.
Name Age(1) Position(s) with Company
- ---- ------ ------------------------
Peter T. Loftin......... 42 Chairman, Chief Executive Officer and Director
R. Michael Newkirk...... 38 President, Chief Operating Officer and Director
H.A. (Butch) Charlton... 50 Executive Vice President, Chief Technology Officer
Anthony M. Copeland..... 44 Executive Vice President, Secretary and General Counsel
Brian K. Branson........ 35 Chief Financial Officer, Treasurer and Director
Joseph J. Nader......... 39 Executive Sales Vice President
Thomas F. Darden........ 45 Director
Anthony J. deNicola..... 36 Director
Thomas E. McInerney..... 59 Director
William M. Moore, Jr.... 61 Director
Paul J. Rizzo........... 72 Director
- --------
(1) At December 31, 2000
Peter T. Loftin founded BTI and serves as Chief Executive Officer and
Chairman of the Board of Directors. Mr. Loftin has more than 15 years of
experience in the telecommunications industry. He has served on the Advisory
Board of the Duke Heart Center at the Duke University Medical Center, the
Steering Committee for the North Carolina Museum of Natural Sciences, the Board
of Directors of the Greater Raleigh Chamber of Commerce and the Board of
Visitors of the Kenan-Flagler Business School at the University of North
Carolina at Chapel Hill ("UNC-CH"). Mr. Loftin attended North Carolina State
University.
R. Michael Newkirk joined BTI in 1986 and has served as Chief Operating
Officer since October 1996, President since July 1997 and as a director since
August 1997. Mr. Newkirk was Executive Vice President of BTI from March 1994
until October 1996. Mr. Newkirk has more than 15 years of experience in the
telecommunications industry and is President of the Associated Communications
Companies of America. He has previously served on the Board of Directors of the
Competitive Telecommunications Association (Comptel), a national organization
that represents telecommunications companies before legislative and regulatory
bodies.
H.A. (Butch) Charlton has served as Executive Vice President since July
1997. Mr. Charlton had joined FiberSouth as its President and Chief Executive
Officer in April 1997. We acquired the fiber optic network assets of FiberSouth
in September 1997. Mr. Charlton served from 1984 to 1997 with DSC
Communications Corporation, a manufacturer of telecommunications equipment for
local, long distance and cellular markets, most recently as Vice President--
Public Network Sales. Prior to joining DSC, Mr. Charlton spent 13 years with
Contel Corporation, a local exchange carrier, holding a variety of positions in
the engineering and network planning area. Mr. Charlton serves on the advisory
board of the Greater Raleigh Chamber of Commerce and holds a B.S. in Business
Finance from the University of Texas at Dallas.
Anthony M. Copeland joined BTI as General Counsel in 1992 after serving as
Chief Counsel for the North Carolina Department of Public Instruction and as
Assistant District Attorney for North Carolina's 10th Prosecutorial District.
Mr. Copeland has served on the North Carolina Board of Public
Telecommunications since July 1995, and in July 1996 was appointed to the Board
of Directors of the North Carolina Electronics and Information Technologies
Association. He has served as the vice president of the Southeastern
Competitive Carriers Association and currently serves as a Director. He is a
member of the Federal Communications Bar Association, the North Carolina State
Bar and the North Carolina Bar Association. Mr. Copeland received his A.B. from
Duke University and his J.D. from the T.M. Cooley Law School at Lansing,
Michigan.
Brian K. Branson was named Chief Financial Officer in August 1996 and
Treasurer and a director in August 1997. Mr. Branson joined BTI in July 1992 as
a financial analyst and served in a variety of financial
34
roles prior to his appointment as Chief Financial Officer. Prior to joining
BTI, he worked in the Entrepreneurial Services Group of Ernst & Young LLP. Mr.
Branson is a board member of the National Telecom Data Exchange. Mr. Branson is
a Certified Public Accountant and holds a B.S. in Accounting and an M.B.A. from
Elon College.
Joseph J. Nader joined BTI as Senior Vice President of Sales in January
2000. Before coming to BTI, Mr. Nader worked as vice president of direct sales
for the East Coast division of Cable & Wireless, USA, Inc., a Global Fortune
500 company. For six years he worked for Sprint Communications, where he most
recently served as a regional district manager for the northeast territory. Mr.
Nader holds a Bachelor of Arts degree in Management from Mercy College, Dobbs
Ferry, NY.
Thomas F. Darden has served since 1984 as Chairman or Chief Executive
Officer of Cherokee Sanford Group, LLC or its predecessors and affiliates,
which include companies in building materials and environmental remediation and
an institutional investment fund. He also serves as a director of two public
companies, Waste Industries, Inc. and Winston Hotels, Inc., and is a trustee of
Shaw University. Previously, Mr. Darden was a consultant with Bain and Company
in Boston. Mr. Darden holds a B.A. and an M.R.P. in Environmental Planning from
UNC-CH and a J.D. from Yale University.
Anthony J. deNicola is a partner with WCAS, joining the firm in April 1994.
Prior to that, he worked at William Blair & Company financing middle market
buyouts. Mr. deNicola is currently a director of Centennial Communications
Corp. and NTELOS, Incorporated. He holds a Bachelor's degree from DePauw
University and a M.B.A. from Harvard Business School. He is a director of
Alliance Data Systems Corporation and several private companies. He is a
trustee of DePauw University.
Thomas E. McInerney has served as a general partner of WCAS and other
associated partnerships since 1987. Prior to joining WCAS, Mr. McInerney was
President and Chief Executive Officer of Dama Telecommunications Corporation, a
voice and data communications services company which he co-founded in 1982. Mr.
McInerney has also been President of the Brokerage Services Division and later
Group Vice President--Financial Services of ADP, with responsibility for the
ADP divisions that serve the securities, commodities, bank, thrift and
electronic funds transfer industries. He has also held positions with the
American Stock Exchange, Citibank and American Airlines. Mr. McInerney serves
as a director of Savvis Communications Corporation, The BISYS Group, Inc.,
Centennial Communications Corp. and SpectraSite Holdings, Inc. He is also a
director of Bridge Information Systems, Inc. and several other private
companies. Mr. McInerney received a B.A. from St. John's University and
attended New York University Graduate School of Business Administration.
William M. Moore, Jr. served as Chairman of the Board and Chief Executive
Officer of Trident Financial Corp., a specialty investment bank, from 1975
until its acquisition by KeyCorp on June 1, 1999. He currently serves as a
senior advisor to McDonald Investments, the investment banking subsidiary of
KeyCorp, and as a director of the following private companies: Franklin Street
Partners; Anchor Capital Corp.; Oberlin Capital, LP; MCNC; and Franklin Street
Trust Co. In the past, Mr. Moore served as chairman of the Educational
Foundation at UNC-CH and as the president of the Kenan-Flagler Business School
Foundation at UNC-CH. He currently serves as a trustee of the National
Humanities Center and is an adjunct professor of finance at the Kenan-Flagler
Business School at UNC-CH. Mr. Moore holds a B.S. in Naval Science from the
U.S. Naval Academy and an M.B.A. from the Kenan-Flagler Business School at UNC-
CH.
Paul J. Rizzo has served as Chairman of the Board of Franklin Street
Partners, a private investment company, since 1996 and also serves as a
director of Kenan Transport Co. and Pharmaceutical Product Development.
Following his retirement as Vice Chairman of IBM in 1987, Mr. Rizzo became Dean
of the Kenan-Flagler Business School at UNC-CH. He returned to IBM in 1993 as
Vice Chairman and retired from that position in 1994. Mr. Rizzo serves as
chairman of the Board of the University of North Carolina Healthcare System. In
addition, he serves as a director of five private companies.
There are no family relationships between any of our directors or executive
officers.
35
Item 11. Executive Compensation
Summary Compensation Information
The following table sets forth all compensation paid or accrued by us for
services rendered to it in all capacities for the fiscal years ended December
31, 2000, 1999 and 1998, to BTI's Chief Executive Officer and its other four
most highly compensated executive officers as of December 31, 2000
(collectively, the "Named Officers").
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
----------------------- --------------------------
Fiscal Stock Options All Other
Name and Principal Position Year Salary Bonus (Shares) Compensation
- --------------------------- ------ -------- ------- ------------- ------------
Peter T. Loftin, Chairman and CEO..... 2000 $875,016 $ 0 0 $ 86,583 (1)
1999 875,016 0 0 169,786 (2)
1998 875,016 2,537 0 138,982 (3)
R. Michael Newkirk, President and
COO.................................. 2000 440,587 66,189 0 17,808 (4)
1999 295,000 55,157 0 17,496 (5)
1998 168,750 130,000 250,000 16,736 (6)
Anthony M. Copeland, Executive Vice
President and General Counsel........ 2000 195,000 39,163 0 12,634 (7)
1999 175,000 18,386 0 13,114 (8)
1998 145,000 20,000 125,000 12,290 (9)
H.A. (Butch) Charlton, Executive Vice
President............................ 2000 272,324 22,247 0 13,669(10)
1999 232,908 0 0 13,800(11)
1998 175,000 50,000 125,000 8,300(12)
Joseph J. Nader,
Executive Sales Vice President (13).. 2000 428,245 50,000 0 13,725(14)
- --------
(1) Includes $6,474 medical insurance premium cost, $2,170 disability
insurance cost, $15,496 telephone expense, $18,794 tax planning/consulting
cost and $42,000 auto allowance and personal use of Company vehicles.
(2) Includes $5,496 medical insurance premium cost, $2,213 disability
insurance cost, $8,520 telephone expense, $109,908 tax planning/consulting
cost and $42,000 car allowance and personal use of Company vehicles and
$1,649 of other expenses.
(3) Includes $62,000 of relocation expenses, $5,190 medical insurance premium
cost, $2,213 disability insurance cost, $4,793 telephone expense, $21,161
tax planning/consulting cost and $43,625 car allowance and personal use of
Company vehicles.
(4) Includes $5,100 of BTI's matching 401(k) Plan and $12,703 representing the
taxable portion of certain car lease payments.
(5) Includes $4,800 of BTI's matching 401(k) Plan and $12,696 representing the
taxable portion of certain car lease payments.
(6) Includes $4,800 of BTI's matching 401(k) Plan and $11,936 representing the
taxable portion of certain car lease payments.
(7) Includes $5,100 of BTI's matching 401(k) Plan and $7,534 representing the
taxable portion of certain car lease payments.
(8) Includes $4,800 of BTI's matching contributions to the 401(k) Plan and
$8,314 representing the taxable portion of certain car lease payments.
(9) Includes $4,770 of BTI's matching contributions to the 401(k) Plan and
$7,520 representing the taxable portion of certain car lease payments.
36
(10) Includes $5,100 of BTI's matching 401(k) Plan and $8,569 representing
the taxable portion of certain lease payments.
(11) Includes $4,800 of BTI's matching contribution to the 401(k) Plan and
$9,000 representing the taxable portion of certain car lease payments.
(12) Includes $4,800 of BTI's matching contribution to the 401(k) Plan and
$3,500 representing the taxable portion of certain car lease payments.
(13) Mr. Nader joined BTI in January 2000.
(14) Includes $5,100 of BTI's matching contribution to the 401(k) Plan and
$8,625 auto allowance.
Option Grants, Exercises and Holdings and Fiscal Year-End Option Values
The following table summarizes all option grants during the fiscal year
ended December 31, 2000, to the Named Officers:
Option Grants During Fiscal Year Ended December 31, 2000
Potential
Realizable
Value at Assumed
Annual Rates of
% of Total Stock Price
Number of Options Appreciation
Shares Granted to For Option
Underlying Employees Exercise or Term(1)
Options in Fiscal Year Base Price Expiration --------------------
Name Granted 2000 Per Share Date 5% 10%
- ---- ---------- -------------- ----------- ---------- -------- --------
Peter T. Loftin......... 0 0% N/A N/A N/A N/A
R. Michael Newkirk...... 0 0% N/A N/A N/A N/A
Anthony M. Copeland..... 0 0% N/A N/A N/A N/A
H.A. (Butch) Charlton... 0 0% N/A N/A N/A N/A
Joseph J. Nader......... 50,000 7.8% $3.00 01/04/2010 $546,352(1) $958,825(1)
- --------
(1) Potential realizable value of each grant is calculated assuming that the
underlying security's fair market value, which the Board of Directors had
determined in good faith to be $8.55 per share, appreciates at annualized
rates of 5% and 10%, respectively, over the 10-year term of the grant. The
assumed annual appreciation of 5% and 10% would result in the price of the
common stock increasing to $13.93 and $22.18, respectively.
The following table sets forth information about the number and value of
unexercised options held by the Named Officers as of December 31, 2000. No
Named Officer exercised options in 2000.
Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
at December 31, 2000 at December 31, 2000(1)
----------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------------- ---------------- ----------- -------------
Peter T. Loftin......... 0 0 $ 0 $ 0
R. Michael Newkirk...... 1,982,960 0 15,959,295 0
Anthony M. Copeland..... 158,330 0 978,688 0
H.A. (Butch) Charlton... 158,330 0 978,688 0
Joseph J. Nader......... 16,667 33,333 92,502 184,998
- --------
(1) Value is computed as the difference between the deemed fair market value
of a share of common stock at December 31, 2000, based on the most recent
determination by the Board of Directors prior to that date, which was
$8.55 per share, and the exercise price of the options.
37
Director Compensation
Our directors receive no cash compensation for serving as such, but they are
reimbursed for their out-of-pocket expenses to attend our meetings. In
addition, each director who is not an employee of ours (excluding WCAS-
appointed directors) is eligible to be granted stock options, as in prior
years; however, no such grants were made in 2000.
Severance Agreements
In December 1998, we entered into severance agreements with Mr. Newkirk, Mr.
Charlton, Mr. Copeland and Mr. Branson. These agreements require us to pay
these officers severance if their employment by us is terminated, other than
for cause, within three years of:
(1) the date Peter T. Loftin is no longer beneficial owner of securities
of the Company representing at least 50% of the combined voting power of
the Company's then outstanding securities, if such date is prior to the
date upon which the Company registers its equity securities under the 1933
Securities Act;
(2) the date on which Peter T. Loftin is no longer Chairman of our Board
of Directors; or
(3) the closing date of the sale of our company.
The severance payments would be payable over three years and include:
(1) three times the officer's annual base salary for the full calendar
year prior to termination;
(2) three times the officer's cash bonuses for the full calendar year
prior to termination;
(3) three times the officer's average annual commissions for the two
full calendar years prior to termination; and
(4) fringe benefits and perquisites as provided immediately prior to
termination.
In addition, the officer would get use of his company car and reimbursement
of up to $10,000 for all reasonable executive out-placement services for up to
12 months.
Compensation Committee Interlocks and Insider Participation
In 1999 we established a compensation committee to review compensation
beginning in 2000. The committee consists of Messrs. Darden, Moore and Rizzo,
none of whom have ever been employees of our company. The compensation
committee reviews and acts on matters relating to compensation levels and
benefit plans for our executive officers and key employees, including salary
and stock options. The compensation committee is also responsible for granting
stock options and other awards to be made under our existing incentive
compensation plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 29, 2001 by (i) each shareholder who
is known by us to beneficially own 5% or more of any class of our capital
stock, (ii) each of our directors, (iii) each Named Officer and (iv) all
directors and executive officers as a group.
In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person is deemed to be a "beneficial owner" of a security if he or
she has or shares the power to vote or direct the disposition of such security.
A person also is deemed to be a beneficial owner of any securities of which
that person has the right to acquire beneficial ownership within 60 days. The
percentage ownership of each shareholder is calculated based on the total
number of outstanding shares of common stock and those shares of common stock
that may be acquired by such shareholder within 60 days. Consequently, the
denominator for calculating such percentage may be different for each
shareholder. Unless otherwise indicated in the footnotes to this table, each
shareholder named in this table has sole voting and investment power with
respect to the shares shown as beneficially owned.
38
Beneficial Ownership
---------------------------------------------------------------------------
Series A Preferred Series B Preferred
Common Stock Stock Stock Percentage
---------------------- -------------------- -------------------- Total
Number of Percent of Number of Percent of Number of Percent of Voting
Name of Beneficial Owner Shares Class(1) Shares Class (1) Shares Class (1) Power
- ------------------------ ----------- ---------- --------- ---------- --------- ---------- ----------
Peter T. Loftin(2)...... 102,496,861 99.86% 0 * 9,999 14.9% 59.7%
Thomas F. Darden(3)..... 6,000 0.01% 0 * 0 * *
William M. Moore(3)..... 6,000 0.01% 0 * 0 * *
Paul J. Rizzo(3)........ 6,000 0.01% 0 * 0 * *
Thomas E. McInerney(4).. 183,603,061 99.92% 200,000 100.0% 67,142 100.0% 99.9%
Anthony J. deNicola(4).. 183,603,061 99.92% 200,000 100.0% 67,142 100.0% 99.9%
R. Michael Newkirk(3)... 1,982,960 2.10% 0 * 0 * 1.16%
H.A. (Butch)
Charlton(3)............ 158,300 0.17% 0 * 0 * *
Anthony M. Copeland(3).. 158,300 0.17% 0 * 0 * *
Brian K. Branson(3)..... 158,300 0.17% 0 * 0 * *
Joseph J. Nader (3)..... 50,000 0.05% 0 * 0 * *
Welsh, Carson, Anderson
& Stowe VIII, L.P.(4).. 183,603,061 99.92% 200,000 100.0% 67,142 100.0% 99.9%
Directors and executive
officers as a group
(11 persons)(3)........ 186,128,921 99.92% 200,000 100.0% 67,142 100.0% 99.9%
- --------
* Less than one percent.
(1) Based on a total of 92,543,370 shares of common stock outstanding as of
March 30, 2001, and with respect to each director, Named Officer and
shareholder beneficially owning more than 5% of our common stock, the
shares of common stock that would be outstanding if the director or Named
Officer exercised options and warrants to purchase shares of common stock
which are exercisable within 60 days of March 30, 2001, and the shareholder
exercised the right to convert shares of Series A and Series B preferred
stock into shares of common stock; and with respect to the directors, Named
Officers and 5% shareholders as a group, the shares that would be
outstanding if each had exercised the options and warrants and converted
the Series A and Series B preferred stock into common stock.
(2) Consists of (i) 92,397,661 shares of common stock; (ii) 7,999,200 shares of
common stock that are issuable upon the conversion of 9,999 shares of
Series B preferred stock; and (iii) 2,100,000 shares of common stock
issuable upon the exercise of warrants.
(3) Consists entirely of shares of common stock that such person has the right
to purchase pursuant to options exercisable within 60 days of March 30,
2001.
(4) Consists of (i) 23,391,800 shares of common stock that are issuable upon
the conversion of 200,000 shares of Series A preferred stock held WCAS,
which convert at the rate of 116.959 shares of common stock for each share
of Series A preferred stock; (ii) 45,714,400 shares of common stock that
are issuable upon the conversion of 57,143 shares of Series B preferred
stock held by WCAS, which convert at the rate of 800 shares of common stock
for each share of Series B preferred stock; (iii) 12,000,000 shares of
common stock convertible upon the exercise of warrants; and (iv) deemed
beneficial ownership of 92,397,661 shares of common stock, 2,100,000 shares
of common stock issuable upon the exercise of warrants and 7,999,200 shares
of common stock that are issuable upon the conversion of 9,999 shares of
Series B preferred stock held by Peter T. Loftin, pursuant to that certain
Second Amended and Restated Shareholders Agreement dated March 30, 2001 by
and among WCAS, Peter T. Loftin and the Company. All shares owned or deemed
beneficially owned by WCAS are deemed to be beneficially owned by Mr.
deNicola and Mr. McInerney, who are partners of WCAS, but the shares are
counted only once in determining the amount outstanding and the percentage
of ownership.
39
Item 13. Certain Relationships and Related Transactions
Directors Anthony J. deNicola and Thomas E. McInerney are both partners in
WCAS. As part of the WCAS Preferred Investment, WCAS has the right to appoint
two directors to our Board as long as WCAS beneficially owns at least
11,700,000 shares of common stock, including the assumed conversion of the
Series A preferred stock and the warrants into shares of our common stock.
Directors deNicola and McInerney are the appointees of WCAS.
40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report:
(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
See Index to Consolidated Financial Statements on page F-1.
All other financial statement schedules for which provision is made in
Regulation S-X are omitted because they are not required under the related
instructions, are inapplicable, or the required information is given in the
financial statements, including the notes thereto and, therefore, have been
omitted.
(3) Exhibits.
See Exhibit Index in Item 14 (c) below
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended December 31, 2000.
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1* Agreement and Plan of Merger as of September 17, 1997, among
Business Telecom, Inc., BTI Telecom Corp., and BTI OpCo Inc.
2.2* Asset Purchase Agreement dated September 17, 1997, between
FiberSouth, Inc., and Business Telecom, Inc.
3.1** Articles of Restatement of BTI Telecom Corp.
3.2** Second Amended and Restated Bylaws of BTI Telecom Corp.
4.1* Indenture dated as of September 22, 1997, among BTI Telecom Corp.,
Business Telecom, Inc. and First Trust of New York, National
Association, as Trustee, relating to the 101/2% Senior Notes due
2007 of BTI Telecom Corp.
4.2* Registration Rights Agreement dated September 22, 1997, between
BTI Telecom Corp. and Morgan Stanley & Co. Incorporated and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
4.3* Pledge and Security Agreement dated as of September 22, 1997, from
BTI Telecom Corp., as Pledgor, and Business Telecom, Inc., as
Guarantor, to First Trust of New York, National Association, as
Trustee.
10.1* 1994 Stock Plan.
10.2+ 1997 Stock Plan, as amended.
10.3* Second Amended and Restated Loan Agreement dated September 22,
1997, between Business Telecom, Inc. and General Electric Capital
Corporation and the other financial institutions party thereto
from time to time as Lenders and General Electric Capital
Corporation as Agent (the "GE Capital Agreement").
10.4* Future Advance Promissory Note, dated June 30, 1997, made by
ComSouth Cable International, Inc. in favor of Business Telecom,
Inc.
10.5* Subordinated Promissory Note, dated August 31, 1997, made by
Business Telecom, Inc. in favor of Peter T. Loftin.
41
Exhibit No. Description
----------- -----------
10.6* Employment Letter Agreement, dated March 20, 1997, and March 26,
1997, between FiberSouth, Inc. and H.A. (Butch) Charlton, as
amended effective October 1, 1997.
10.7* Interconnection Agreement, dated November 5, 1997, between
Business Telecom, Inc., and BellSouth Telecommunications, Inc.
10.8* Lease, dated May 13, 1994, between RBC Corporation and Business
Telecom, Inc., as amended March 1, 1995, November 30, 1995, and
May 15, 1997 (the "Lease").
10.9*+ IRU Agreement dated October 31, 1997, between QWEST Communications
Corporation and Business Telecom, Inc.
10.10*** First and Second Amendments to the GE Capital Agreement.
10.11*** Amendments Four, Five and Six to the Lease.
10.12+ First Amendment to IRU Agreement, entered into on April 19, 1999,
between Qwest Communications Corporation and Business Telecom,
Inc.
10.13+ Commitment Letter and Summary of Indicative Terms and Conditions
between Business Telecom, Inc. and Bank of America, dated July 16,
1999.
10.14+ Employee Stock Purchase Plan.
10.15+ Third Amendment to the GE Capital Agreement.
10.16+ Form of Executive Severance Agreement.
10.17++ Fourth Amendment to the GE Capital Agreement.
10.18++ Loan Agreement, entered into on September 8, 1999, between
Business Telecom, Inc. and Bank of America, National Association
and the other financial institutions party thereto from time to
time as lenders and Bank of America, National Association as
Agent.
10.19++ First Amendment to the Bank of America Loan Agreement.
10.20++ Fifth Amendment to the GE Capital Agreement.
10.21** Shareholders Agreement among BTI Telecom Corp., Peter T. Loftin,
Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Information
Partners, L.P., and BTI Investors LLC, dated December 28, 1999.
10.22** Redemption Agreement among BTI Telecom Corp., Welsh, Carson,
Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P., and
BTI Investors LLC, dated December 28, 1999.
10.23** Investor Rights Agreement among BTI Telecom Corp., Welsh, Carson,
Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P., and
BTI Investors LLC, dated December 28, 1999.
10.24** Common Stock Purchase Warrant issued by BTI Telecom Corp. to
Welsh, Carson, Anderson & Stowe VIII, L.P., dated December 28,
1999.
10.25** Common Stock Purchase Warrant issued by BTI Telecom Corp. to WCAS
Information Partners, L.P., dated December 28, 1999.
10.26** Common Stock Purchase Warrant issued by BTI Telecom Corp. to BTI
Investors LLC, dated December 28, 1999.
10.27** Series A Preferred Stock Purchase Agreement among BTI Telecom
Corp., FS Multimedia, Inc., Welsh, Carson, Anderson & Stowe VIII,
L.P., WCAS Information Partners, L.P., and BTI Investors, LLC,
dated December 28, 1999.
10.28 Agreement between BellSouth Telecommunications Inc. and Business
Telecom, Inc., dated February 21, 2000.
11.1 Computation of Earnings Per Common Share.
42
Exhibit No. Description
- ----------- -----------
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1+++ Subsidiaries of BTI Telecom Corp.
- --------
* Filed as an exhibit to the Registration Statement on Form S-4 (File No.
333-41723).
** Filed as an exhibit to the Current Report on Form 8-K filed January 12,
2000.
*** Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1998.
****Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000.
+ Filed as an exhibit to the Registration Statement on Form S-1 (File No.
333-83101).
++ Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
+++ Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997.
+ Confidential treatment granted.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on our behalf by the undersigned, thereunto duly authorized.
BTI Telecom Corp.
Date: March 30, 2001
/s/ Peter T. Loftin
By: _________________________________
Peter T. Loftin,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter T. Loftin Chairman, Chief Executive March 30, 2001
______________________________________ Officer (Principal
Peter T. Loftin Executive Officer) and
Director
/s/ Brian K. Branson Chief Financial Officer March 30, 2001
______________________________________ (Principal Financial and
Brian K. Branson Accounting Officer) and
Director
/s/ R. Michael Newkirk President, Chief Operating March 30, 2001
______________________________________ Officer and Director
R. Michael Newkirk
/s/ Thomas F. Darden Director March 30, 2001
______________________________________
Thomas F. Darden
/s/ William M. Moore, Jr. Director March 30, 2001
______________________________________
William M. Moore, Jr.
/s/ Paul J. Rizzo Director March 30, 2001
______________________________________
Paul J. Rizzo
/s/ Anthony J. deNicola Director March 30, 2001
______________________________________
Anthony J. deNicola
/s/ Thomas E. McInerney Director March 30, 2001
_____________________________________
Thomas E. McInerney
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1999 and 2000...................................................... F-4
Consolidated Statements of Redeemable Preferred Stock and Shareholders'
Deficit for the Years Ended December 31, 1998, 1999 and 2000............. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Schedule
Schedule II--Valuation and Qualifying Accounts............................ F-20
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
BTI Telecom Corp.
We have audited the accompanying consolidated balance sheets of BTI
Telecom Corp. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, redeemable preferred stock and shareholders' deficit
and cash flows for each of the three years in the period ended December 31,
2000. Our audits also included the financial statement schedule listed in the
Index on page F-1. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule 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 audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BTI Telecom
Corp. at December 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Raleigh, North Carolina
January 19, 2001, except for Note 11,
as to which the date is March 30, 2001
F-2
BTI TELECOM CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
--------------------
1999 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents.............................. $ 86,149 $ 5,570
Restricted cash........................................ 28,997 --
Accounts receivable, net............................... 34,157 45,296
Accounts and notes receivable from related parties..... 617 790
Other current assets................................... 1,456 4,995
--------- ---------
Total current assets................................. 151,376 56,651
Property, plant and equipment:
Property, plant and equipment.......................... 200,059 296,269
Construction in progress............................... 10,925 54,330
Less: accumulated depreciation and amortization........ 44,410 72,950
--------- ---------
Total property, plant and equipment.................. 166,574 277,649
Other assets, net........................................ 16,884 23,062
--------- ---------
Total assets......................................... $ 334,834 $ 357,362
========= =========
Liabilities, redeemable preferred stock and shareholders'
deficit
Current liabilities:
Accounts payable....................................... $ 59,546 $ 95,584
Accrued expenses....................................... 3,931 5,520
Accrued interest....................................... 8,203 8,711
Current portion of long-term debt...................... -- 9,450
Advance billings and other liabilities................. 5,993 11,469
--------- ---------
Total current liabilities............................ 77,673 130,734
Long-term debt........................................... 279,000 328,918
Other long-term liabilities.............................. 1,747 1,468
--------- ---------
Total liabilities.................................... 358,420 461,120
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 $200,000 and $212,000 in
1999 and 2000, respectively).......................... 195,756 204,198
Shareholders' deficit:
Common stock, no par value, authorized 500,000,000
shares, 92,397,661 and 92,542,036 shares issued and
outstanding in 1999 and 2000, respectively............ 1,864 3,411
Common stock warrants.................................. 27,000 27,000
Unearned compensation.................................. (737) (852)
Accumulated deficit.................................... (247,469) (337,515)
--------- ---------
Total shareholders' deficit.......................... (219,342) (307,956)
--------- ---------
Total liabilities, redeemable preferred stock and
shareholders' deficit................................... $ 334,834 $ 357,362
========= =========
See accompanying notes to consolidated financial statements.
F-3
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Revenue......................................... $212,554 $260,049 $271,484
Cost of services................................ 150,901 173,153 166,445
-------- -------- --------
Gross profit.................................... 61,653 86,896 105,039
Selling, general and administrative expenses.... 68,554 86,133 116,759
Depreciation and amortization................... 11,457 19,412 34,376
-------- -------- --------
Loss from operations............................ (18,358) (18,649) (46,096)
Other income (expense):
Interest expense................................ (25,430) (28,531) (30,467)
Other income (expense), net..................... 5,555 2,454 (868)
-------- -------- --------
Net loss........................................ $(38,233) $(44,726) $(77,431)
======== ======== ========
Dividend on preferred stock..................... -- (27,000) (12,000)
-------- -------- --------
Net loss available for common shareholders...... $(38,233) $(71,726) $(89,431)
======== ======== ========
Basic and diluted net loss per common share..... $ (.38) $ (.72) $ (.97)
======== ======== ========
Basic and diluted weighted average shares
outstanding.................................... 100,000 99,938 92,478
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
(In thousands)
Shareholders' Deficit
-------------------------------------------------------
Redeemable Common Total
Preferred Stock Common Stock Accumulated Unearned Shareholders'
Series A Stock Warrants Deficit Compensation Deficit
--------------- ------ -------- ----------- ------------ -------------
Balance at December 31,
1997................... $ -- $ 857 $ -- $ (70,349) $ (82) $ (69,574)
Net loss............... -- -- -- (38,233) -- (38,233)
Distributions.......... -- -- -- (606) -- (606)
Compensation related to
stock options......... -- -- -- -- 47 47
Decrease in unrealized
gains................. -- -- -- (1) -- (1)
Settlement of stock and
option repurchase
obligations........... -- -- -- (1,475) -- (1,475)
-------- ------ ------- --------- ----- ---------
Balance at December 31,
1998................... $ -- $ 857 $ -- $(110,664) $ (35) $(109,842)
======== ====== ======= ========= ===== =========
Net loss............... -- -- -- (44,726) -- (44,726)
Distributions.......... -- -- -- (82) -- (82)
Repurchase of shares... -- (3) -- (64,997) -- (65,000)
Compensation related to
stock options......... -- 1,010 -- -- (702) 308
Issuance of preferred
stock and related
warrants.............. 168,756 -- 27,000 -- -- 27,000
Dividend on preferred
stock................. 27,000 -- -- (27,000) -- (27,000)
-------- ------ ------- --------- ----- ---------
Balance at December 31,
1999................... $195,756 $1,864 $27,000 $(247,469) $(737) $(219,342)
======== ====== ======= ========= ===== =========
Net loss............... -- -- -- (77,431) -- (77,431)
Issuance of common
stock................. -- 1,147 -- -- -- 1,147
Compensation related to
stock options......... -- 400 -- -- (115) 285
Additional issuance
costs................. (4,173) -- -- -- -- --
Accretion of
transaction costs..... 615 -- -- (615) -- (615)
Dividend on preferred
stock................. 12,000 -- -- (12,000) -- (12,000)
-------- ------ ------- --------- ----- ---------
Balance at December 31,
2000................... $204,198 $3,411 $27,000 $(337,515) $(852) $(307,956)
======== ====== ======= ========= ===== =========
See accompanying notes to consolidated financial statements.
F-5
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------------
1998 1999 2000
-------- -------- ---------
Operating Activities:
Net loss....................................... $(38,233) $(44,726) $ (77,431)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................. 9,201 15,930 28,650
Amortization................................. 2,256 3,482 5,726
Non-cash compensation related to stock
options..................................... 47 308 285
Changes in operating assets and liabilities:
Accounts receivable........................ (3,775) (8,317) (10,231)
Accounts and notes receivable from related
parties................................... 301 (273) (165)
Other assets............................... 150 (155) (3,793)
Accounts payable and accrued expenses...... 20,057 13,640 36,725
Accrued interest expense................... 540 431 508
Advance billings and other liabilities..... 3,038 1,218 4,790
-------- -------- ---------
Net cash used in operating activities.......... (6,418) (18,462) (14,936)
Investing Activities:
Change in restricted cash.................... 22,262 23,783 28,997
Sales of marketable securities............... 6 -- --
Purchases of property, plant and equipment,
net......................................... (66,311) (80,544) (139,642)
Acquisitions, net of cash acquired........... -- -- (3,916)
Purchases of other assets.................... (3,123) (4,506) (6,246)
Settlement of FiberSouth stock option
repurchase obligation....................... (2,300) -- --
-------- -------- ---------
Net cash used in investing activities.......... (49,466) (61,267) (120,807)
Financing Activities:
Net proceeds from long-term debt............. 4,119 24,881 59,368
Proceeds from issuance of redeemable
preferred stock............................. -- 195,756 --
Decrease in other long-term liabilities...... (89) -- --
Payments of shareholder note payable......... (943) (763) --
Increase in deferred financing costs and
other assets................................ (832) (1,681) (110)
Repurchase of common stock................... -- (65,000) --
Issuance of common stock related to options
exercised................................... -- -- 79
Additional issuance cost of redeemable
preferred stock............................. -- -- (4,173)
Distributions paid........................... (606) (82) --
-------- -------- ---------
Net cash provided by financing activities...... 1,649 153,111 55,164
-------- -------- ---------
(Decrease) increase in cash and cash
equivalents................................... (54,235) 73,382 (80,579)
Cash and cash equivalents at beginning of
period........................................ 67,002 12,767 86,149
-------- -------- ---------
Cash and cash equivalents at end of period..... $ 12,767 $ 86,149 $ 5,570
======== ======== =========
See accompanying notes to consolidated financial statements.
F-6
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--BTI Telecom Corp. and its majority owned
subsidiaries (the "Company") provide (1) integrated retail services, which
include long distance, local, paging, advanced intelligent network
applications, and operator and other enhanced services, primarily to small to
medium-sized business customers located in the southeastern United States; (2)
data services, which include dial-up and dedicated Internet service, DSL high-
speed Internet access, private line, frame relay and ATM services to both
retail and wholesale customers; and (3) wholesale voice services, which include
switched/dedicated access and prepaid calling card services primarily to other
telecommunication carriers. The Company serves its customers utilizing an
advanced fiber optic telecommunications network consisting of both leased and
owned transmission capacity.
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
all significant intercompany transactions.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--The Company considers highly liquid, short-term
investments with a maturity of three months or less when purchased to be cash
equivalents.
Restricted Cash--Restricted cash consists of pledged securities being held
as security for certain scheduled interest payments due on the Company's ten
year 10 1/2% notes ("Senior Notes"). The securities were purchased pursuant to
the pledge agreement executed in connection with the issuance of the Senior
Notes. The balance as of December 31, 1999 included securities pledged for the
remaining scheduled interest payments through September 2000 (Note 3).
Property, Plant and Equipment--Property, plant and equipment is stated at
cost, including labor and other direct costs associated with the installation
of network facilities. Improvements that significantly add to productive
capacity or extend the useful life are capitalized, while repairs and
maintenance are expensed as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of various assets, ranging
from 5 to 20 years.
Interest is capitalized as part of the cost of constructing the Company's
fiber optic network and switching facilities. The amount capitalized for the
years ended December 31, 1998, 1999 and 2000 was approximately $1.5 million,
$1.8 million and $2.2 million, respectively.
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.
Other Assets--Costs incurred in connection with obtaining long-term
financing have been deferred and are being amortized over the terms of the
related debt agreements. Deferred costs relating to long-term financing at
December 31, 1999 and 2000 were $12.9 million and $13.0 million, respectively.
Accumulated amortization of these costs at December 31, 1999 and 2000 was $3.4
million and $5.2 million, respectively.
F-7
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Line access costs are capitalized and amortized over the estimated period
the related lines will be used by the Company (24 months to 60 months) using
the straight line method. Deferred line access costs at December 31, 1999 and
2000 were $12.0 million and $18.2 million, respectively, with accumulated
amortization of $6.4 million and $9.6 million, respectively.
The balance in "Other Assets" as of December 31, 1999 and 2000 also includes
$1.5 million for the multi-media franchise the Company purchased from a related
company (Note 8). This asset is being amortized using the straight line method
over a four year period, with accumulated amortization at December 31, 1999 and
2000 of $.5 million and $.9 million, respectively.
Supplemental Cash Flow Information--The Company paid interest of $26.4
million, $29.9 million and $31.0 million for the years ended December 31, 1998,
1999 and 2000, respectively. The transfer of paging equipment from inventory to
equipment for the year ended December 31, 1998 was $.3 million. There were no
transfers of paging equipment during 1999 or 2000. The Company paid no income
taxes for the years ended December 31, 1998, 1999 and 2000.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of
trade accounts receivable which are unsecured. The Company's risk is limited
due to the fact that there is no significant concentration with one particular
customer. The Company uses the allowance method of accounting for uncollectible
accounts receivable. The allowance for uncollectible accounts was $3.8 million
and $5.7 million as of December 31, 1999 and 2000, respectively.
Revenue Recognition--Revenue for telecommunications services is recognized
as services are provided. Due to the timing of the Company's billing cycles, at
any point in time, certain services have been provided to customers which have
not yet been billed. Revenue which has been earned but not yet billed to
customers amounts to $5.9 million and $6.7 million at December 31, 1999 and
2000, respectively, and is recorded as accounts receivable in the Company's
consolidated balance sheets. Additionally, the Company invoices customers one
month in advance for certain recurring services resulting in advance billings
of $5.6 million and $6.4 million at December 31, 1999 and 2000, respectively.
Effective January 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides
additional guidance in applying generally accepted accounting principles to
revenue recognition in financial statements. Through December 31, 1999, the
Company recognized installation revenue upon completion of the installation.
Effective January 1, 2000, in accordance with the provisions of SAB 101, the
Company is recognizing installation revenue and related costs over the average
contract period. The adoption of SAB 101 did not have a material impact on the
Company's results of operations or financial position.
Advertising Expense--In accordance with Statement of Position 93-7
"Reporting on Advertising Costs," the Company expenses all advertising costs as
incurred. The Company expensed $3.1 million, $2.8 million and $4.3 million in
advertising costs during 1998, 1999 and 2000, respectively.
Income Taxes--Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws anticipated
to be in effect when those differences are expected to reverse. The Company
provides a valuation allowance for its deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
F-8
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Basic and Diluted Loss Per Share--Basic loss per share is calculated by
dividing net loss by the weighted average number of common shares outstanding
for the period. Diluted loss per share generally includes any dilutive effects
of options, warrants and convertible securities. At December 31, 1998, 1999 and
2000, common stock equivalents were excluded from the diluted loss per share
calculations due to their anti-dilutive effect as a result of the Company's net
loss for these years.
Accounting for Stock Options--In 1996, the Company adopted Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation," which gives companies the option to adopt the fair value
method for expense recognition of employee stock options and other stock-based
awards or to continue to account for such items using the intrinsic value
method as outlined under Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" with pro forma disclosures of net
income (loss) and net income (loss) per share as if the fair value method had
been applied. The Company has elected to continue to apply APB 25 for stock
options and other stock based awards and has disclosed pro forma net loss and
net loss per share as if the fair value method had been applied.
Segment Reporting--In June 1997, the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 uses a management approach to report financial and descriptive
information about a Company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally for the Company's management. Under this
definition, the Company operated, for all periods presented, as a single
segment.
Comprehensive Income--In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 requires that total comprehensive income (loss) and comprehensive
income (loss) per share be disclosed with equal prominence as net income and
earnings per share. Comprehensive income is defined as changes in shareholder's
equity exclusive of transactions with owners such as capital contributions and
dividends. The Company adopted this Standard in 1998. The Company did not have
any comprehensive income items in any of the periods presented.
Recently Issued Accounting Standards--In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of FASB Statement No. 133" ("SFAS
137"). In June 2000, the FASB issued Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133" ("SFAS 138"). SFAS
133, as amended by SFAS 137 and SFAS 138, will require the recognition of all
derivatives on the Company's consolidated balance sheet at fair value and is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The adoption of SFAS 133, as amended, will not have an effect on the
Company's results of operations or financial position as the Company does not
have derivative instruments at December 31, 2000.
Reclassifications--Certain amounts in the December 31, 1998 and 1999
financial statements have been reclassified to conform to the December 31, 2000
presentation.
F-9
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2: PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are summarized below:
December 31,
------------------
1999 2000
-------- --------
(In thousands)
Data processing equipment................................ $ 14,008 $ 21,751
Telephone service equipment.............................. 85,554 131,357
Fiber optic network...................................... 87,680 116,100
Office furnishings and equipment......................... 4,794 11,276
Leasehold improvements................................... 8,023 15,785
Construction in progress................................. 10,925 54,330
Accumulated depreciation................................. (44,410) (72,950)
-------- --------
Total property, plant and equipment...................... $166,574 $277,649
======== ========
NOTE 3: LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following:
December 31,
-----------------
1999 2000
-------- --------
(In thousands)
Unsecured 10 1/2% Senior Notes, due 2007.................. $250,000 $250,000
Credit Facilities, due 2002............................... 29,000 81,812
Other..................................................... -- 6,556
-------- --------
$279,000 $338,368
======== ========
Less current portion...................................... -- 9,450
-------- --------
$279,000 $328,918
======== ========
Senior Notes--In September 1997, the Company issued 10 1/2% notes (the
"Initial Notes") with a principal value of $250.0 million. In January 1998, the
Company exchanged all of the Initial Notes outstanding in $1,000 principal
amounts for $250.0 million in $1,000 principal amounts of Senior Notes. The
entire principal balance is due September 2007, with interest payable semi-
annually on March 15th and September 15th of each year. The Senior Notes have
been registered under the Securities Act of 1933, as amended, and are identical
in all material respects to the terms of the Initial Notes for which they were
exchanged, except for certain transfer restrictions and registration rights
relating to the Initial Notes. 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 debt agreement. Pursuant to the
pledge agreement executed in connection with the issuance of the Initial Notes,
the Company utilized $74.1 million of the proceeds to purchase a portfolio of
pledged securities. These securities were required to be held in escrow for the
payment of the first six scheduled interest payments due on the Senior Notes;
all six of these interest payments have been made as of December 31, 2000. The
pledged securities were included in the "Restricted cash" captions of the
consolidated balance sheet as of December 31, 1999.
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 December 31, 2000, $52.8 million was
outstanding under
F-10
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Facilities, in addition to $1.3 million outstanding in letters of credit.
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, except certain fiber optic network assets, and bear interest,
at the Company's option, at either the 30-, 60- or 90-day LIBOR rate (6.56%,
6.49%, and 6.40% at December 31, 2000, respectively) or the prime rate (9.5% at
December 31, 2000), plus 3% for borrowings under the prime rate option and 4%
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. The Company was in compliance with such covenants, as amended or
waived, as of December 31, 2000.
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
remaining assets. Outstanding amounts bear interest, at the Company's option,
at either the 30-, 60- or 90-day LIBOR rate (6.56%, 6.49%, and 6.40% at
December 31, 2000, respectively) or the prime rate (9.50% at December 31,
2000), 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 December 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. The Company was in compliance with such covenants, as
amended or waived, as of December 31, 2000.
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," the Company estimates
that the fair value of the long-term debt at December 31, 1999 and December 31,
2000 was $261.6 million and $175.9 million as compared to the carrying value of
$279.0 million and $328.9 million, respectively. The fair value of long-term
debt is determined based on negotiated trades for the securities or is
estimated using rates currently available to the Company for debt with similar
terms and maturities.
F-11
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4: INCOME TAXES
Income taxes are calculated using the liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Deferred income taxes arise from temporary
differences between the income tax basis and financial reporting basis of
assets and liabilities. Components of the Company's income tax expense are as
follows:
1998 1999 2000
-------- -------- -------
(In thousands)
Current:
Federal....................................... -- $ -- --
State......................................... -- -- --
Deferred:
Federal....................................... 13,512 10,915 29,444
State......................................... 1,930 1,559 4,206
-------- -------- -------
Income tax benefit.............................. $ 15,442 $ 12,474 $33,650
Changes in valuation allowance.................. (15,442) (12,474) (33,650)
-------- -------- -------
Income tax expense.............................. $ -- $ -- $ --
======== ======== =======
The significant components of the Company's deferred tax assets and
liabilities at December 31 were as follows:
1999 2000
-------- -------
(In thousands)
Deferred tax liabilities:
Tax over book depreciation................................ $ 8,375 $15,803
Line access costs......................................... 957 1,429
FiberSouth asset purchase................................. 627 577
Other..................................................... 237 365
-------- -------
Total deferred tax liabilities.............................. 10,196 18,174
Deferred tax assets:
Stock options............................................. 613 758
Net operating loss carryforward........................... 38,163 78,649
Accounts receivable reserve............................... 1,503 2,300
Other..................................................... 869 1,069
-------- -------
Total deferred tax assets................................... 41,148 82,776
Valuation allowance......................................... (31,525) (65,175)
-------- -------
9,623 17,601
-------- -------
Net deferred tax liabilities................................ $ (573) $ (573)
======== =======
For the years ended December 31, 1998, 1999 and 2000, the Company generated
net operating losses ("NOLs") that may be used to offset future taxable income.
The Company has established a valuation allowance for the net deferred tax
assets associated with these net operating losses. 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. The Tax Reform Act of 1986 contains provisions that limit the ability
to utilize net operating loss carryforwards in the case of certain events,
including significant changes in ownership interests. The net deferred tax
liability is included in other long-term liabilities.
F-12
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 and 2000, the Company had net operating loss
carryforwards of approximately $104.9 million and $199.5 million, respectively,
for federal and state income tax purposes which will begin to expire in the
year 2012.
The reconciliation of the federal statutory income tax rate with the
effective income tax rate reflected in the financial statements is as follows
for the years ended December 31:
1998 1999 2000
----- ----- -----
Federal income tax
benefit at statutory
rate................... 35.0% 35.0% 35.0%
State income tax benefit
(net of federal
benefit)............... 5.0% 5.0% 5.0%
Change in valuation
allowance.............. (40.0)% (40.0)% (40.0)%
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
NOTE 5: SHAREHOLDERS' EQUITY
Preferred Stock--Of the Company's 10,000,000 authorized shares of $.01 par
value preferred stock, 200,000 shares were designated as Series A Preferred
Stock ("Series A Preferred Stock"). In December 1999, the Company completed the
issuance of 200,000 shares of its Series A Preferred Stock in a private
placement offering for net proceeds of approximately $196 million (after
deducting issuance costs of approximately $4 million). Series A Preferred Stock
ranks senior to the Company's common stock as to dividends and liquidation
rights and has voting rights equal to that of common stock. Each share of
Series A Preferred Stock is immediately convertible into 116.959 shares of
common stock, subject to adjustment for dilutive issuances of the Company's
common stock. The Company has the right to force conversion of the Series A
Preferred Stock in certain instances as outlined in the purchase agreement. The
holders are also entitled to dividends equal to the greater of (i) 6% per annum
of the original purchase price of $1,000 per share or (ii) the amount of
dividends that would have been received during such period had the Series A
Preferred Stock been converted into shares of the Company's common stock. After
the later of a period of seven years or six months after the repayment of the
Company's Senior Notes, the Preferred Stock is redeemable, at the option of the
holders, at the greater of (i) $1,000 per share plus accrued and unpaid
dividends thereon or (ii) fair market value on such date. In the event of
liquidation, dissolution or winding up of the Company, the holders are entitled
to be paid out of the assets of the Company, prior and in preference to common
stockholders or any other class or series of capital stock (other than the
Series B Preferred Stock), an amount equal to the greatest of (i) $1,000 per
share plus accrued and unpaid dividends thereon, (ii) such amount as would have
been payable had the Series A Preferred Stock been converted into shares of the
Company's common stock immediately prior to such an event and (iii) an amount
representing an internal rate of return on the investment of the holders of the
Series A Preferred Stock of 20%.
F-13
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the sale of the Series A Preferred Stock, the Company
issued warrants to purchase 4.5 million shares of common stock of the Company
at $.01 per share, expiring ten years from the date of issuance. The warrants
are eligible for exercise three years after the issuance date and are
cancelable by the Company if the Company closes a public equity offering and
its stock achieves certain price levels outlined in the Stock Purchase
Agreement. The warrants had an estimated fair value of $27.0 million on the
date of issuance. The Company recorded the estimated value of the common stock
warrants as a preferred dividend on the date the warrants were issued.
In 1999, the Board of Directors approved the use of $65 million of the net
proceeds from the issuance of the Series A Preferred Stock to repurchase
approximately 7.6 million shares of the Company's outstanding common stock held
by its Chairman and Chief Executive Officer. The repurchase has been recorded
as a reduction of common stock and accumulated deficit for the year ended
December 31, 1999.
Dividends--Throughout the period of time that the Company was an S
corporation (prior to September 1997), 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 the Company. The Company will continue to reimburse
shareholders for any tax obligations arising from income earned by the Company
while it was an S corporation. The Company paid dividends of $.6 million and
$.08 million in 1998 and 1999, respectively, to shareholders for the
reimbursement of these tax obligations. No such distributions were made during
2000. The Company believes that any such future reimbursements will not have a
material effect on the Company's financial condition or results of operations.
Loss Per Share--The following table sets forth the computation of basic and
diluted loss per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share":
December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(In thousands)
Numerator:
Net loss................................... $(38,233) $(44,726) $(77,431)
Preferred stock dividend--issuance of
warrants.................................. -- (27,000) --
Preferred stock dividend................... -- -- (12,000)
-------- -------- --------
Numerator for basic and diluted loss per
share--loss available to common
stockholders.............................. $(38,233) $(71,726) $(89,431)
Denominator:
Denominator for basic and diluted loss per
share--
weighted-average shares................... 100,000 99,938 92,478
-------- -------- --------
Basic and diluted loss per share........... $ (.38) $ (.72) $ (.97)
======== ======== ========
F-14
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shares Reserved for Issuance--Shares of common stock reserved for future
issuance are as follows at December 31, 2000:
(In thousands)
--------------
For conversion of convertible Series A Preferred Stock....... 23,392
Outstanding warrants......................................... 4,500
Outstanding stock options.................................... 3,807
Possible future issuances under stock option plan............ 3,674
NOTE 6: STOCK-BASED COMPENSATION
In 1994, the Company formalized the 1994 Stock Plan (the "1994 Plan"). The
1994 Plan provided that an aggregate of 4,998,900 of the Company's authorized
shares be reserved for future issuance.
In 1997, the Company assumed the obligations under the 1994 Plan and
incorporated these obligations into the 1997 Stock Plan (the "1997 Plan") which
will terminate in August 2007, unless sooner terminated by the Board of
Directors, for the purpose of attracting and retaining certain key employees of
the Company. The 1997 Plan provides that an aggregate of 7,500,000 of the
Company's authorized shares be reserved for future issuance. In the case of
initial grants, the exercise price and vesting terms will be fixed by the
compensation committee on the date of grant. The 1997 Plan permits the grant of
options for a term of up to ten years. Outstanding options vest at various
times from the date of issuance to 3 years.
The Company has elected to account for its stock-based compensation plan
under the provisions of APB Opinion No. 25, which requires compensation cost to
be measured by the quoted market price at the measurement date less the amount,
if any, an employee is required to pay. The required pro forma-disclosures in
accordance with SFAS No. 123 are as follows:
December 31,
----------------------------
1998 1999 2000
-------- -------- --------
In thousands, except per
share data
Net loss
Actual....................................... $(38,233) $(44,726) $(77,431)
Pro forma.................................... (38,375) (44,768) (77,615)
Loss per share
Actual....................................... $ (.38) $ (.72) $ (.97)
Pro forma.................................... (.38) (.72) (.97)
F-15
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option activity under the Company's plans is summarized below:
December 31,
-------------------------------------------------
1998 1999 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
In thousands, except per share amounts
Outstanding at beginning
of year................. 1,866 $ .13 2,855 $1.10 3,561 $1.75
Options granted.......... 989 2.89 746 4.20 661 7.87
Options exercised........ -- -- -- -- (19) 4.08
Options cancelled........ -- -- (40) 3.00 (396) 5.13
----- ----- ----- ----- ----- -----
Outstanding at end of
year.................... 2,855 $1.10 3,561 $1.75 3,807 $2.42
===== ===== ===== ===== ===== =====
Options exercisable at
end of year............. 2,106 $ .55 2,555 $1.05 3,015 1.33
Shares available for
future grant............ 2,145 3,939 3,674
The weighted-average remaining contractual life of options as of December
31, 2000 is 6.5 years, with exercise prices ranging from $.001 to $8.55 per
share.
The per share weighted average fair value of stock options granted by the
Company during 1998, 1999 and 2000 was approximately $.22, $1.92 and $2.23,
respectively, on the dates of grant.
The Company recorded non-cash compensation expense of $.3 million and $.3
million related to the issuance of stock options during the years ended
December 31, 1999 and 2000, respectively.
The following assumptions were used by the Company to determine the fair
value of stock options granted using the minimum value option-pricing model:
Year ended December 31,
-----------------------------
1998 1999 2000
--------- ----------- -------
Dividend yield................................. 0% 0% 0%
Expected option life........................... 1.5 years 1.5-3 years 3 years
Risk-free interest rate........................ 5.0% 5.5% 6.5%
NOTE 7: EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan and Trust covering substantially all
employees. Participants were allowed to elect to defer up to 20% of their
salary, subject to Internal Revenue Service limits. The Company matched 50% of
employee contributions in 1998, 1999 and 2000, up to a maximum of 6% of each
employee's annual salary. Employer contributions for the years ended December
31, 1998, 1999 and 2000 were $.2 million, $.6 million and $.8 million,
respectively.
NOTE 8: RELATED PARTY TRANSACTIONS
The Company has accounts receivable from affiliates related through common
ownership of $.6 million at December 31, 1999 and 2000.
During 1995, the Company entered into an operating lease for an airplane
with a company under common ownership. Rent expense related to this lease was
approximately $.3 million for the year ending December 31, 1998 and $.2 million
for the year ending December 31, 1999. The Company also leased certain
facilities from its shareholder (Note 9). The airplane and facilities leases
were terminated in 1999.
F-16
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective July 15, 1998, the Company purchased a multi-media franchise from
FiberSouth, an entity related through common ownership, for $1.5 million. As a
result, the Company will have the right to offer multi-media services in
Raleigh, North Carolina.
In 1998, the Company sold certain integrated telecommunications services to
agents and customers of an affiliate related through common ownership. The
Company paid the affiliate a commission on all sales made through the
affiliate. The commissions totaled $.5 million in 1998. There were no
commissions paid during 1999 or 2000.
NOTE 9: COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Legal Matters--In April 2000, the Company was served with a lawsuit filed by
Wachovia Bank, N.A. and Wachovia Securities, Inc. ("Wachovia"). Wachovia
alleged that the Company breached a letter agreement between Wachovia and the
Company and owed Wachovia a placement fee of $10 million in exchange for
Wachovia's services as financial advisor. The parties have agreed in principle
to a confidential settlement of this matter. Final documents are being prepared
to include a dismissal with prejudice of all claims. The full settlement
amount, less the amount originally accrued has been recorded and treated as
additional equity transaction costs as of December 31, 2000 and therefore, had
no impact on the Company's earnings.
Also in April 2000, the Company joined 13 other competing local exchange
companies to bring a lawsuit against AT&T and Sprint in federal court in
Virginia to collect access charges that the defendants have ordered and
accepted pursuant to the Company's lawfully filed tariffs. As of December 31,
2000, AT&T owed the Company approximately $5.9 million and Sprint owed the
Company approximately $1.9 million for access services. Proceedings in this
case are stayed until July 19, 2001, while the FCC considers two issues that
were referred to it by the Court. In response to the Court's referral, in
January 2001, AT&T and Sprint filed a formal rate complaint against the Company
at the FCC seeking unspecified damages. Because discovery is ongoing, and due
to the uncertainties inherent in the complaint process, the Company is unable
to predict the outcome of these complaints.
The Company is subject to various legal proceedings, including regulatory,
judicial and administrative matters, all of which have arisen in the ordinary
course of business. The Company's management believes that the ultimate
resolution of these matters will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
Operating leases--The Company rents its facilities and certain office and
other equipment under operating leases that contain escalation clauses and
various renewal and buy-out provisions. Future minimum lease payments under the
leases, which have remaining terms in excess of one year, are as follows (in
thousands):
2001 2002 2003 2004 2005 Thereafter Total
---- ------ ------ ------ ------ ---------- -------
$8,777 $7,843 $7,261 $6,446 $4,719 $16,801 $51,847
Total rent expense was $5.1 million, $6.5 million and $8.6 million
(including facilities rent of $60,000, $40,000, and $0 respectively, paid to a
related party) in 1998, 1999 and 2000, respectively.
Other Matters--During 1997, the Company signed an agreement with a
municipality to contribute $3.1 million to partially fund the construction of a
performing arts center. The contribution will be paid over a ten year period
commencing in 1998 and is payable in cash and in-kind service (telephone and
data transmission service). As of December 31, 2000, the Company has paid $.9
million of this commitment.
F-17
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, the Company signed sponsorship and advertising agreements with
a professional hockey team and an operator of an entertainment and sports
arena. The Company has committed to pay an aggregate of $4.1 million under the
agreements in exchange for a sponsorship of the hockey team and certain
advertising and promotional benefits over the next five years. Payments under
the agreement will be made over a five-year period commencing in October 1999.
As of December 31, 2000, the Company has paid $.8 million of this commitment.
NOTE 10: ENTERPRISE WIDE DISCLOSURE
Under Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," the Company operated,
for all periods presented, as a single segment.
Revenues by product line are disclosed as follows (in thousands):
1998 1999 2000
-------- -------- --------
Retail Long Distance........................ $109,671 $107,320 $104,241
Local Service............................... 11,899 38,796 64,245
-------- -------- --------
Retail Integrated Voice..................... 121,570 146,116 168,486
Data Services............................... 17,765 27,631 45,383
Wholesale Long Distance..................... 73,219 86,302 57,615
-------- -------- --------
Total....................................... $212,554 $260,049 $271,484
======== ======== ========
All operations and assets are based in the United States.
NOTE 11: SUBSEQUENT EVENTS
Preferred Equity Investments--In two transactions during the first quarter
of 2001, the Company issued 59,999 shares of Series B preferred stock ("Series
B Preferred Stock") to existing shareholders at a price of $1,000 per share,
providing total proceeds of approximately $60 million. The terms of the Series
B Preferred Stock also provide for the issuance of 12.6 million warrants to
purchase the Company's common stock at a price of $0.01 per share. The number
of warrants outstanding may be reduced to a minimum of 6.6 million, or
increased to a maximum of 18.6 million, based upon the Company attaining
certain financial plan objectives on a quarterly basis through the end of 2001.
The warrants are exercisable for a period of ten years beginning on January 12,
2001, and are subject to customary anti-dilution provisions. All shares of
Series B Preferred Stock have customary anti-dilution protections.
F-18
Each share of Series B Preferred Stock is convertible into 800 shares of
the Company's common stock. The holders are also entitled to dividends
equal to the greater of (i) 6% per annum of the original purchase price of
$1,000 per share or (ii) the amount of dividends that would have been
received during such period had the Series B Preferred Stock been converted
into shares of the Company's common stock. Such dividends are payable in
cash or stock at the Company's election. The Series B Preferred Stock
shareholders may redeem their shares at a price equal to the higher of the
fair market value or liquidation value upon the later of January 12, 2008,
or six months after the Company's 10 1/2% senior notes are refinanced. In
the event of liquidation, dissolution or winding up of the Company, the
holders are entitled to be paid out of the assets of the Company, prior and
in preference to common stockholders or any other class or series of
capital stock, an amount equal to the greatest of (i) $1,000 per share plus
accrued and unpaid dividends thereon, (ii) such amount as would have been
payable had the Series B Preferred Stock been converted into shares of the
Company's common stock immediately prior to such an event and (iii) an
amount representing an internal rate of return on the investment of the
holders of the Series B Preferred Stock of 20%.
Restructured Bank Credit Facilities--Effective March 30, 2001, the
Company restructured its existing Credit Facilities. In connection with
this restructuring, the Company entered into a new $89 million loan with GE
Capital, Bank of America, and Export Development Corporation (the "Loan"),
which was fully drawn at closing. The Loan contains a provision to allow
its expansion to $100 million if the Company obtains a commitment from an
additional lender. The Loan begins quarterly amortization in 2003, and
matures on April 30, 2007.
Interest accrues on the Loan, at the Company's option, at either 1, 2,
3, or 6 month reserve-adjusted LIBOR or an Index Rate (the higher of the
Prime Rate or 50 basis points over the Federal Funds Rate) plus an
applicable margin. The applicable margin varies, based upon the Company's
financial condition, from 3.50% to 4.50% for LIBOR borrowings and from
2.50% to 3.50% for Index Rate borrowings. The Loan is secured by a first
priority lien on all of the Company's assets and a pledge of the stock of
the Company's operating subsidiary.
Senior Secured Note--Concurrent with the closing of the Series B
Preferred Stock, the Company also issued a Senior Secured Note (the "Note")
to an existing shareholder in the amount of $50 million. The Note is
secured by a second priority lien on certain of the Company's assets and
matures immediately following the repayment of the restructured bank credit
facilities. The Note bears interest at the higher of 10% per annum or the
rate existing on the Company's restructured bank credit facilities, and
contains covenants identical to those contained in the Company's
restructured bank credit facilities. The Note transaction also provided for
the issuance of 7,143 shares of Series B Preferred Stock, and the issuance
of 1.5 million warrants to purchase the Company's common stock at $.01 per
share. The number of warrants outstanding may be reduced to a minimum of
approximately .8 million or increased to a maximum of approximately 2.2
million, based upon the Company attaining certain financial plan objectives
on a quarterly basis through the end of 2001. These warrants have terms
identical to the warrants described under Preferred Equity Investments
above.
F-19
BTI TELECOM CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1999 and 2000
(In thousands)
Additions
Balance at Charged to Deductions Balance at
Beginning of Costs and from End of
Period Expenses Reserves Period
------------ ---------- ---------- ----------
Year ended December 31, 1998:
Allowance for doubtful
accounts...................... $4,825 $4,183 $(3,737) $5,271
====== ====== ======= ======
Year ended December 31, 1999:
Allowance for doubtful
accounts...................... $5,271 $3,448 $(4,962) $3,757
====== ====== ======= ======
Year ended December 31, 2000:
Allowance for doubtful
accounts...................... $3,757 $5,134 $(3,141) $5,750
====== ====== ======= ======
F-20
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
2.1* Agreement and Plan of Merger as of September 17, 1997, among
Business Telecom, Inc., BTI Telecom Corp., and BTI OpCo Inc.
2.2* Asset Purchase Agreement dated September 17, 1997, between
FiberSouth, Inc., and Business Telecom, Inc.
3.1** Articles of Restatement of BTI Telecom Corp.
3.2** Second Amended and Restated Bylaws of BTI Telecom Corp.
4.1* Indenture dated as of September 22, 1997, among BTI Telecom Corp.,
Business Telecom, Inc. and First Trust of New York, National
Association, as Trustee, relating to the 102% Senior Notes due
2007 of BTI Telecom Corp.
4.2* Registration Rights Agreement dated September 22, 1997, between
BTI Telecom Corp. and Morgan Stanley & Co. Incorporated and
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
4.3* Pledge and Security Agreement dated as of September 22, 1997, from
BTI Telecom Corp., as Pledgor, and Business Telecom, Inc., as
Guarantor, to First Trust of New York, National Association, as
Trustee.
10.1* 1994 Stock Plan.
10.2+ 1997 Stock Plan, as amended.
10.3* Second Amended and Restated Loan Agreement dated September 22,
1997, between Business Telecom, Inc. and General Electric Capital
Corporation and the other financial institutions party thereto
from time to time as Lenders and General Electric Capital
Corporation as Agent (the "GE Capital Agreement").
10.4* Future Advance Promissory Note, dated June 30, 1997, made by
ComSouth Cable International, Inc. in favor of Business Telecom,
Inc.
10.5* Subordinated Promissory Note, dated August 31, 1997, made by
Business Telecom, Inc. in favor of Peter T. Loftin.
10.6* Employment Letter Agreement, dated March 20, 1997 and March 26,
1997, between FiberSouth, Inc. and H.A. (Butch) Charlton, as
amended effective October 1, 1997.
10.7* Interconnection Agreement, dated November 5, 1997, between
Business Telecom, Inc., and BellSouth Telecommunications, Inc.
10.8* Lease, dated May 13, 1994, between RBC Corporation and Business
Telecom, Inc., as amended March 1, 1995, November 30, 1995 and May
15, 1997 (the "Lease").
10.9*" IRU Agreement dated October 31, 1997, between QWEST Communications
Corporation and Business Telecom, Inc.
10.10*** First and Second Amendments to the GE Capital Agreement.
10.11*** Amendments Four, Five and Six to the Lease.
10.12+" First Amendment to IRU Agreement, entered into on April 19, 1999,
between Qwest Communications Corporation and Business Telecom,
Inc.
10.13 Commitment Letter and Summary of Indicative Terms and Conditions
between Business Telecom, Inc. and Bank of America, dated July 16,
1999.
10.14+ Employee Stock Purchase Plan.
10.15+ Third Amendment to the GE Capital Agreement.
10.16+ Form of Executive Severance Agreement.
10.17++ Fourth Amendment to the GE Capital Agreement.
10.18++ Loan Agreement, entered into on September 8, 1999 between Business
Telecom, Inc. and Bank of America, National Association and the
other financial institutions party thereto from time to time as
lenders and Bank of America, National Association as Agent.
10.19++ First Amendment to the Bank of America Loan Agreement.
10.20++ Fifth Amendment to the GE Capital Agreement.
Exhibit No. Description
----------- -----------
10.21** Shareholders Agreement among BTI Telecom Corp., Peter T. Loftin,
Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Information
Partners, L.P., and BTI Investors LLC, dated December 28, 1999.
10.22** Redemption Agreement among BTI Telecom Corp., Welsh, Carson,
Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P., and
BTI Investors LLC, dated December 28, 1999.
10.23** Investor Rights Agreement among BTI Telecom Corp., Welsh, Carson,
Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P., and
BTI Investors LLC, dated December 28, 1999.
10.24** Common Stock Purchase Warrant issued by BTI Telecom Corp. to
Welsh, Carson, Anderson & Stowe VIII, L.P., dated December 28,
1999.
10.25** Common Stock Purchase Warrant issued by BTI Telecom Corp. to WCAS
Information Partners, L.P., dated December 28, 1999.
10.26** Common Stock Purchase Warrant issued by BTI Telecom Corp. to BTI
Investors LLC, dated December 28, 1999.
10.27** Series A Preferred Stock Purchase Agreement among BTI Telecom
Corp., FS Multimedia, Inc., Welsh, Carson, Anderson & Stowe VIII,
L.P., WCAS Information Partners, L.P., and BTI Investors, LLC,
dated December 28, 1999.
10.28 Agreement between BellSouth Telecommunications Inc. and Business
Telecom, Inc., dated February 21, 2000.
11.2 Computation of Earnings Per Common Share.
12.2 Computation of Ratio of Earnings to Fixed Charges.
21.1+++ Subsidiaries of BTI Telecom Corp.
- --------
* Filed as an exhibit to the Registration Statement on Form S-4 (File No.
333-41723).
** Filed as an exhibit to the Current Report on Form 8-K filed January 12,
2000.
*** Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1998.
+ Filed as an exhibit to the Registration Statement on Form S-1 (File No.
333-83101).
++ Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
+++ Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997.
" Confidential treatment requested.