AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
REGISTRATION NO. 333-41723
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BTI TELECOM CORP.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 4813 56-2047220
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
BTI CORPORATE CENTER
4300 SIX FORKS ROAD
RALEIGH, NORTH CAROLINA 27609
(800) 849-9100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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PETER T. LOFTIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BTI TELECOM CORP.
BTI CORPORATE CENTER
4300 SIX FORKS ROAD
RALEIGH, NORTH CAROLINA 27609
(800) 849-9100
(Name, address, including zip code, and telephone number, including
area code, of agent for service of process)
COPIES TO:
DONALD R. REYNOLDS, ESQ.
WYRICK ROBBINS YATES & PONTON LLP
4101 LAKE BOONE TRAIL, SUITE 300
RALEIGH, NORTH CAROLINA 27619
(919) 781-4000
FAX: (919) 781-4865
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED DISTRIBUTION TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
[CAPTION]
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFER- REGISTRATION
BE REGISTERED REGISTERED (1) PER NOTE ING PRICE FEE (2)
10 1/2% Senior Notes
due 2007.................. $250,000,000 100% $250,000,000 $73,750.00
(1) Equals the aggregate principal amount of the securities being registered.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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(A redherring appears on the left hand side of this page, rotated 90 degrees.
Text follows.)
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED JANUARY 30, 1998
PROSPECTUS
BTI TELECOM CORP.
OFFER TO EXCHANGE ITS
10 1/2% SENIOR NOTES DUE 2007 THAT HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("EXCHANGE NOTES"),
FOR ANY AND ALL OF ITS OUTSTANDING
10 1/2% SENIOR NOTES DUE 2007 ("INITIAL NOTES")
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
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BTI Telecom Corp. (the "Company" or "BTI Telecom") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), which together with the Prospectus constitute the "Exchange
Offer," to exchange up to an aggregate principal amount of $250.0 million of its
10 1/2% Senior Notes Due 2007 (the "Exchange Notes") that have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a Registration Statement of which this Prospectus is a part, for an equal amount
of its outstanding 10 1/2% Senior Notes Due 2007 (the "Initial Notes"). The
terms of the Exchange Notes are identical in all material respects to those of
the Initial Notes, except for certain transfer restrictions and registration
rights relating to the Initial Notes. The Exchange Notes will be issued pursuant
to, and entitled to the benefits of, the Indenture (the "Indenture") dated as of
September 22, 1997, between the Company and First Trust of New York, National
Association (the "Trustee" and the "Exchange Agent"). The Exchange Notes and the
Initial Notes are sometimes referred to collectively as the "Notes." Certain
capitalized terms used in this Prospectus are defined under the headings
"Description of Credit Facility" beginning on page 55 and "Description of the
Exchange Notes -- Certain Definitions" beginning on page 60.
The Exchange Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after September 15, 2002, initially at 105.25% of
their principal amount, plus accrued interest, declining ratably to 100% of
their principal amount, plus accrued interest, on or after September 15, 2004.
In addition, at any time prior to September 15, 2000, the Company may redeem up
to 35% of the aggregate principal amount of the Initial Notes and the Exchange
Notes from the proceeds of one or more Public Equity Offerings at 110.5% of
their principal amount, plus accrued interest; provided that after any such
redemption at least $162.5 million aggregate principal amount of the Initial
Notes and the Exchange Notes remains outstanding. See "Description of the
Exchange Notes -- Certain Definitions."
The Exchange Notes will bear interest from September 17, 1997, the date of
issuance of the Initial Notes that are tendered in exchange for the Exchange
Notes (or the most recent Interest Payment Date to which interest on such Notes
has been paid), at the rate of 10 1/2% per annum and will be payable
semiannually in cash on each March 15 and September 15, commencing on March 15,
1998.
Approximately $74.1 million of the net proceeds from the offering of the
Initial Notes (the "Offering") have been used to purchase a portfolio of U.S.
government securities that have been pledged to secure and fund the first six
scheduled interest payments on the Notes. The Notes are not guaranteed by any
Company subsidiary, and no subsidiary's stock is pledged as collateral for the
Notes.
The Exchange Notes will be unsubordinated indebtedness of the Company,
ranking equally ("PARI PASSU") in right of payment with all existing and future
unsecured unsubordinated indebtedness of the Company and senior in right of
payment to all subordinated indebtedness of the Company. As of September 30,
1997, the Company had (on an unconsolidated basis) no indebtedness outstanding
other than the Initial Notes. However, the Company is a holding company and the
Exchange Notes will be effectively subordinated to all existing and future
liabilities (including trade payables) of the Company's subsidiaries. On
September 30, 1997, the Company's subsidiaries had approximately $34.4 million
of liabilities (excluding intercompany payables), including approximately $2.0
million of indebtedness (including capital leases). See "Description of the
Exchange Notes -- Security" and " -- Ranking."
(Continued on the next page.)
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SEE "RISK FACTORS" BEGINNING ON PAGE 14, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is , 1998.
The Initial Notes were originally issued and sold on September 17, 1997 in
a transaction not registered under the Securities Act (the "Offering").
Accordingly, the Initial Notes may not be offered for resale, resold or
otherwise transferred unless so registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in no-action letters issued to third parties
unrelated to the Company, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any older that is (i) a broker-dealer
that acquired Initial Notes as a result of market-making activities or other
trading activities or (ii) an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration or
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement or understanding with any person to participate
in a distribution (within the meaning of the Securities Act) of such Exchange
Notes. Any holder who tenders Initial Notes in the Exchange Offer with the
intention to participate, or for the purpose of participating, in a distribution
of the Exchange Notes, or who is an affiliate of the Company, may not rely upon
such interpretations by the staff of the Commission and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liabilities under the Securities Act for which
the holder is not indemnified by the Company. The staff of the Commission has
not considered the Exchange Offer in the context of a no-action letter, and
there can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
By tendering Initial Notes in exchange for Exchange Notes, each holder will
represent to the Company, among other things, that: (i) any Exchange Notes to be
received by such holder will be acquired in the ordinary course of such holder's
business; (ii) such holder has no arrangement or understanding with any person
to participate in a distribution (within the meaning of the Securities Act) of
the Exchange Notes; and (iii) such holder is not an "affiliate" of the Company
(within the meaning of Rule 405 under the Securities Act), or if such holder is
an affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Initial Notes, where such Initial Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Initial Notes where such Initial Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period not to exceed 180 days after the Expiration Date
(as defined in the second paragraph on the next page), it will furnish
additional copies of this Prospectus, as amended or supplemented, to any
broker-dealer that reasonably requests such documents for use in connection with
any such resale. See "Plan of Distribution."
The Company intends to apply for listing of the Exchange Notes on the
Luxembourg Stock Exchange. The Company does not intend to apply for listing of
the Exchange Notes on any other securities exchange, nor does the Company intend
to apply for inclusion of the Exchange Notes in any automated quotation system.
The Initial Notes, however, have been designated for trading in the Private
Offerings, Resales and Trading through Automatic Linkages ("PORTAL") Market of
the National Association of Securities Dealers, Inc. Any Initial Notes not
tendered and accepted in the Exchange Offer will remain outstanding. To the
extent that Initial Notes are not tendered and accepted in the Exchange Offer, a
holder's ability to sell such Initial Notes could be adversely affected.
Following consummation of the Exchange Offer, the holders of Initial Notes will
continue to be subject to the existing restrictions on transfer thereof and the
Company will have no further obligation to such holders to provide for the
registration under the Securities Act of the Initial Notes. See "Description of
the Exchange Notes -- Exchange Offer; Registration Rights." No assurance can be
given as to the liquidity of either the Initial Notes or the Exchange Notes.
2
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF INITIAL NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
INITIAL NOTES PURSUANT TO THE EXCHANGE OFFER.
Initial Notes may be tendered for exchange prior to 5:00 p.m., New York
City time, on , 1998 (such time on such date being hereinafter
called the "Expiration Date"), unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended). Tenders of Initial Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum aggregate principal amount of Initial Notes being
tendered for exchange. The Exchange Offer is, however, subject to certain events
and conditions and to the terms of the Registration Rights Agreement dated
September 22, 1997 (the "Registration Rights Agreement") between the Company and
Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (together, the "Placement Agents"). Initial Notes may be tendered
only in integral multiples of aggregate principal amount of $1,000. The Company
has agreed to pay all expenses of the Exchange Offer. This Prospectus, together
with the Letter of Transmittal, is being sent to all registered Holders of
Initial Notes as of the date hereof.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds of the Exchange Notes" and "Plan of
Distribution."
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TABLE OF CONTENTS
PAGE
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Prospectus Summary............................. 4
Note Regarding Forward-Looking
Statements................................... 14
Risk Factors................................... 14
Use of Proceeds of the Exchange
Notes........................................ 23
Capitalization................................. 24
Selected Financial and Operating Data.......... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 27
The Exchange Offer............................. 33
Business....................................... 40
PAGE
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Management..................................... 51
Certain Transactions........................... 54
Principal Shareholders......................... 54
Description of Credit Facility................. 55
Description of the Exchange Notes.............. 57
Certain United States Federal Tax
Considerations............................... 83
Plan of Distribution........................... 85
Legal Matters.................................. 86
Experts........................................ 86
Available Information.......................... 86
Glossary....................................... 87
Index to Financial Statements.................. F-1
3
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL
DATA CONTAINED ELSEWHERE IN THIS PROSPECTUS. PARTICIPANTS IN THE EXCHANGE OFFER
SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN UNDER THE CAPTION "RISK
FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE
INDICATED, (I) THE INFORMATION IN THIS PROSPECTUS, OTHER THAN THE HISTORICAL
FINANCIAL INFORMATION, GIVES EFFECT TO THE REORGANIZATION, THE SHARE REPURCHASE
AND THE FIBERSOUTH ACQUISITION (EACH AS DEFINED HEREIN) AND THE OFFERING, AND
(II) REFERENCES HEREIN TO THE "COMPANY" REFER TO BTI TELECOM CORP. ("BTI
TELECOM") AND REFERENCES HEREIN TO BTI REFER TO ITS OPERATING SUBSIDIARY,
BUSINESS TELECOM, INC. ("BTI"). CERTAIN TERMS RELATING TO THE EXCHANGE NOTES ARE
DEFINED UNDER THE HEADING "DESCRIPTION OF THE EXCHANGE NOTES -- CERTAIN
DEFINITIONS" BEGINNING ON PAGE 60. CERTAIN OTHER TERMS USED IN THIS PROSPECTUS
ARE DEFINED UNDER THE HEADING "DESCRIPTION OF CREDIT FACILITY" BEGINNING ON PAGE
55 AND IN THE "GLOSSARY" BEGINNING ON PAGE 87.
THE COMPANY
BTI believes that it is a leading provider of telecommunications services
in the southeastern United States. BTI currently offers (i) integrated
telecommunications services, including long distance (domestic and
international, "1+" outbound dialing and toll-free service), data, Internet
access, paging, advanced intelligent network ("AIN") applications, operator and
other enhanced services, primarily to small and medium-sized business customers,
and (ii) wholesale telecommunications services, including switched, dedicated
access (private line and dedicated data facilities) and special access services,
primarily to telecommunications carriers. BTI had pro forma revenues of
approximately $149.9 million and earnings before interest, income taxes,
depreciation and amortization ("EBITDA") of approximately $9.7 million for the
year ended December 31, 1996, and pro forma revenues of approximately $148.3
million and EBITDA of approximately $6.7 million for the nine months ended
September 30, 1997. For the five years ended December 31, 1996, BTI's revenues
increased at a compound annual growth rate of approximately 37.6%. As of
September 30, 1997, BTI provided its services to over 31,000 business customers
and over 150 telecommunications carriers and other end-user customers.
BTI has begun, and intends to continue, adding local exchange services to
its current array of integrated telecommunications services where authorized.
With the addition of local exchange, BTI will be able to offer "one-stop"
integrated telecommunications services, tailored to the individual needs of
small to medium-sized business customers. BTI began offering local exchange
services in selected markets in October 1997, initially by reselling the
services of the incumbent local exchange carriers ("ILECs") in those markets,
and intends to install network infrastructure to support local switched services
as market conditions warrant.
BTI entered the wholesale services business to leverage its network
infrastructure for its integrated telecommunications services business. BTI
provides wholesale services to telecommunications carriers and other end-user
customers, including Nextel Communications, GTE, Sprint Mid-Atlantic, BellSouth
Mobility, UUNET, WorldCom, PSINet, ITC DeltaCom and CCI (McLeod). BTI provides
access services over its fiber optic network, which currently extends
approximately 65 route miles in North Carolina, linking Raleigh, Durham and the
Research Triangle Park area.
BTI operates an advanced telecommunications network including digital
switches in Atlanta, Dallas, New York, Orlando and Raleigh interconnected by
leased transmission capacity from major facilities-based carriers (including
AT&T, MCI and WorldCom). BTI uses multiple carriers and multiple switches in
order to improve network redundancy and re-route capability. BTI leases network
capacity either on its own or through its membership in the Associated
Communications Companies of America (the "ACCA"), an 11-member trade association
co-founded by BTI 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 long
distance providers in the United States. In October 1997, BTI entered into an
agreement to acquire, through long-term lease on an irrevocable right to use
("IRU") basis, approximately 3,200 route miles of fiber optic network to be
built over 18 months to serve markets from New York to Miami and Nashville,
Tennessee. BTI believes that this network will enable it to carry its
intraregional telecommunications traffic over its owned facilities, thereby
reducing its cost of services by decreasing payments to other carriers for use
of their transport facilities.
4
BTI's objective is to strengthen the market position it believes that it
holds as a leading provider of telecommunications services in the southeastern
United States. To achieve this objective, BTI intends to (i) leverage its
current market position, extensive customer base, brand name and network
capacity to aggressively penetrate the local exchange market and enter new
geographic markets while further penetrating existing markets and (ii) expand
its telecommunications network to lower the cost of providing services to its
customers. See "Risk Factors -- Significant Capital Requirements," " -- Ability
to Service Debt" and " -- Anticipated Future Negative Cash Flow After Capital
Expenditures." As part of its expansion strategy, BTI may make acquisitions and
enter into joint ventures or strategic alliances with businesses that are
related or complementary to its current operations; however, BTI has no current
understanding, commitment or agreement with respect to any such transaction. The
principal elements of BTI's business strategy include:
PROVIDING INTEGRATED TELECOMMUNICATIONS SERVICES TO SMALL AND MEDIUM-SIZED
BUSINESS CUSTOMERS. BTI believes that there is substantial and growing demand,
particularly in the southeastern United States, among small and medium-sized
businesses for an integrated package of services. BTI offers long distance,
data, Internet access, paging, AIN, operator and other enhanced services to
small and medium-sized businesses, and began adding local telephone service to
its current service offerings in October 1997. BTI believes that bundling local
telephony with its current array of telecommunications services will enable it
to offer "one-stop" integrated telecommunications services and allow it to
leverage its existing infrastructure, increase customer retention and better
penetrate its target markets.
RAPIDLY PENETRATING THE LOCAL EXCHANGE MARKET. BTI is among the first
providers of competitive local exchange carrier ("CLEC") services in key markets
in the southeastern United States and intends to leverage its sales force and
existing customer base to rapidly gain CLEC market share. BTI began offering
local exchange services in selected markets throughout the southeastern United
States in October 1997. BTI is currently in the process of installing a Lucent
5ESS local switch in Raleigh, where it will begin offering switch-based local
exchange services in late 1997. Following its "smart-build" strategy, BTI will
initially resell ILEC services in its other target markets, and intends to
install network infrastructure to support local switched services as market
conditions warrant.
"SMART-BUILDING" ITS NETWORK EXPANSION. BTI's strategy since its inception
has been to add revenue-producing customers before building or acquiring
additional network capacity. BTI believes that using this "smart-build" strategy
reduces the risks associated with speculative network expansion and allows it to
focus its capital expenditures in markets where network expansion will provide
competitive or cost advantages. Given BTI's favorable experience leasing network
capacity at competitive rates, through the ACCA and otherwise, BTI has typically
chosen to lease network capacity to enter new markets prior to building or
purchasing capacity. Following its "smart-build" strategy, in October 1997 BTI
entered into an agreement to lease on an IRU basis for the lesser of 25 years or
the life of the fiber approximately 3,200 route miles of fiber optic network to
be built over 18 months to serve markets from New York to Miami and Nashville,
Tennessee. This network will enable BTI to carry its intraregional
telecommunications traffic over its owned facilities, thereby reducing its cost
of services by decreasing payments to other carriers for use of their transport
facilities. BTI also intends to follow its "smart-build" strategy in entering
the local exchange market.
BUILDING MARKET SHARE BY FOCUSING ON PERSONALIZED SALES, MARKETING AND
CUSTOMER SERVICE. BTI believes that the key to revenue growth in its target
markets is capturing and retaining customers through effective, personalized
sales, marketing and customer service programs. BTI's direct sales force markets
BTI's entire range of services and is responsible and rewarded for obtaining and
maintaining face-to-face relationships with business customers. BTI seeks to
build long-term relationships with its customers by responding rapidly and
creatively to their telecommunications needs. BTI currently has 22 sales offices
staffed by representatives trained in marketing BTI's services and providing
comprehensive customer service and support. BTI's customer-support software and
network architecture give BTI personnel, along with its dealers and agents,
immediate access to customer data, allowing for quick and effective response to
customer requests and needs. This software also permits BTI to provide its
customers one fully integrated monthly billing statement for all of its current
services and is expected to permit the inclusion of local exchange service as
well.
FOCUSING ON THE SOUTHEASTERN UNITED STATES. BTI intends to continue to
focus on the high-growth southeastern United States in order to leverage its
existing market presence and telecommunications network in the region. In 1996,
the Company derived over 75% of its revenue from North Carolina, South Carolina,
Georgia,
5
Florida and Virginia. BTI believes that its regional focus will enable it to
take advantage of economies of scale in network infrastructure, operations and
maintenance, sales, marketing and management, and further develop its
long-standing customer and business relationships in the region. BTI's market
presence in the southeastern United States should provide opportunities for BTI
to increase revenues and gain market share in the region.
LEVERAGING PROVEN MANAGEMENT TEAM. The Company's management team consists
of experienced telecommunications executives led by Peter T. Loftin, Chairman
and Chief Executive Officer of the Company, who founded BTI 13 years ago. Other
members of the team include R. Michael Newkirk, President and Chief Operating
Officer, H.A. (Butch) Charlton, Senior Vice President, Sales, and Brian K.
Branson, Chief Financial Officer. These executives collectively have over 60
years of experience in the telecommunications industry.
The Company's principal executive offices are located at BTI Corporate
Center, 4300 Six Forks Road, Raleigh, North Carolina 27609, and its telephone
number at that location is (800) 849-9100.
THE TRANSACTIONS
The Company has undertaken a series of transactions (collectively, the
"Transactions") that are designed to provide BTI with greater liquidity and
financial flexibility and enhance its ability to execute its business strategy,
including rapidly penetrating the local exchange market and expanding its
network.
The Transactions, each of which was consummated on September 22, 1997,
consisted of the following:
1. BTI entered into a five-year, senior secured reducing revolving
credit facility (the "Credit Facility"), guaranteed by the Company,
with General Electric Capital Corporation ("GE Capital"), amending
and restating its then-existing credit facility with GE Capital
(the "Original Credit Facility"), to provide BTI with up to $60.0
million of availability to be used for working capital and other
purposes, including capital expenditures;
2. BTI repaid all $26.6 million of indebtedness outstanding under the
Original Credit Facility, including accrued interest thereon (the
"BTI Refinancing");
3. BTI repurchased, pursuant to a Stock Purchase Option and Put Option
Agreement dated July 1, 1992, as amended (the "Shareholders'
Agreement"), among BTI, Peter T. Loftin, the Company's Chairman and
Chief Executive Officer, and A.B. Andrews (the "Retiring
Shareholder"), the 50% interest in BTI held by the Retiring
Shareholder for approximately $28.3 million (the "Share
Repurchase");
4. the Company issued $250.0 million aggregate principal amount of
Initial Notes in the Offering;
5. BTI was merged with a wholly owned subsidiary of BTI Telecom and
converted for income tax purposes from an S corporation to a C
corporation (the "Reorganization"); and
6. in order to obtain equipment and technology it needs to begin
offering local exchange services and expand its fiber optic
facilities, BTI acquired substantially all of the assets of
FiberSouth, Inc. ("FiberSouth"), whose principal shareholder is
Peter T. Loftin, the Company's Chairman and Chief Executive
Officer, for $35.3 million (the "FiberSouth Acquisition"). The
assets acquired in this acquisition included FiberSouth's Lucent
5ESS local switch and its 65-mile fiber optic network in North
Carolina linking Raleigh, Durham and the Research Triangle Park
area. In connection with the FiberSouth Acquisition, BTI repaid all
of FiberSouth's outstanding indebtedness (approximately $5.2
million), together with accrued interest thereon.
6
THE INITIAL NOTES OFFERING
The Initial Notes............................ $250.0 million aggregate principal amount of 10 1/2% Senior Notes
due 2007. The Initial Notes were sold by the Company on September
17, 1997 to the Placement Agents pursuant to a Placement
Agreement, dated September 17, 1997 (the "Placement Agreement").
The Placement Agents subsequently resold the Initial Notes to
qualified institutional buyers pursuant to Rule 144A under the
Securities Act and to a limited number of Accredited Investors.
Registration Rights Agreement................ Pursuant to the Placement Agreement, the Company, and the
Placement Agents entered into a Registration Rights Agreement,
which grants the holders of the Initial Notes certain exchange and
registration rights. The Exchange Offer is intended to satisfy
such exchange rights, which terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
The Exchange Notes........................... The forms and terms of the Exchange Notes are identical in all
material respects to the terms of the Initial Notes for which they
may be exchanged pursuant to the Exchange Offer, except for
certain transfer restrictions and registration rights relating to
the Initial Notes and except for certain penalty interest
provisions relating to the Initial Notes described below under
" -- Terms of the Exchange Notes."
The Exchange Offer........................... The Company is offering to exchange $1,000 principal amount of
Exchange Notes for each $1,000 principal amount of Initial Notes.
As of the date hereof, $250.0 million aggregate principal amount
of Initial Notes are outstanding. The Company will issue the
Exchange Notes to holders on or promptly after the Expiration
Date.
Based on an interpretation by the staff of the Commission set
forth in no-action letters issued to third parties, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Initial Notes may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any
such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the
Securities Act; provided that such Exchange Notes are acquired in
the ordinary course of such holder's business and that such holder
does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution
of such Exchange Notes. Each holder accepting the Exchange Offer
is required to represent to the Company in the Letter of
Transmittal that, among other things, (i) the Exchange Notes will
be acquired by the holder in the ordinary course of business, (ii)
the holder is not an "affiliate" (as defined in Rule 405 under the
Securities Act) of the Company, and (iii) the holder is not
participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in
the distribution of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
7
Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a
broker-dealer in connection with resale of Exchange Notes received
in exchange for Initial Notes where such Initial Notes were
acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in
connection with any such resale; provided that the Company has no
obligation to amend or supplement this Prospectus unless it has
received written notice from a broker-dealer of its prospectus
delivery requirements under the Securities Act within five
business days following consummation of the Exchange Offer. See
"Plan of Distribution."
Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a
distribution of the Exchange Notes could not rely on the position
of the staff of the Commission enunciated in no-action letters
and, in the absence of an exemption therefrom, must comply with
the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Failure
to comply with such requirements in such instance may result in
such holder incurring liability under the Securities Act for which
the holder is not indemnified by the Company.
Expiration Date; Withdrawal of Tender........ The Exchange Offer will expire at 5:00 p.m., New York City time,
on , 1998, or such later date and time to which it is
extended by the Company (the "Expiration Date"). The tender of
Initial Notes pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any Initial Notes not
accepted for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Certain Conditions to the Note Exchange
Offer...................................... The Exchange Offer is subject to certain customary conditions,
which may be waived by the Company. See "The Exchange
Offer -- Certain Conditions to the Exchange Offer."
Procedures for Tendering Initial Notes....... Each holder of Initial Notes wishing to accept the Exchange Offer
must complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such Initial Notes
and any other required documentation to the Exchange Agent at the
address set forth herein.
Special Procedures for Beneficial Owners..... Any beneficial owner whose Initial Notes are registered in the
name of a broker, dealer, commercial bank, trust or other nominee
and who wishes to tender such Initial Notes in the Exchange Offer
should contact such registered holder and promptly instruct such
registered holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf,
such owner must, prior to completing and executing the Letter of
Transmittal and delivering
8
his Initial Notes, either make appropriate arrangements to
register ownership of the Initial Notes in such owner's name or
obtain a properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable time
and may not be able to be completed prior to the Expiration Date.
Registration Requirements.................... The Company has agreed to use its best efforts to consummate, by
March 22, 1998, the registered Exchange Offer pursuant to which
holders of the Initial Notes will be offered an opportunity to
exchange their Initial Notes for the Exchange Notes that will be
issued without legends restricting the transfer thereof. In the
event that applicable interpretations of the staff of the
Commission do not permit the Company to effect the Exchange Offer
or in certain other circumstances, the Company has agreed to file
a Shelf Registration Statement covering resales of the Initial
Notes and to use their best efforts to cause such Shelf
Registration Statement to be declared effective under the
Securities Act and, subject to certain exceptions, keep such Shelf
Registration Statement effective until two years after the
original issuance of the Initial Notes.
Certain Federal Income Tax
Consequences............................... Based upon the opinion of Wyrick Robbins Yates & Ponton LLP, there
will be no U.S. federal income tax consequences to holders
exchanging Initial Notes for Exchange Notes pursuant to the
Exchange Offer. See "Certain United States Federal Tax
Consequences."
Use of Proceeds.............................. There will be no cash proceeds to the Company from the exchange of
Notes pursuant to the Exchange Offer. See "Use of Proceeds of the
Exchange Notes."
Consequences of Exchanging Initial
Notes...................................... As a result of the making of this Exchange Offer, the Company will
have fulfilled certain of their obligations under the Registration
Rights Agreement, and holders of Initial Notes who do not tender
their Notes will generally not have any further registration
rights under the Registration Rights Agreement or otherwise. Such
holders will continue to hold the untendered Initial Notes and
will be entitled to all the rights and subject to all the
limitations applicable thereto under the Indenture except to the
extent such rights or limitations, by their terms, terminate or
cease to have further effectiveness as a result of the Exchange
Offer. All untendered Initial Notes will continue to be subject to
certain restrictions on transfer. Accordingly, if any Initial
Notes are tendered and accepted in the Exchange Offer, the trading
market for the untendered Initial Notes could be adversely
affected.
Exchange Agent............................... First Trust of New York, National Association, is the Exchange
Agent. The address and telephone number of the Exchange Agent are
set forth in "The Exchange Offer -- Exchange Agent."
TERMS OF THE EXCHANGE NOTES
General...................................... The form and terms of the Exchange Notes are the same as the form
and terms of the Initial Notes (which they replace) except that
(i) the Exchange Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting the transfer
thereof, and (ii) the holders of Exchange Notes will not
9
be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in
the interest rate on the Initial Notes in certain circumstances
relating to the timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated. See "The
Exchange Offer -- Consequences of Failure to Exchange." The
Exchange Notes will evidence the same debt as the Initial Notes
and will be entitled to the benefits of the Indenture. See
"Description of the Exchange Notes."
Maturity..................................... September 15, 2007.
Interest..................................... The Exchange Notes will bear interest at the rate of 10 1/2% per
annum from September 17, 1997, the date of issuance of the Initial
Notes that are tendered in exchange for the Exchange Notes (or the
most recent interest Payment Date to which interest on such Notes
has been paid). Accordingly, holders of Initial Notes that are
accepted for exchange will not receive interest on the Initial
Notes that is accrued by unpaid at the time of tender, but such
interest will be payable on the first Interest Payment Date after
the Expiration Date. Interest on the Exchange Notes will be
payable semiannually in cash on each March 15 and September 15,
commencing March 15, 1998.
Security..................................... Pursuant to the Indenture, approximately $74.1 million of the net
proceeds from the Offering were used by the Trustee to purchase a
portfolio of Pledged Securities (consisting only of U.S.
securities) that are being held as security for the payment of the
first six scheduled interest payments due on the Initial Notes and
the Exchange Notes. The Pledged Securities are being held by the
Trustee for the benefit of the holders of the Initial Notes and
the Exchange Notes pursuant to the Pledge Agreement pending
disbursement. The Notes are not guaranteed by any Company
subsidiary, and no subsidiary's stock is pledged as collateral for
the Notes. After the first six scheduled interest payments on the
Initial Notes and the Exchange Notes are made, the Initial Notes
and the Exchange Notes will be unsecured. See "Description of the
Exchange Notes -- Security."
Optional Redemption.......................... The Exchange Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after September 15, 2002, at
105.25% of their principal amount, plus accrued interest,
declining ratably to 100% of their principal amount, plus accrued
interest, on or after September 15, 2004. See "Description of the
Exchange Notes -- Optional Redemption." In addition, at any time
prior to September 15, 2000, the Company may redeem up to 35% of
the aggregate principal amount of Notes from the proceeds of one
or more Public Equity Offerings at 110.5% of their principal
amount, plus accrued interest; provided that after any such
redemption at least $162.5 million aggregate principal amount of
Notes remains outstanding.
Change of Control............................ Upon a Change of Control, the Company will be required to make an
offer to purchase the Exchange Notes at a purchase price equal to
101% of their principal amount, plus accrued interest. There can
be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any
required debt repayment (including repurchases of the Notes). See
"Description of the Exchange Notes -- Repurchase of Notes upon a
Change of Control."
10
Ranking...................................... The Exchange Notes will be unsecured (except as described above
under " -- Security"), unsubordinated indebtedness of the Company,
ranking PARI PASSU in right of payment with all existing and
future unsubordinated indebtedness of the Company and senior in
right of payment to all subordinated indebtedness of the Company.
As of September 30, 1997, the Company had (on an unconsolidated
basis) no indebtedness outstanding other than the Exchange Notes.
However, the Company is a holding company and the Exchange Notes
will be effectively subordinated to all existing and future
liabilities (including trade payables) of the Company's
subsidiaries. As of September 30, 1997, the subsidiaries of the
Company had $34.4 million of liabilities (excluding intercompany
payables), including $2.0 million of indebtedness (including
capital leases). In September 1997, a subsidiary of the Company
entered into the $60.0 million Credit Facility with GE Capital to
be used for working capital and other purposes, including
refinancing existing indebtedness, capital expenditures and
permitted acquisitions. The Credit Facility is secured by
substantially all of the assets of the Company's subsidiaries. In
addition, all obligations under the Credit Facility are guaranteed
by the Company and its other subsidiaries. Indebtedness under the
Credit Facility is effectively senior to the Exchange Notes
(except as described under " -- Security") to the extent of such
security interests. See "Risk Factors -- Holding Company
Structure; Priority of Secured Debt" and "Description of Credit
Facility."
Certain Covenants............................ The Indenture contains certain covenants that, among other things,
restrict the ability of the Company and its Restricted
Subsidiaries to incur additional indebtedness, create liens,
engage in sale-leaseback transactions, pay dividends or make
distributions in respect of their capital stock, make investments
or certain other restricted payments, sell assets, redeem capital
stock, issue or sell stock of Restricted Subsidiaries, enter into
transactions with stockholders or affiliates or effect a
consolidation or merger. However, these limitations are subject to
a number of important qualifications and exceptions. See
"Description of the Exchange Notes -- Covenants."
For additional information regarding the Exchange Notes, see "Description
of the Exchange Notes."
RISK FACTORS
See "Risk Factors" beginning on page 14 for a discussion of certain factors
that should be considered by participants in the Exchange Offer.
11
SUMMARY FINANCIAL AND OPERATING DATA
The following summary historical financial and operating data for the three
years ended December 31, 1996 were derived from the audited financial statements
of the Company. The summary financial data presented below as of and for the
nine months ended September 30, 1996 and 1997 were derived from the unaudited
financial statements of the Company and in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
entire year or any future interim period.
The pro forma statements of operations data give effect to the Transactions
as if each had occurred on January 1, 1996. The pro forma financial and
operating information does not purport to represent what the Company's results
of operations would have been if these transactions had in fact occurred on
these dates, nor does it purport to indicate the future financial position or
results of future operations of the Company. The pro forma adjustments are based
on currently available information and certain assumptions that management
believes to be reasonable. All pro forma information is unaudited. The summary
historical and pro forma financial and operating data set forth below should be
read in conjunction with "Selected Financial and Operating Data," "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 in this Prospectus.
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------- ----------------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
----------- ------------ ------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues....................... $91,547,763 $114,536,706 $148,780,816 $149,923,351 $106,237,643 $145,145,510 $148,271,741
Operating expenses:
Cost of services............. 54,424,983 68,199,125 90,820,467 90,236,755 62,884,645 101,238,476 102,724,266
Selling, general and
administrative expenses.... 33,671,250 44,732,343 53,791,036 54,924,909 40,688,329 43,753,394 45,173,007
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses... 88,096,233 112,931,468 144,611,503 145,161,664 103,572,974 144,991,870 147,897,273
----------- ------------ ------------ ------------ ------------ ------------ ------------
Income from operations......... 3,451,530 1,605,238 4,169,313 4,761,687 2,664,669 153,640 374,468
Interest expense(a)............ (749,661) (1,296,707) (1,695,324) (27,762,707) (1,366,903) (2,108,730) (21,339,675)
Gain on sale of marketable
securities................... -- 62,298 131,910 131,910 -- -- --
----------- ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before income
taxes........................ 2,701,869 370,829 2,605,899 (22,869,110) 1,297,766 (1,955,090) (20,965,207)
Income taxes................... -- -- -- -- -- 2,210,000 2,210,000
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss).............. 2,701,869 370,829 2,605,899 $(22,869,110) 1,297,766 $ (4,165,090) $(23,175,207)
------------ ------------ ------------
------------ ------------ ------------
Pro forma income taxes(b)...... 1,134,785 155,748 1,094,478 545,062
----------- ------------ ------------ ------------
Pro forma net income
(loss)(b).................... $ 1,567,084 $ 215,081 $ 1,511,421 $ 752,704
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
OTHER FINANCIAL DATA:
Capital expenditures, including
line access fees............. $ 4,434,616 $ 10,717,866 $ 8,589,707 $ 9,792,395 $ 5,690,992 $ 7,973,910 $ 8,496,278
Depreciation and
amortization................. 2,748,903 3,073,368 4,471,623 4,917,636 3,256,526 4,545,000 5,603,186
Net cash provided by (used in)
operating activities......... 6,230,855 9,446,250 (175,347) 64,077 (1,445,198) 7,044,372 9,410,711
Net cash used in investing
activities................... (4,529,987) (10,721,433) (8,222,677) (9,560,830) (5,487,329) (117,154,062) (117,778,785)
Net cash provided by (used in)
financing activities......... (1,700,868) 1,581,023 8,588,694 9,446,750 6,750,176 187,846,641 187,830,391
EBITDA(c)...................... 6,200,433 4,678,606 8,640,936 9,679,323 5,921,195 5,406,140 6,685,154
Ratio of earnings to fixed
charges(d)................... 3.3x 1.2x 1.8x -- 1.5x -- --
BALANCE SHEET DATA (AT PERIOD
END):
Working capital (deficit)...... $(1,546,220) $ (5,182,319) $ 741,199 $ 2,315,053 $ 99,829,161
Property and equipment, net.... 9,008,664 16,792,434 21,498,067 18,888,377 30,230,037
Total assets................... 26,802,487 35,968,645 48,223,809 44,684,021 221,493,450
Debt and capital lease
obligations.................. 8,388,172 13,553,439 25,017,610 23,140,561 252,045,816
Shareholders' equity
(deficit).................... 4,070,371 1,896,559 2,374,398 1,436,172 (63,129,976)
(FOOTNOTES ON NEXT PAGE)
12
(a) Pro forma interest expense reflects (i) interest expense of $26,250,000
and $19,687,500, for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, relating to the Notes,
the amortization of $860,000 and $645,000, respectively, of debt
issuance costs relating to the Offering, and the amortization of
$135,000 and $101,250, respectively, of financing fees related to the
Credit Facility, and (ii) the elimination of $1,659,441 and $1,674,487
of interest expense for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, relating to the
$26,597,914 indebtedness repaid in the BTI Refinancing and $5,227,691
repaid in connection with the FiberSouth Acquisition. Pro forma
interest expense excludes interest income of $3,742,360 and $2,806,770,
respectively, for the year ended December 31, 1996 and the nine months
ended September 30, 1997, that would have been earned on the
$74,093,277 of the proceeds from the Offering placed in a pledged
account to secure and fund the first six scheduled interest payments
(including .5% interest in the event the Exchange Offer is not
consummated as required) on the Notes.
(b) Historical financial information for the three years in the period
ended December 31, 1996 and the nine months ended September 30, 1996
does not include a provision for income taxes because, prior to the
Reorganization, BTI was 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. Pro forma net income (loss) for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 does
not include an adjustment for income taxes due to the pro forma net
loss.
(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. Pro forma EBITDA for the year ended
December 31, 1996 and the nine months ended September 30, 1997 excludes
an estimated $3,742,360 and $2,806,770, respectively, of interest
income that would have been earned on the $74,093,277 placed in a
pledged account and invested in Pledged Securities to fund the first
six scheduled interest payments on the Notes. See "Description of the
Notes -- Security."
(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 the Company believes to be representative of interest
(estimated to be one-third of such expense). For the nine months ended
September 30, 1997, earnings were insufficient to cover fixed charges
by $4,165,090. For the year ended December 31, 1996 and the nine months
ended September 30, 1997, on a pro forma basis giving effect to the
Transactions, earnings would have been insufficient to cover fixed
charges by $22,869,110 and $23,202,451, respectively.
13
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning: industry performance; the Company's operations,
performance, financial condition, growth and acquisition strategies, margins;
and growth in sales of the Company's services. For this purpose, any statements
contained in this Prospectus that are not statements of historical fact may be
deemed to be forward-looking statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the Company's control, and
actual results may differ materially depending on a variety of important
factors, including those described in "Risk Factors" below.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
ANTICIPATED FUTURE NEGATIVE CASH FLOW AFTER CAPITAL EXPENDITURES
Although its revenue has increased substantially in each of the last three
years, the Company also has experienced significant increases in expenses
associated with the development and expansion of its customer base and network
infrastructure. For the years ended December 31, 1994, 1995 and 1996, the
Company's EBITDA less capital expenditures and interest expense was $1.0
million, $(7.3) million and $(1.6) million, respectively, and for the nine
months ended September 30, 1996 and 1997 was $(1.1) million and $(4.7) million,
respectively. After giving pro forma effect to the Transactions, for the year
ended December 31, 1996 and the nine months ended September 30, 1997, the
Company's EBITDA less capital expenditures and interest expense would have been
$(27.9) million and $(23.2) million, respectively. The Company expects to incur
significant and increasing negative cash flow (after capital expenditures)
during the next several years as it implements its business strategy to expand
its telecommunications service offerings, expand its fiber optic network and
enter new markets. There can be no assurance that the Company will sustain
profitability or achieve or sustain positive net cash flow in the future. If the
Company cannot do so, it may not be able to meet its working capital or debt
service requirements, which could have a material adverse effect on the Company
and its ability to meet its obligations on the Notes. See " -- Significant
Capital Requirements," " -- Uncertainty of Additional Financing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SIGNIFICANT CAPITAL REQUIREMENTS
Expansion of BTI's network, operations and services will require
significant capital. The Company currently estimates that its aggregate capital
expenditure requirements will total approximately $21.5 million for the second
half of 1997 and $62.3 million for 1998. The Company anticipates making
substantial capital expenditures thereafter. Capital expenditures will be
primarily for the addition of local telephone service to its integrated
telecommunications services offerings, including the acquisition and
installation of switches, opening direct sales and dealer service offices,
expansion of its fiber optic network (including transmission equipment), and
infrastructure enhancements. Although there can be no assurance, the Company
believes that the net proceeds from the Offering, together with cash on hand,
cash flow from operations and borrowings under the Credit Facility, will provide
sufficient funds to enable BTI to expand its business as currently planned. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
UNCERTAINTY OF ADDITIONAL FINANCING
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimate, depending on the demand for
BTI's services and as a result of regulatory, technological and competitive
developments (including new market developments and new opportunities) in the
Company's industry. The Company may also require additional capital in the
future (or sooner than currently anticipated) for new business activities
related to its current and planned businesses, or in the event it decides to
make additional acquisitions or enter into joint ventures and strategic
alliances. Sources of additional capital may include cash flow from operations
and public and private equity and debt financings. There can be no assurance,
however, that the Company will be successful in producing sufficient cash flow
or raising sufficient debt or capital to meet its
14
strategic objectives or that such funds, if available, will be available on a
timely basis and on terms that are acceptable to the Company and within the
limitations contained in the Company's financing arrangements. See " -- High
Leverage," " -- Ability to Service Debt" and " -- Restrictive Covenants."
Failure to generate or raise sufficient funds may require the Company to delay
or abandon some or all of its future expansion plans or expenditures, which
could have a material adverse effect on the Company. Such failure could also
limit the ability of the Company to make principal and interest payments on its
indebtedness, including the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ABILITY TO SERVICE DEBT
At September 30, 1997, the Company had $252.0 million of debt and capital
lease obligations, and its shareholder's deficit was $63.1 million. On a pro
forma basis, giving effect to the Transactions, the Company's earnings would
have been insufficient to cover its fixed charges for the year ended December
31, 1996 and the nine months ended September 30, 1997 by $22.9 million and $23.2
million, respectively, and its EBITDA less capital expenditures and interest
expense, net, would have been $(27.9) million and $(23.9) million, respectively.
There can be no assurance that the Company will be able to improve its
earnings before fixed charges or that the Company will be able to meet its debt
service obligations, including its obligations on the Notes. If the Company is
unable to generate sufficient cash flow or otherwise obtain funds necessary to
make required payments, or if the Company otherwise fails to comply with the
various covenants in its indebtedness, it would be in default under the terms
thereof, which would permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause defaults under other indebtedness
of the Company. Such defaults could result in a default under the Credit
Facility or on the Notes and could delay or preclude payment of interest or
principal on the Notes. The ability of the Company to meet its obligations will
be dependent upon the future performance of the Company, which will be subject
to prevailing economic conditions and to financial, business and other factors,
including those discussed in "Risk Factors." See "Description of Credit
Facility" and "Description of the Notes -- Covenants."
The successful implementation of BTI's strategy and significant and
sustained growth in cash flows from operating activities are necessary for the
Company and its subsidiaries to meet their debt service requirements, including
its obligations under the Notes. There can be no assurance that BTI will
successfully implement its strategy or that the Company will be able to generate
sufficient cash flow from operating activities to meet its debt service
obligations and working capital requirements. In the event the implementation of
BTI's strategy is delayed or is unsuccessful or the Company does not generate
sufficient cash flow to meet its debt service and working capital requirements,
the Company may need to seek additional financing. There can be no assurance
that any such financing could be obtained on a timely basis on terms that are
acceptable to the Company, or at all. In the absence of such financing, the
Company and its subsidiaries could be forced to dispose of assets in order to
make up for any shortfall in the payments due on its indebtedness under
circumstances that might not be favorable to realizing the highest price for
such assets. There can be no assurance that the assets of the Company and its
subsidiaries could be sold quickly enough or for sufficient amounts to enable
them to meet their obligations, including its obligations with respect to the
Notes.
HIGH LEVERAGE
The level of the Company's indebtedness could have important consequences
to its future prospects, including the following: (i) limiting the ability of
the Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes; (ii) limiting
the flexibility of the Company in planning for, or reacting to, changes in its
business; (iii) leveraging the Company more highly than some of its competitors,
which may place it at a competitive disadvantage; (iv) increasing its
vulnerability in the event of a downturn in its business or the economy
generally; (v) making it more difficult for the Company to make payments on the
Notes; and (vi) requiring that a substantial portion of the Company's cash flow
from operations be dedicated to the payment of principal and interest on its
indebtedness and not be available for other purposes. In addition, BTI's
indebtedness under the Credit Facility bears interest at variable rates, which
causes BTI to be vulnerable to increases in interest rates.
15
RESTRICTIVE COVENANTS
The Indenture and the Credit Facility contain restrictions on the Company
and its subsidiaries that affect, and in certain cases significantly limit or
prohibit, among other things, their ability to incur additional indebtedness,
create liens, make investments, issue stock of subsidiaries and sell assets. In
addition, the Credit Facility requires the Company to maintain certain financial
ratios. See "Description of Credit Facility." There can be no assurance that the
Company will be able to maintain such ratios or that such covenants will not
adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities that may be in the
interest of the Company. The limitations in the Indenture are subject to a
number of important qualifications. In particular, while the Indenture restricts
the Company's ability to incur indebtedness by requiring compliance with
specified leverage ratios, it permits the Company to incur an unlimited amount
of additional indebtedness to finance the acquisition of equipment, inventory
and network assets. See "Description of the Exchange Notes -- Covenants."
HOLDING COMPANY STRUCTURE
The Company is a holding company with no direct operations and no
significant assets other than the stock of BTI. The Company is dependent on the
cash flow of BTI to meet its obligations, including the payment of interest and
principal on the Notes. BTI is a separate legal entity that has no obligation to
pay any amounts due pursuant to the Notes or to make any funds available
therefor, whether by dividends, loans or other payments. Because BTI will not
guarantee the payment of the principal or interest on the Notes, any right of
the Company to receive assets of BTI upon its liquidation or reorganization (and
the consequent right of holders of the Notes to participate in the distribution
or realize proceeds from those assets) will be effectively subordinated to the
claims of the creditors of BTI (including trade creditors and holders of
indebtedness of such subsidiary), except if and to the extent the Company is
itself a creditor of BTI, in which case the claims of the Company would still be
effectively subordinated to any security interest in the assets of BTI held by
other creditors. As of September 30, 1997, BTI had approximately $34.4 million
of liabilities (excluding intercompany payables), including approximately $2.0
million of indebtedness (including capital leases). In addition, BTI has up to
$60.0 million of availability under the Credit Facility. See "Description of
Credit Facility" and "Description of the Exchange Notes -- Ranking."
PRIORITY OF SECURED DEBT
The Notes are unsecured (except with respect to the Pledged Securities) and
therefore effectively subordinated to any secured indebtedness of the Company.
The Notes are not guaranteed by any Company subsidiary, and no subsidiary's
stock is pledged as collateral for the Notes. The Indenture permits the Company
and its subsidiaries to incur an unlimited amount of indebtedness to finance the
acquisition of equipment, inventory and network assets and to secure such
indebtedness, and up to $100.0 million of other secured indebtedness pursuant to
one or more credit facilities, including the Credit Facility. The Credit
Facility is guaranteed by BTI Telecom. The Credit Facility is secured by a first
priority security interest in substantially all of the assets of BTI and a
pledge of the capital stock of BTI. Consequently, in the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding with respect to
the Company, such assets would be available to satisfy obligations of the
secured debt (including the Credit Facility) before any payment could be made on
the Notes. In addition, to the extent such assets did not satisfy in full the
secured indebtedness (including the Credit Facility), the holders of such
indebtedness would have a claim for any shortfall that would be pari passu (or
effectively senior if the indebtedness were issued by BTI) with the Notes.
Accordingly, there may only be a limited amount of assets available to satisfy
any claims of the holders of the Notes upon an acceleration of the Notes. See
"Description of the Exchange Notes -- Security" and " -- Ranking."
ABILITY TO MANAGE GROWTH
BTI's rapid growth has placed, and anticipated growth in the future will
also place, a significant strain on its administrative, operational and
financial resources. BTI's ability to continue to manage its growth successfully
will require BTI to enhance its operational, managerial, financial and
information systems and controls and to hire and retain qualified sales,
marketing, administrative, operating and technical personnel. In particular, as
BTI commences providing local exchange services, the need for enhanced
provisioning, billing and information systems will increase significantly. In
addition, as BTI increases its service offerings and expands its targeted
16
markets, there will be additional demands on customer support, sales and
marketing, administrative resources and network infrastructure. There can be no
assurance that BTI will be able to successfully enhance its systems and controls
or hire and retain qualified personnel. BTI's inability to manage its growth
effectively would have a material adverse effect on the Company.
BUSINESS DEVELOPMENT AND EXPANSION RISKS
The successful implementation of BTI's strategy to expand and develop its
business will depend on, among other things, its ability to successfully
implement its sales and marketing strategy, evaluate markets, design fiber
routes, secure financing, install or obtain fiber optic facilities equipment,
acquire rights of way, obtain required government authorizations, comply with
applicable regulations and court orders, compete effectively, negotiate
interconnection agreements and implement and maintain interconnection to, and
co-location with, facilities owned by ILECs and obtain appropriately priced
unbundled network elements and wholesale services from the ILECs, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions. In
addition, the expansion of BTI's services to include local telephony will
subject the Company to additional risks. See " -- Risks Related to Local
Services Strategy." The expansion of BTI's business may involve acquisitions of
other telecommunications businesses and assets. Such transactions commonly
involve certain risks including, among others: the difficulty of assimilating
the acquired operations and personnel; the potential disruption of BTI's ongoing
business and diversion of resources and management time; the possible inability
of management to maintain uniform standards, controls, procedures and policies;
the risks of entering markets in which BTI has little or no direct prior
experience; and the potential impairment of relationships with employees or
customers as a result of changes in management. There can be no assurance that
BTI will be successful in overcoming these risks and other problems encountered
in connection with any future transactions, that any acquired business will be
successfully integrated into BTI's operations or that any acquired business will
perform as expected. As part of its expansion, BTI may also enter into joint
ventures in the future. There are risks in participating in joint ventures,
including the risk that the other joint venture partners may at any time have
economic, business or legal interests or goals that are inconsistent with those
of the joint venture or BTI. The risk is also present that a joint venture
partner may be unable to meet its economic or other obligations in the joint
venture and that the Company may be required to fulfill some or all of those
obligations. Failure of BTI to implement its expansion and growth strategy
successfully could have a material adverse effect on the Company.
RISKS RELATED TO LOCAL SERVICES STRATEGY
BTI began offering local exchange services in late 1997. While some states
authorized local competition prior to 1996, the local dial tone services market
was largely opened to competition through the passage of the Telecommunications
Act of 1996 (the "Telecommunications Act") in February 1996 and subsequent state
and Federal regulatory actions designed to implement the Telecommunications Act.
Regulatory bodies have not completed all actions expected to be needed to fully
implement local service competition, and there is little experience under those
decisions that have been made to date. Although BTI has entered into
interconnection agreements with BellSouth (the "BellSouth Interconnection
Agreement"), GTE and Sprint, BTI will need to enter into interconnection
agreements with other ILECs, including Bell Atlantic. Changes in the regulatory
environment, including the recent decision of the U.S. Court of Appeals for the
Eighth Circuit (the "Eighth Circuit Court"), could make negotiating such
agreements more difficult and protracted, and there can be no assurance that BTI
will be able to enter into such agreements on terms acceptable to the Company.
See " -- Regulation."
BTI will have to make significant operating and capital investments in
order to implement its local exchange service strategy. There are numerous
operating complexities associated with providing these services. BTI will be
required to develop new products, services and systems and will need to develop
new marketing initiatives and train its sales force in connection with selling
these services. BTI will also need to implement the necessary provisioning,
billing and collection systems for these services. BTI will face significant
competition from the Regional Bell Operating Companies (the "RBOCs"), whose core
business is providing local dial tone service. The RBOCs, who currently are the
dominant providers of services in their markets, are expected to mount a
significant competitive response to new entrants such as BTI. BTI also will face
significant competitive product and pricing pressures from other ILECs and from
other firms seeking to compete in the local services market, including AT&T,
MCI, Sprint and WorldCom.
17
BTI also expects that the addition of local service to its bundle of
telecommunications services will initially have an adverse impact on its gross
margin because the gross margin on the resale of local services through ILEC
facilities is lower than the gross margin on BTI's existing business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to BTI's growth
and its ability to monitor costs, provision customer orders, bill customers and
achieve operating efficiencies. As BTI commences providing dial tone and
switched local access services, the need for enhanced billing and information
systems will increase significantly. The inability of the Company to adequately
identify all of its information and processing needs, or to upgrade systems as
necessary, could have a material adverse effect on the ability of the Company to
reach its objectives, on its financial condition and results of operations and
on its ability to pay interest and principal on the Notes.
DEPENDENCE ON RIGHTS OF WAY AND OTHER THIRD PARTY AGREEMENTS
BTI has obtained, and in the future will need to obtain, easements, rights
of way, franchises and licenses from various private parties, including actual
and potential competitors, and local governments in order to implement its
business strategy, including constructing and maintaining its fiber optic
network. There can be no assurance that BTI will obtain such rights and
franchises or will continue to have access to existing rights and franchises
after the expiration of such agreements. If a franchise, license or lease
agreement were terminated and BTI were forced to remove or abandon a significant
portion of its network, such termination could have a material adverse effect on
the Company.
REGULATION
BTI is subject to significant regulation at the federal, state and local
levels. Delays in receiving required regulatory approvals or the enactment of
adverse regulations or regulatory requirements may have a material adverse
effect upon the Company. BTI is required to obtain authorizations from the
Federal Communications Commission ("FCC") and state public utility commissions
("PUCs") to offer its telecommunications services, as well as file tariffs for
many of its services. Local authorities regulate BTI's access to municipal
rights of way. BTI will face new obligations arising out of the
Telecommunications Act as it begins to enter the local telephone market. Because
the FCC and the states have yet to adopt many of the rules and policies
necessary to implement the Telecommunications Act, or to respond to other
related local telephone competition issues, it is uncertain how burdensome these
requirements will be for BTI. Failure to maintain proper federal and state
tariffing or state certification, or noncompliance with federal or state laws or
regulations, could have a material adverse effect on the Company.
Although BTI entered into the BellSouth Interconnection Agreement, pursuant
to which it will obtain wholesale local services and access to unbundled network
elements from BellSouth, the terms of the BellSouth Interconnection Agreement
must be approved by certain of the PUCs regulating BTI's markets. BellSouth
recently filed the agreement with such PUCs, however, there can be no assurance
that the agreement will be approved by these PUCs on a timely basis, or at all.
BTI is currently negotiating interconnection agreements with other local
exchange carriers. To the extent such agreements must be approved by any of the
PUCs regulating BTI's markets, there can be no assurance that such agreements
will be approved by them on a timely basis, or at all.
In addition, BTI's plans to provide local telephone service are heavily
dependent upon implementation of provisions of the Telecommunications Act. The
Telecommunications Act preempts state and local laws to the extent that they
prohibit local telephone competition, and imposed a variety of new duties on
ILECs intended to advance such competition, including the duty to negotiate in
good faith with competitors requesting interconnection to the ILEC's network.
However, negotiations with ILECs have sometimes involved considerable delays and
the resulting negotiated agreements may not necessarily be obtained on terms and
conditions that are acceptable to the Company. In such instances, the Company
may petition the proper state regulatory agency to arbitrate disputed issues.
There can be no assurance that BTI will be able to negotiate acceptable
interconnection agreements with ILECs or that if state regulatory authorities
impose terms and conditions on the parties in arbitration, such terms will be
acceptable to BTI. On August 8, 1996, the FCC
18
adopted rules and policies implementing certain of the local competition
provisions of the Telecommunications Act, which rules, in general, are
considered favorable to new competitive entrants, but those rules have not been
fully implemented. On July 18, 1997, the Eighth Circuit Court vacated certain of
the pricing provisions of the FCC rules and the rules that enable new entrants
to "pick and choose" elements of existing interconnection agreements between the
ILECs and other carriers. The Eighth Circuit Court ruling does not affect the
implementation of the FCC's other interconnection rules and does not affect the
statutory requirements of the Telecommunications Act, including the statutory
requirements that ILECs conduct negotiations and enter into interconnection
agreements with competitive carriers. However, the Eighth Circuit Court decision
may act to reduce the role of the FCC in fostering competition in the local
service market, including the FCC's ability to take enforcement action if the
Telecommunications Act is violated, thereby increasing the role of the PUCs. The
overall impact of the Eighth Circuit Court decision on the Company cannot yet be
determined and there can be no assurance that it will not have a material
adverse effect on the Company. 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. Although the Company believes that
the Telecommunications Act and other state and federal regulatory initiatives
that favor increased competition are advantageous to the Company, there can be
no assurance that changes in current or future state or federal regulations,
including changes that may result from court review of the FCC's implementing
rules, or increased competition by ILECs and others resulting from such changes,
will not have a material adverse effect on the Company.
The Telecommunications Act also creates the foundation for increased
competition in the long distance market from the RBOCs, which could affect the
successful implementation of BTI's business plans. For example, certain
provisions eliminate previous prohibitions on the provision of interLATA long
distance services (both retail and wholesale) by the RBOCs subject to compliance
by such companies with requirements set forth in the Telecommunications Act and
implemented by the FCC. The Company could be adversely affected if the RBOCs
(particularly BellSouth) are allowed to provide wireline interLATA long distance
services within their own regions before local competition is firmly
established. In a related development, the FCC is considering proposed new
policies and rules that would grant the ILECs additional flexibility in the
pricing of interstate access services, and states are considering or are
expected to consider ILEC requests for similar regulatory relief with respect to
intrastate services. Such flexibility is likely to come first for services
offered in the business market. Any pricing flexibility or other significant
deregulation of the ILECs could have a material adverse effect on the Company.
See "Business -- Regulation."
COMPETITION
BTI operates in a highly competitive environment, and the level of
competition, particularly with respect to pricing, is increasing. Many of BTI's
existing and potential competitors have financial, technical and other resources
and customer bases and name recognition far greater than those of the Company.
The long distance market has generally been characterized by over-capacity
and declining prices since shortly after the AT&T divestiture in 1984 and has
been extremely competitive, with prices declining substantially in recent years.
BTI anticipates that prices for its long distance services will continue to
decline over the next several years, which will adversely affect the Company's
gross margins as a percentage of revenues. The long distance market consists of
four major competitors (AT&T, MCI, Sprint and WorldCom), but other companies are
building nationwide networks and some compete in various geographic areas. Other
competitors are likely to include RBOCs providing out-of-region (and, with the
future removal of regulatory barriers, in-region) long distance services, other
CLECs, microwave and satellite carriers, and private networks owned by large
end-users. If industry capacity expansion results in capacity that exceeds
overall demand along any of BTI's routes, severe additional pricing pressure
could develop. In addition, strategic alliances or similar transactions, such as
the long distance capacity purchasing alliance among certain RBOCs announced in
the spring of 1996, could result in additional pricing pressure on long distance
carriers. Furthermore, the marginal cost of carrying an additional call over
existing fiber optic cable is extremely low. As a result, within a few years,
there may be dramatic and substantial price reductions. Such pricing pressure
could have a material adverse effect on the Company. In addition, the FCC has
announced changes to its interstate access rules that will reduce per-minute
access charges and substitute new per-line flat-rate monthly charges. These
actions are expected to reduce access rates. AT&T has committed to reduce its
long distance rates to reflect access cost reductions, and other
19
competitors of BTI are likely to make similar reductions. In such event, BTI may
need to reduce its rates to respond to competitive pressures. See
" -- Dependence on Incumbent Local Exchange Carriers" and
"Business -- Regulation."
Local telephone and intraLATA long distance services substantially similar
to those expected to be offered by BTI are also offered by the ILECs serving the
markets that BTI plans to serve. BellSouth is the ILEC and a particularly strong
competitor in most of the markets targeted by BTI. BellSouth recently announced
its intent to establish its own CLEC to obtain pricing flexibility to compete in
areas served by BTI and to provide competitive local services in areas where it
is not the ILEC. BellSouth and other ILECs already have relationships with
virtually every customer and have the potential to effectively subsidize
services of the type offered by BTI from service revenues not subject to
effective competition, which could result in even more intense price
competition. The Telecommunications Act, other recent state legislative actions,
and current federal and state regulatory initiatives provide increased business
opportunities for the Company by removing or substantially reducing barriers to
local exchange competition. However, these new competitive opportunities are
expected to be accompanied by new competitive opportunities for the ILECs. It is
also expected that increased local competition will result in increased pricing
flexibility for, and relaxation of regulatory oversight of, the ILECs. If the
ILECs are permitted to engage in increased volume and discount pricing practices
or charge CLECs increased fees for interconnection to their networks, or if the
ILECs seek to delay implementation of interconnection by competitors to their
networks, the Company's results of operations and financial condition could be
adversely affected. There can be no assurance that the Company will be able to
achieve or maintain adequate market share or revenues, or compete effectively in
any of its markets.
In addition, a continuing trend toward business combinations and strategic
alliances in the telecommunications industry may further enhance competition.
For example, the national long distance carrier WorldCom acquired MFS
Communications Company, Inc., a CLEC, in December 1996. In November 1997,
WorldCom and MCI announced their agreement to merge. In March 1997, BellSouth
and International Business Machines Corporation ("IBM") announced an alliance to
provide Internet and Intranet services to businesses in the southern United
States. These types of strategic alliances could put the Company at a
significant competitive disadvantage.
BTI will also face competition in the markets in which it operates from one
or more CLECs operating fiber optic networks, in some cases in conjunction with
the local cable television operator or electric utility. One of the primary
purposes of the Telecommunications Act is to promote competition, particularly
in the local telephone market. AT&T, MCI, Sprint and others have begun to offer
local telecommunications services, either directly or in conjunction with other
CLECs.
To complement its telecommunications services offerings, BTI offers data
transmission services on a resale basis. The data transmission business is
extremely competitive and prices have declined substantially in recent years and
are expected to continue to decline.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by the
Company. Under this agreement, the United States and other members of the WTO
committed themselves to opening their telecommunications markets to competition
and foreign ownership and to adopting regulatory measures to protect against
anticompetitive behavior by dominant telephone companies.
The Company also believes that providers of wireless services increasingly
will offer, in addition to products that supplement a customer's wireline
communications (similar to cellular telephone services in use today), wireline
replacement products that may result in wireless services becoming the
customer's primary mode of communication. AT&T has announced plans to offer
local services using a new wireless technology. AT&T's proposed wireless system
would link residential and business telephones via radio waves to the AT&T
network. If successful, this new service could further enhance AT&T's ability to
market, on a nationwide basis, "one-stop" telecommunications services.
Competition with providers of wireless telecommunications services may be
intense. Many of the Company's potential wireless competitors have substantially
greater financial, technical, marketing, sales, manufacturing and distribution
resources than those of the Company.
20
DEPENDENCE ON INCUMBENT LOCAL EXCHANGE CARRIERS
BTI is dependent on ILECs to provide access service for the origination and
termination of its toll long distance traffic and interexchange private lines.
Historically those access charges have made up a significant percentage of the
overall cost of providing long distance service. On May 7, 1997, the FCC adopted
changes to its interstate access rules that, among other things, will reduce
per-minute access charges and substitute new per-line flat rate monthly charges.
The FCC also approved reductions in overall access rates, and established new
rules to recover subsidies to support universal service and other public
policies. The impact of these changes on the Company and its competitors is not
yet clear. The Company could be adversely affected if it does not experience
access cost reductions proportionally equivalent to those of its competitors.
BTI intends to obtain the local telephone services of the ILECs on a
wholesale basis and resell that service to end users, in the early stages of its
local telephone service business, and thereafter plans to install network
infrastructure to support local switched services as market conditions warrant.
BTI generally will be dependent on ILECs for provision of local telephone
service through access to local loops, termination service and, in some markets,
central office switches of such carriers. Additionally, BTI will be heavily
dependent on the ILECs and other carriers for provisioning of connections to
local exchange customers, and will require substantial development of new
internal provisioning, billing and customer management systems. Although under
the Telecommunications Act the ILECs are generally required to cooperate with
BTI, the ILECs can impose significant operating delays on BTI, thereby causing
the loss of revenues or slowing of the Company's planned growth. There also are
no guarantees that BTI can design and install necessary provisioning, billing
and customer management systems in a timely manner to permit BTI to provision
local exchange, long distance or data services as planned.
Any successful effort by the ILECs to deny or substantially limit BTI's
access to their network elements or wholesale services would have a material
adverse effect on BTI's ability to provide local telephone services. Although
the Telecommunications Act imposes interconnection obligations on ILECs, there
can be no assurance that BTI will be able to obtain access to such network
elements or services at rates, and on terms and conditions, that permit BTI to
offer local services at rates that are both profitable and competitive. BTI has
entered into the BellSouth Interconnection Agreement, pursuant to which it will
obtain wholesale local services and access to unbundled network elements from
BellSouth, but the agreement does not provide all material terms for the resale
of local services or access to the unbundled network elements. Some of such
terms may be affected by pending legal proceedings regarding FCC regulatory
requirements, the outcome of which will apply to the industry as a whole.
Although there can be no assurance, BTI expects that the BellSouth
Interconnection Agreement will provide a foundation for it to provide local
service on a reasonable commercial basis in several of its target markets. BTI
also has interconnection agreements with GTE and Sprint, and is currently
negotiating similar interconnection agreements with other local exchange
carriers. The BellSouth Interconnection Agreement expires in January 1999, and
there can be no assurance that BTI will be able to renew it under favorable
terms, or at all. Many issues relevant to the terms and conditions by which
competitors may use the ILEC network and wholesale services remain unresolved.
For example, BellSouth and certain other ILECs have taken the position that when
a carrier seeking to provide local service obtains all necessary elements (loops
and switches) from the ILEC in a combined form, the ILEC retains the right to
receive the access revenues associated with service to the customers served on
that basis. In addition, the FCC has recently created a task force to examine
complaints that competition in the local service market has been delayed by
problems that have arisen with respect to the systems used by carriers to order
and receive network elements and wholesale services from the ILECs. These
systems are necessary for carriers like BTI to provide local service on a timely
and competitive basis. See "Business -- Regulation."
RISK OF RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. Although the Company believes that, for the foreseeable future,
these changes will neither materially affect the continued use of its fiber
optic networks, digital switches and transmission equipment, nor materially
hinder its ability to acquire necessary technologies, the effect of
technological changes on the business of the Company and its subsidiaries cannot
be predicted. The Company believes its future success will depend, in part, on
its ability to anticipate or adapt to such changes and to offer, on a timely
basis, services that meet customer demands. There
21
can be no assurance that technological developments in telecommunications will
not have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon a small number of key management
and operating personnel, particularly Peter T. Loftin, Chairman and Chief
Executive Officer, R. Michael Newkirk, President and Chief Operating Officer,
and H.A. (Butch) Charlton, Senior Vice President, Sales. With the exception of
Mr. Charlton, none of these employees has an employment agreement with the
Company, and, with the exception of Mr. Loftin, the Company does not maintain
"key man" insurance on any of these employees. The loss of the services of key
personnel, or the inability to attract, recruit and retain sufficient or
additional qualified personnel, could have a material adverse effect on the
Company.
POTENTIAL CONFLICTS OF INTEREST WITH SOLE SHAREHOLDER
All of the outstanding capital stock of the Company is held by Peter T.
Loftin, Chairman and Chief Executive Officer of the Company. Accordingly, Mr.
Loftin is in a position to elect all of the Company's directors and determine
the outcome of corporate actions requiring shareholder approval. Certain
decisions concerning the operations or financial structure of the Company may
present conflicts of interest between Mr. Loftin and the holders of the Notes.
For example, if the Company encounters financial difficulties or is unable to
pay its debts as they mature, the interests of Mr. Loftin might conflict with
those of the holders of the Notes. In addition, Mr. Loftin may have an interest
in pursuing acquisitions, divestitures, financings or other transactions that,
in his judgment, could enhance his equity investment in the Company, even though
such transactions might involve risk to the holders of the Notes.
Mr. Loftin has a 50% interest in International Communications, Inc.
("ICI"), a company that sells telecommunications services as an agent for BTI.
Conflicts may arise in connection with transactions between ICI and the Company,
including the negotiation or enforcement of the terms of such arrangements. In
addition, ICI or Mr. Loftin may compete with the Company in the provision of
telecommunications services and conflicts of interest may also arise with
respect to future business opportunities.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Company's management believes that the indebtedness represented by the
Notes is being incurred for proper purposes and in good faith, and that, based
on present forecasts, asset valuations and other financial information, the
Company is solvent, will have sufficient capital for carrying on its business
and will be able to pay its debts as they mature. Notwithstanding management's
belief, if a court in a suit by an unpaid creditor or representative of
creditors were to find that, after giving effect to the sale of the Notes and
the applications of the net proceeds therefrom, either (a) the Company incurred
such indebtedness with the intent of hindering, delaying or defrauding creditors
or (b) the Company received less than reasonably equivalent value or
consideration for incurring such indebtedness and (i) was insolvent or was
rendered insolvent by reason of such transactions, (ii) was engaged in a
business or transaction for which the assets remaining with the Company
constituted unreasonably small capital or (iii) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they matured,
such court may subordinate such indebtedness to existing and future indebtedness
of the Company, avoid such indebtedness and direct the repayment of any amounts
paid thereunder to the Company's creditors or take other action detrimental to
the holders of such indebtedness. The measure of insolvency for purposes of the
foregoing varies depending upon the law of the jurisdiction which is being
applied. Generally, however, a company would be considered insolvent if the sum
of all its liabilities, including contingent liabilities, were greater than the
value of all its property at a fair valuation, or if the present fair saleable
value of the company's assets were less than the amount required to repay its
liabilities on its debts, including contingent liabilities, as they become
absolute and matured.
LACK OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
active trading market. If the Notes are traded after their initial issuance,
they may trade at a discount from their face value, depending upon prevailing
interest rates, the market for similar securities, the financial condition and
prospects of the Company and other factors beyond the control of the Company,
including general economic conditions. The Company does not intend to apply for
a listing or quotation of the Notes in the United States. Although the Placement
Agents have informed the Company that they currently intend to make a market in
the Notes, they are not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly, no assurance can be given
as to the development or liquidity of any trading market for the Notes.
22
USE OF PROCEEDS OF THE EXCHANGE NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any cash proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive, in exchange, Initial Notes in like principal amount.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Initial Notes, except as otherwise described herein
under "The Exchange Offer -- Terms of the Exchange Offer." The Initial Notes
surrendered in exchange for the Exchange Notes will be retired and cancelled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not result
in any increase in the outstanding debt of the Company.
23
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
on a historical basis as of September 30, 1997. This table should be read in
conjunction with "Selected Financial and Operating Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
financial statements, and notes thereto, and the other financial data included
elsewhere in this Prospectus.
BTI
TELECOM
CORP.
SEPTEMBER 30, 1997
------------------
Cash............................................................................................ $ 78,233,461
------------------
------------------
Restricted cash................................................................................. $ 74,093,277
------------------
------------------
LONG-TERM DEBT, SHAREHOLDER NOTES PAYABLE, AND CAPITAL LEASE OBLIGATIONS:
Shareholder notes payable..................................................................... $ 1,930,493
Capital lease obligations, including current portion of $90,919............................... 115,323
Senior notes.................................................................................. 250,000,000
------------------
Total debt and capital lease obligations, including current portion (a).................... 252,045,816
------------------
Total shareholders' deficit (b)................................................................. (63,129,976)
------------------
Total capitalization............................................................................ $188,915,840
------------------
------------------
- ---------------
(a) Excludes any potential borrowings under the Credit Facility. See
"Description of Credit Facility."
(b) The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, no par value per share. As of September 30, 1997, 10,000,000
shares of such Common Stock were issued and outstanding.
There has been no material adverse change in the capitalization of the
Company since September 30, 1997.
24
SELECTED FINANCIAL AND OPERATING DATA
The following selected historical financial and operating data for the five
years ended December 31, 1996 were derived from the audited financial statements
of the Company. The financial data for the nine months ended September 30, 1996
and 1997 were derived from the Company's unaudited financial statements and in
the opinion of management include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year. The selected data should be
read in conjunction with "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 in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------- ---------------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------ ------------ -------------
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $42,019,704 $62,984,752 $91,547,763 $114,536,706 $148,780,816 $106,237,643 $ 145,145,510
Operating expenses:
Cost of services.......... 25,184,302 38,067,197 54,424,983 68,199,125 90,820,467 62,884,645 101,238,476
Selling, general and
administrative
expenses................ 13,411,799 20,778,939 33,671,250 44,732,343 53,791,036 40,688,329 43,753,394
----------- ----------- ----------- ------------ ------------ ------------ -------------
Total operating
expenses.............. 38,596,101 58,846,136 88,096,233 112,931,468 144,611,503 103,572,974 144,991,870
----------- ----------- ----------- ------------ ------------ ------------ -------------
Income from operations...... 3,423,603 4,138,616 3,451,530 1,605,238 4,169,313 2,664,669 153,640
Interest expense............ (357,207) (463,651) (749,661) (1,296,707) (1,695,324) (1,366,903) (2,108,730)
Gain on sale of marketable
securities................ -- 21,618 -- 62,298 131,910 -- --
----------- ----------- ----------- ------------ ------------ ------------ -------------
Income (loss) before income
taxes..................... 3,066,396 3,696,583 2,701,869 370,829 2,605,899 1,297,766 (1,955,090)
Income taxes................ -- -- -- -- -- -- 2,210,000
----------- ----------- ----------- ------------ ------------ ------------ -------------
Net income (loss)........... 3,066,396 3,696,583 2,701,869 370,829 2,605,899 1,297,766 $ (4,165,090)
-------------
-------------
Pro forma income taxes(a)... 1,287,886 1,552,565 1,134,785 155,748 1,094,478 545,062
----------- ----------- ----------- ------------ ------------ ------------
Pro forma net income
(loss)(a)................. $ 1,778,510 $ 2,144,018 $ 1,567,084 $ 215,081 $ 1,511,421 $ 752,704
----------- ----------- ----------- ------------ ------------ ------------
----------- ----------- ----------- ------------ ------------ ------------
Cash dividends declared per
common share(b)........... $ .07 $ .11 $ .13 $ .13 $ .10 $ .08 $ .08
----------- ----------- ----------- ------------ ------------ ------------ -------------
----------- ----------- ----------- ------------ ------------ ------------ -------------
OTHER DATA:
Capital expenditures,
including line access
fees...................... $ 1,031,241 $ 1,736,013 $ 4,434,616 $ 10,717,866 $ 8,589,707 $ 5,690,992 $ 7,973,910
Depreciation and
amortization.............. 1,380,676 1,881,937 2,748,903 3,073,368 4,471,623 3,256,526 4,545,000
Net cash provided by (used
in) operating
activities................ 2,691,810 4,551,789 6,230,855 9,446,250 (175,347) (1,445,198) 7,044,372
Net cash used in investing
activities................ (1,031,241) (1,903,993) (4,529,987) (10,721,433) (8,222,677) (5,487,329) (117,154,062)
Net cash provided by (used
in) financing
activities................ (1,253,887) (2,929,915) (1,700,868) 1,581,023 8,588,694 6,750,176 187,846,641
EBITDA(c)................... 4,804,279 6,020,553 6,200,433 4,678,606 8,640,936 5,921,195 5,406,140
Ratio of earnings to fixed
charges(d)................ 6.4x 6.0x 3.3x 1.2x 1.8x 1.5x --
Customers................... 16,000 28,000 34,000 52,000 49,000 59,000
Sales offices............... 13 16 20 22 22 22
BALANCE SHEET DATA (AT
PERIOD END):
Working capital (deficit)... $ 717,309 $ 542,918 $(1,546,220) $ (5,182,319) $ 741,199 $ 2,315,053 $ 99,829,161
Property and equipment,
net....................... 2,918,266 6,168,816 9,008,664 16,792,434 21,498,067 18,888,377 30,230,037
Total assets................ 10,638,072 18,856,576 26,802,487 35,968,645 48,223,809 44,684,021 221,493,450
Debt and capital lease
obligations............... 3,626,550 6,605,821 8,388,172 13,553,439 25,017,610 23,140,561 252,045,816
Shareholders' equity
(deficit)................. 2,390,970 3,989,003 4,070,371 1,896,559 2,374,398 1,436,172 (63,129,976)
- ---------------
(a) Historical financial information for the five years in the period ended
December 31, 1996 and the nine months ended September 30, 1996 does not
include a provision for income taxes because, prior to the
25
Reorganization, BTI was 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.
(b) From 1987 until September 1997, the Company was subject to taxation under
Subchapter S of the Internal Revenue Code of 1986, as amended. As a result,
the net income of BTI, for federal and certain state income tax purposes,
was reported by and taxable directly to BTI shareholders, rather than to
BTI. The dividends were paid in part to provide funds for tax obligations
owed by BTI's shareholders as a result of BTI's income.
(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 the Company
believes to be representative of interest (estimated to be one-third of such
expense). For the nine months ended September 30, 1997, earnings were
insufficient to cover fixed charges by $4,165,090.
26
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 IN
THIS PROSPECTUS. THE COMPANY HAS INCLUDED EBITDA DATA IN THE FOLLOWING ANALYSIS
BECAUSE IT IS A MEASURE COMMONLY USED IN THE INDUSTRY. EBITDA REPRESENTS
EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION. 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
COMPANY BACKGROUND. BTI provides high quality long distance
telecommunications services at competitive prices. Since inception, BTI's
business strategy has been to focus primarily on small to medium-sized business
customers located in the southeastern United States, utilizing a sales and
marketing approach driven by an emphasis on customer relationships. Although
initially only providing long distance service, BTI has continually expanded its
service offerings, and now provides a wide array of integrated and wholesale
telecommunications services.
BTI currently has sales offices in 22 markets primarily in the southeastern
United States, along with switching operations centers in Atlanta, Dallas, New
York, Orlando and Raleigh. BTI has a fiber optic network concentrated within the
southeastern United States, primarily through lease agreements with
facilities-based carriers. BTI uses multiple carriers to obtain competitive
pricing and high quality service for its customers while maintaining built-in
flexibility and routing diversity to mitigate the impact of service
interruptions.
REVENUES. BTI generates its revenues primarily from: (i) the sale of
integrated telecommunications services, primarily to small and medium-sized
businesses; and (ii) the sale of wholesale telecommunications services,
primarily to other telecommunications carriers. For the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 1997, revenues from
integrated services represented approximately 95.1%, 95.0%, 82.7% and 60.2%,
respectively, of BTI's total revenue. During the past several years, market
prices for many telecommunications services have been declining, which is a
trend that the Company believes will likely continue. This decline will have a
negative effect on the Company's gross margin, which may not be offset
completely by savings from decreases in the Company's cost of services.
BTI's portfolio of integrated telecommunications services includes long
distance, data, Internet access, paging, AIN, operator and other enhanced
services. In order to capitalize on the excess capacity of its network in
off-peak hours, BTI markets long distance services to the residential market
through its Alliance Program for trade associations and professional
organizations and its Academic Edge Program for colleges and universities, and
through direct mail marketing of its dial-around long distance service. BTI
began adding local exchange services to its current array of integrated
telecommunications services in selected markets throughout the southeastern
United States beginning in October 1997. BTI is currently in the process of
installing a Lucent 5ESS local switch in Raleigh, where it will begin offering
switch-based local exchange services in late 1997. BTI will initially resell
ILEC services in its other target markets, and intends to install network
infrastructure to support local switched services as market conditions warrant.
Through 1995, BTI's direct sales compensation structure consisted of base
salary plus one-time commissions on each customer's initial monthly billings and
nominal residual commissions. During 1996, BTI redesigned its sales compensation
structure in order to provide sales representatives with greater long-term
incentives and to encourage stronger customer relationships. The new sales
commission structure, known as the Partner Program, compensates sales
representatives by offering a base salary for a ramp-up period, with higher
commissions on initial billings, followed by more significant residual
commissions. As the Company anticipated, the implementation of the new sales
commission structure initially caused increased turnover of sales
representatives and managers and resulted in decreased integrated services
revenues. However, there has been recent improvement in integrated services
revenues as a result of the new sales compensation structure and recent changes
in the sales management team. Although there can be no assurance, management
believes that this trend will continue.
27
BTI's portfolio of wholesale telecommunications services includes switched
and dedicated access services. BTI entered the wholesale services business to
leverage its network infrastructure for its integrated telecommunications
services. In 1996, BTI began to aggressively pursue wholesale revenues to
carriers, resellers and debit card providers. BTI has increased monthly
wholesale revenue from $.7 million in January 1996 to $6.9 million in September
1997.
OPERATING EXPENSES. The Company's primary operating expense categories
include cost of services and selling, general and administrative expenses
("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. By using multiple carriers
for its transmission capacity, BTI is able to maintain network diversity and
take advantage of least-cost traffic routing. In addition, in October 1997 BTI
entered into an agreement to lease on an IRU basis for the lesser of 25 years or
the life of the fiber approximately 3,200 route miles of fiber optic network to
be built over 18 months serving markets from New York to Miami and Nashville,
Tennessee. This network is expected to enable BTI to carry its intraregional
traffic over its own facilities, thereby reducing its costs of services by
decreasing payments to other carriers for the use of their facilities. Although
the initial gross margins on local services will be lower because the Company
will be reselling ILEC local services, the Company expects these margins to
improve as BTI begins to offer these services using its own local switching
facilities.
SG&A includes all infrastructure costs such as selling, customer support,
corporate administration, personnel, network maintenance, depreciation and
amortization and alternate sales channels. Selling expenses include commissions
for the Company's 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 the Company's
Corporate Partners (third party agents), 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 the Company incurs substantial capital expenditures
on its infrastructure and begins acquiring its own fiber optic network
facilities. In addition, depreciation and amortization also includes line access
fees, which represent installation charges paid primarily to ILECs for leased
fiber optic facilities.
In connection with the Transactions, the Company issued options to purchase
333,260 shares of Common Stock to certain individuals under the BTI 1994 Stock
Plan and recorded approximately $2.1 million in compensation expense with
respect thereto in quarter ended September 30, 1997. The Company expects to
repurchase certain of such options.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUE
Revenue increased 36.6% from $106.2 million for the nine months ended
September 30, 1996 to $145.1 million for the nine months ended September 30,
1997, primarily as a result of a $44.9 million increase in wholesale services
revenue. Revenue increased 36.6% from $106.2 million for the nine months ended
September 30, 1996 to $145.1 million for the nine months ended September 30,
1997, primarily as a result of a $44.9 million increase in wholesale services
revenue. This increase was partially offset by an anticipated decrease in
integrated services revenue resulting from the implementation of BTI's new sales
commission structure and price declines in retail long distance rates due to
competitive pressures. The increase in wholesale services revenue was a result
of an increase in both revenues from existing customers and sales to new
customers.
COST OF SERVICES
Cost of services increased 61.0% from $62.9 million for the nine months
ended September 30, 1996 to $101.2 million for the nine months ended September
30, 1997, primarily as a result of the increase in total call volume resulting
from increased wholesale revenue. Cost of services as a percentage of revenue
increased from 59.2% for the nine months ended September 30, 1996 to 69.8% for
the nine months ended September 30, 1997, primarily due to the increase in lower
margin wholesale revenue as a percentage of BTI's total revenues. Wholesale
revenue accounted for 39.8% of total revenue for the nine months ended September
30, 1997, up from 12.2% for the nine months ended September 30, 1996.
28
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased 7.4% from $40.7 million for the nine months ended
September 30, 1996 to $43.7 million for the nine months ended September 30,
1997, primarily due to the 1997 stock option compensation expense of $2.1
million discussed above and an increase in depreciation and amortization,
partially offset by certain cost containment measures implemented in the second
quarter of 1996. SG&A decreased as a percentage of total revenue from 38.3% for
the nine months ended September 30, 1996 to 30.1% for the nine months ended
September 30, 1997. Depreciation and amortization increased 36.4% from $3.3
million for the nine months ended September 30, 1996 to $4.5 million for the
nine months ended September 30, 1997. This increase is due primarily to capital
expenditures related to the addition of new switching operations centers in
Orlando and Dallas during 1996 and in New York during 1997. In addition, BTI
continues to invest in expanding its existing operations centers and
infrastructure due to increased traffic volume and expanded product offerings.
INTEREST EXPENSE
Interest expense was $1.4 million for the nine-month period ended September
30, 1996, as compared to $2.1 million for the nine-month period ended September
30, 1997, primarily due to increased borrowings during the latter period,
primarily to finance working capital and capital expenditures related to
continued expansion.
EBITDA
EBITDA decreased 20.6% from $5.9 million for the nine months ended
September 30, 1996 to $5.4 million for the nine months ended September 30, 1997.
The decrease is due primarily to an increase in cost of services, partially
offset by increased revenues.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
Revenue increased 29.9% from $114.5 million for 1995 to $148.8 million for
1996. This $34.2 million increase consists primarily of a $20.0 million increase
in wholesale revenues. The remaining $14.3 million net increase was generated by
improved integrated service revenues, primarily from sales to new customers and
increased sales to existing customers. The increase includes $5.0 million in new
revenue derived from alternate sales channels, $3.0 million of which was from
direct mail marketing of dial-around long distance services.
COST OF SERVICES
Cost of services increased 33.2% from $68.2 million for 1995 to $90.8
million for 1996, primarily due to the increase in total call volume from 1995
to 1996. Cost of services as a percentage of revenue increased from 59.5% for
1995 to 61.0% for 1996, primarily due to the increase in lower margin wholesale
revenue as a percentage of BTI's total revenues, partially offset by cost
reductions during 1996. Wholesale revenue accounted for 17.3% of BTI's total
revenue for 1996 as compared to 5.0% for 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased 20.3% from $44.7 million for 1995 to $53.8 million for 1996,
but decreased as a percentage of revenue from 39.1% in 1995 to 36.2% in 1996.
The $9.1 million increase was primarily due to increases in support and
operational costs for BTI's continued business infrastructure growth, including
the opening of additional sales offices. Depreciation and amortization increased
45.5% from $3.1 million for 1995 to $4.5 million for 1996. This increase is due
primarily to capital expenditures related to the addition of new switching
operations centers in Orlando and Dallas during 1996.
INTEREST EXPENSE
Interest expense increased from $1.3 million for 1995 to $1.7 million for
1996, primarily due to an increase of $11.5 million in BTI's outstanding debt
(including capital leases) from December 31, 1995 to December 31, 1996. The
additional outstanding indebtedness consisted primarily of indebtedness under
the Original Credit Facility to finance working capital and capital expenditures
related to continued expansion.
29
EBITDA
EBITDA increased 84.7% from $4.7 million for 1995 to $8.6 million for 1996.
The increase is due primarily to a decrease in BTI's SG&A as a percent of total
revenue offset by the increase in cost of services as a percentage of total
revenue.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE
Revenue increased 25.1% from $91.5 million for 1994 to $114.5 million for
1995. The increase of $23.0 million includes $21.8 million of sales of
integrated services primarily to new customers from the continued expansion of
BTI's direct sales force.
COST OF SERVICES
Cost of services increased 25.3% from $54.4 million for 1994 to $68.2
million for 1995. The change results from an increase in BTI's total call
volume, as the revenue mix remained relatively constant from 1994 to 1995. For
both periods, cost of services as a percentage of revenue was approximately
59.5%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased 32.9% from $33.7 million for 1994 to $44.7 million for 1995
increasing as a percentage of revenue from 36.8% in 1994 to 39.1% in 1995. This
$11.1 million increase was due to investments in the expansion of BTI's support
infrastructure and sales channels. During 1994 and 1995, BTI opened nine
additional sales offices, increasing its total sales offices to 21 at December
31, 1995. Depreciation and amortization increased 11.8% from $2.7 million for
1994 to $3.1 million for 1995 due to continued network equipment expansion.
INTEREST EXPENSE
Interest expense increased from $.7 million for 1994 to $1.3 million for
1995. The increase is due to an increase of $5.2 million in BTI's outstanding
debt and capital leases from December 31, 1994 to December 31, 1995.
EBITDA
EBITDA decreased 24.5% from $6.2 million for 1994 to $4.7 million for 1995.
The decrease is due primarily to an increase in BTI's SG&A as a percent of
revenues from 36.8% for 1994 to 39.1% for 1995, as a result of BTI's expansion
of its sales channels (including the opening of new direct sales offices) and
its network operations infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation in 1983, BTI has funded its operations and growth
primarily from cash flow from operations, capital leases and borrowings under
various credit facilities. For the years ended December 31, 1994 and 1995 and
the nine months ended September 30, 1997, BTI generated cash flow from operating
activities of $6.2 million, $9.4 million and $7.0 million, respectively. For the
year ended December 31, 1996, BTI used net cash of approximately $175,000 in
operating activities. Included in net cash used in operating activities for 1996
was a $7.4 million change in operating assets and liabilities, primarily
resulting from the $7.3 million growth in trade accounts receivable due to
increased revenues and slower collections from wholesale accounts.
Cash used in investing activities was $4.5 million, $10.7 million and $8.2
million for the years ended December 31, 1994, 1995, and 1996, respectively, and
$117.2 million for the nine months ended September 30, 1997. Cash used in
investing activities in 1997 included $74.1 million in restricted cash used to
secure the first six scheduled interest payments due on the Notes and $35.3
million related to the FiberSouth Acquisition. Other investing activities
consisted primarily of capital expenditures for the expansion of operations
centers and related support systems. In addition, cash used in investing
activities includes the capitalization of line access fees, which represent
installation charges paid primarily to ILECs for securing additional leased
fiber optic facilities.
Net cash used by financing activities was $1.7 million for the year ended
December 31, 1994, and net cash provided by financing activities was $1.6
million and $8.6 million for the years ended December 31, 1995 and
30
1996, respectively. Net cash provided by financing activities for the nine
months ended September 30, 1997 was $187.8 million, including $250.0 million of
cash provided by the Offering partially offset by $28.3 million of cash used for
the Share Repurchase. In 1995 and 1996, cash provided by financing activities
primarily consisted of net borrowings on working capital and long-term credit
facilities. In addition, the Company paid dividends of $2.6 million, $2.6
million, $2.0 million and $1.6 million for the years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1997, respectively. Since
1987, BTI has been subject to taxation under Subchapter S of the Internal
Revenue Code of 1986, as amended (the "Code"). As a result, the net income of
BTI, for federal and certain state income tax purposes, was reported by and
taxable directly to BTI shareholders, rather than to BTI. The dividends were
paid in part to provide funds for tax obligations owed by BTI's shareholders as
a result of BTI's income. In connection with the Transactions, in September
1997, BTI converted from S corporation to C corporation status. As a result, at
that time the Company became fully subject to federal and state income taxes,
and it recorded approximately $2.2 million in deferred income tax expense and
$2.8 million of deferred income tax liabilities. However, the Company will
continue to be required to reimburse BTI's shareholders for their tax
obligations arising from income earned by BTI while it was an S corporation. The
Company believes that any such reimbursements will not have a material adverse
effect on the Company's financial condition or results of operations.
In September 1997, BTI and GE Capital entered into the Credit Facility,
which provides BTI with a five-year $60.0 million senior secured, reducing,
revolving credit facility for working capital and other purposes, including
capital expenditures. The Credit Facility contains restrictions on the Company
and its subsidiaries, and requires the Company to comply with certain financial
tests and to maintain certain financial ratios. See "Risk Factors -- Restrictive
Covenants" and "Description of Credit Facility."
The Company expects to require significant capital for its capital
expenditure and working capital requirements. The Company currently estimates
that its aggregate capital requirements will total approximately $21.5 million
in the second half of 1997 and approximately $62.3 million for 1998. The Company
expects to make substantial capital expenditures thereafter and currently
estimates that its aggregate capital requirements for the three years ending
December 31, 2001 will be approximately $95 million. Capital expenditures will
be primarily for: (i) the build out of long haul fiber optic facilities; (ii)
the addition of facilities-based local exchange services, including the
acquisition and installation of switches and related equipment; (iii) market
expansion; (iv) the continued development of its existing operations centers to
service anticipated increased traffic volumes and increased geographic areas;
and (v) the continued development and expansion of infrastructure and systems to
support its operations. The actual amount and timing of the Company's capital
requirements may differ materially from the foregoing estimate as a result of
regulatory, technological or competitive developments (including market
developments and new opportunities) in the Company's industry. Although there
can be no assurance, management believes that proceeds from the Offering,
together with cash on hand, borrowings expected to be available under the Credit
Facility and cash flow from operations, will be sufficient to expand the
Company's business as currently planned for the next 12 months and for the
long-term. The Company may also require additional capital in the future (or
sooner than currently anticipated) for new business activities related to its
current and planned businesses, or in the event it decides to make additional
acquisitions or enter into joint ventures and strategic alliances. Sources of
additional capital may include cash flow from operations and public and private
equity offerings, and subject to provisions in the Indenture requiring the
Company to maintain certain financial ratios in order to incur additional
indebtedness (see "Description of the Exchange Notes -- Covenants"), may include
debt financings. See "Risk Factors -- Anticipated Future Negative Cash Flow
After Capital Expenditures," " -- Significant Capital Requirements,"
" -- Uncertainty of Additional Financing," " -- High Leverage," " -- Ability to
Service Debt" and " -- Restrictive Covenants."
EFFECTS OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of," requires the Company to review for impairment, and potentially write down,
the carrying values of long-lived assets and certain identifiable intangibles
(including goodwill) to be held and used by the Company whenever events or
changes in circumstances indicate that the carrying amount of any such asset may
not be recoverable. The Company adopted SFAS No. 121 effective January 1, 1996
with no material impact on the financial statements.
31
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value based method for financial accounting and reporting stock-based employee
compensation plans. Companies may elect to adopt the measurement criteria of
SFAS No. 123 for accounting purposes, thereby recognizing compensation expense
in results of operations on a prospective basis, or to disclose the pro forma
effects of the new measurement criteria. The Company has disclosed the pro forma
effects of the new measurement criteria in its financial statements for the nine
months ended September 30, 1997 to reflect certain stock options granted under
the Company's 1997 Stock Plan during the quarter ended September 30, 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," and SFAS No. 129, "Disclosure of Information about
Capital Structure." SFAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share. SFAS No. 129 incorporates
related disclosure requirements from APB Opinion No. 10, "Disclosure of
Long-Term Obligations," and SFAS No. 47, "Disclosure of Long-Term Obligations,"
for entities that were subject to the requirements for those standards. Both
statements are effective for fiscal years beginning after December 15, 1997. The
Company will adopt the statements effective January 1, 1998 and does not expect
adoption of the statements to have a significant impact on its earnings per
share calculation and disclosures.
INFLATION
The Company does not believe inflation has had a significant impact on the
Company's operations.
32
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement the Company has agreed to use
its best efforts to cause to be filed a registration statement with respect to
an offer to exchange the Initial Notes for senior debt securities of the Company
with terms substantially identical to the Initial Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions) and
to use its best efforts to have the Exchange Offer consummated not later than 60
days after such registration statement has been declared effective by the
Commission. In the event that applicable law or interpretations of the staff of
the Commission do not permit the Company to file the registration statement
containing this Prospectus or to effect the Exchange Offer, or if certain
holders of the Initial Notes notify the Company that they are not permitted to
participate in, or would not receive freely tradeable Exchange Notes pursuant
to, the Exchange Offer, the Company will use its best efforts to cause to become
effective the Shelf Registration Statement with respect to the resale of the
Initial Notes and to keep the Shelf Registration Statement effective until two
years after the original issuance of the Initial Notes. The interest rate on the
Initial Notes is subject to increase under certain circumstances if the Company
is not in compliance with its obligations under the Registration Rights
Agreement.
Each holder of the Initial Notes who wishes to exchange such Initial Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations in the Letter of Transmittal, including representations that (i)
any Exchange Notes to be received by it will be acquired in the ordinary course
of its business, (ii) it is not participating, does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, and (iii) it is not an "affiliate" as
defined in Rule 405 of the Securities Act, of the Company or, if it is an
affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. See "Description of
the Exchange Notes -- Exchange Offer; Registration Rights."
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that, except as
described below, Exchange Notes issued pursuant to the Exchange Offer in
exchange for Initial Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act; provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention or for the purpose of participating in a distribution
of the Exchange Notes cannot rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Unless an exemption from registration is otherwise available, any
such resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K under the Securities Act. This Prospectus may be used for an
offer to resell, resale or other retransfer of Exchange Notes only as
specifically set forth herein. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Initial Notes, where such Initial Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Initial Notes properly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
outstanding Initial Notes surrendered pursuant to the Exchange Offer. Initial
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Initial Notes except the Exchange Notes will be registered under
the Securities Act and hence will not bear legends restricting the
33
transfer thereof. The Exchange Notes will evidence the same debt as the Initial
Notes. The Exchange Notes will be issued under and entitled to the benefits of
the Indenture, which also authorized the issuance of the Initial Notes, such
that both series will be treated as a single class of debt securities under the
Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange.
As of the date of this Prospectus, $250.0 million aggregate principal
amount of the Initial Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Initial Notes.
There will be no fixed record date for determining registered holders of Initial
Notes entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Initial Notes which are not tendered for exchange in the Exchange Offer will
remain outstanding and continue to accrue interest and will be entitled to the
rights and benefits such holders have under the Indenture.
The Company shall be deemed to have accepted for exchange properly tendered
Notes when, as and if the Issuer shall have given oral or written notice thereof
to the Exchange Agent and complied with the relevant provisions of the
Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the Exchange Notes from the
Company. The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Initial Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions specified
below under " -- Certain Conditions to the Exchange Offer".
Holders who tender Initial Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Initial
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See " -- Fees and Expenses".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Initial Notes an announcement thereof, each prior to 9:00 a.m., New
York City time, on the next business day after the then effective Expiration
Date.
The Company reserves the right, in its sole discretion, to (i) delay
accepting for exchange any Initial Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
" -- Certain Conditions of the Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent or (ii) amend the terms of the Exchange Offer in any manner. Any
such delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice thereof to the registered
holders of Initial Notes. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer, depending upon the significance of the amendment and the manner
of disclosure to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 10 1/2% per annum from
September 17, 1997, the date of issuance of the Initial Notes that are tendered
in exchange for the Exchange Notes (or the most recent Interest Payment Date to
which interest on such Notes has been paid). Accordingly, holders of Initial
Notes that are accepted for exchange will not receive interest on the Initial
Notes that is accrued but unpaid at the time of tender, but such interest will
be payable on the first Interest Payment Date after the Expiration Date.
Interest on
34
the Exchange Notes will be payable semiannually in cash on each March 15 and
September 15, commencing March 15, 1998.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Initial Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of any Initial Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer;
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Initial Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Initial Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Initial
Notes not accepted for exchange for any reason will be returned without expense
to the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Initial Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified above. The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the Initial Notes as
promptly as practicable, such notice in the case of any extension to be issued
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable judgment. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Initial Notes
tendered, and no Exchange Notes will be issued in exchange for any such Initial
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of 1939
(the "TIA").
PROCEDURES FOR TENDERING
Only a holder of Initial Notes may tender such Initial Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) Initial Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or (ii) a timely confirmation of book-entry
transfer (a "Book-Entry Confirmation") of such Initial Notes, if such procedure
is available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth below under " -- Exchange Agent" prior to 5:00 p.m.,
New York City time, on the Expiration Date.
35
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder of Initial Notes to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Initial Notes, either make appropriate arrangements to register
ownership of the Initial Notes in such owner's name or obtain a properly
completed bond power from the registered holder of Initial Notes. The transfer
of registered ownership may take considerable time and may not be able to be
completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as defined
at the end of this paragraph) unless the Initial Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantor must be a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust issuer having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Initial Notes listed therein, such Initial Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Initial Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Initial Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Initial Notes and withdrawal of tendered
Initial Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Initial Notes not properly tendered or any Initial Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Initial Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Initial Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Initial Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Initial Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Initial Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holder, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In all cases, issuance of Exchange Notes for Initial Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of the Initial Notes or a timely Book-Entry
Confirmation of such Initial Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Initial Notes are
not accepted for exchange for any reason set forth in the terms and conditions
of the Exchange Offer or if Initial Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged
Initial Notes will be returned without expense to the tendering holder thereof
(or, in the case of Initial Notes tendered by book-entry transfer into the
Exchange Agent's account
36
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Initial Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Initial Notes by causing the
Book-Entry Transfer Facility to transfer such Initial Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under " -- Exchange Agent" on or prior to the Expiration Date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available or (ii) who cannot deliver their Initial Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Dates, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Initial Notes and the principal amount of Initial Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the Initial
Notes or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Initial Notes in proper form
for transfer or a Book-Entry Confirmation, as the case may be, and all
other documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Initial Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
" -- Exchange Agent". Any such notice of withdrawal must specify the name of the
person having tendered the Initial Notes to be withdrawn, identify the Initial
Notes to be withdrawn (including the principal amount of such Initial Notes) and
(where certificates for Initial Notes have been transmitted) specify the name in
which such Initial Notes were registered, if different from that of the
withdrawing holder. If certificates for Initial Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Initial Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and
37
number of the account at the Book-Entry Transfer Facility to be credited with
the withdrawn Initial Notes and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Issuer, whose
determination shall be final and binding on all parties. Any Initial Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Initial Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of Initial Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Initial Notes will be credited to an account maintained
with such Book-Entry Transfer Facility for the Initial Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Initial Notes may be retendered by following one of
the procedures described under " -- Procedures for Tendering" above at any time
on or prior to the Expiration Date.
EXCHANGE AGENT
First Trust of New York, National Association, has been appointed as
Exchange Agent of the Exchange Offer. Questions and request for assistance,
request for additional copies of this Prospectus or of the Letter of Transmittal
and requests for Notice of Guaranteed Delivery should be directed to the
Exchange Agent addressed as follows:
FOR INFORMATION BY TELEPHONE:
(212) 361-2894
BY HAND: BY MAIL:
First Trust of New York, National First Trust National
Association Association
100 Wall Street P.O. Box 64485
Suite 2000 St. Paul, Minnesota 55164-9549
New York, New York 10005
Attn: Corporate Trust Operations
BY OVERNIGHT COURIER: BY FACSIMILE:
First Trust National Association (612) 244-1537
Attn: Specialized Finance Attn: Specialized Finance
180 East Fifth Street Telephone: (800) 934-6802
St. Paul, Minnesota 55101
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile, telephone, in person or otherwise by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, and related fees and expenses.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Initial Notes for principal amounts not tendered or accepted for exchange are to
be delivered to, or are to be issued in the name of, any person other than the
registered holder of Initial Notes tendered, or if tendered Initial Notes are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
38
exchange of Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Initial Notes, as set forth (i) in the legend
thereon as a consequence of the issuance of the Initial Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws and (ii)
otherwise set forth under "Transfer Restrictions" in the Offering Memorandum
dated September 22, 1997 distributed in connection with the Initial Offering. In
general, the Initial Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Initial Notes
under the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act; provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
or understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
(i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or such securities laws have been complied
with. The Company has agreed, pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein, to register or qualify the
Exchange Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Exchange Notes reasonably requests in
writing.
39
BUSINESS
OVERVIEW
The Company is a holding company organized under North Carolina law in
August 1997 for the purpose of issuing the Notes. The Company's sole asset is
all of the outstanding capital stock of its subsidiary, BTI, which it acquired
in September 1997. Consequently, the business of the Company consists solely of
the business of BTI, a discussion of which follows.
BTI believes that it is a leading provider of telecommunications services
in the southeastern United States. BTI currently offers (i) integrated
telecommunications services, including long distance (domestic and
international, "1+" outbound dialing and toll-free service), data, Internet
access, paging, AIN, operator and other enhanced services, primarily to small
and medium-sized businesses, and (ii) wholesale telecommunications services,
including switched, dedicated access (private line and dedicated data
facilities) and special access services, primarily to telecommunications
carriers. The Company had pro forma revenues of approximately $149.9 million and
EBITDA of approximately $9.7 million for the year ended December 31, 1996, and
pro forma revenues of approximately $148.3 million and EBITDA of approximately
$6.7 million, for the nine months ended September 30, 1997. For the five years
ended December 31, 1996, BTI's revenues increased at a compound annual growth
rate of approximately 37.6%. As of September 30, 1997, BTI provided its services
to over 31,000 business customers and over 150 telecommunications carriers and
other end-user customers.
In October 1997, BTI began to add local exchange services to its current
array of integrated telecommunications services where authorized. With the
addition of local exchange, BTI will be able to offer "one-stop" integrated
telecommunications services, tailored to the individual needs of small to
medium-sized businesses. BTI began to offer local exchange services in selected
markets throughout the southeastern United States in October 1997. BTI is
currently in the process of installing a Lucent 5ESS local switch in Raleigh,
where it will begin offering switch-based local exchange services in late 1997.
BTI will initially resell ILEC services in its other target markets, and as and
if local exchange market share is gained, BTI intends to install network
infrastructure to support local switched services in those markets.
BTI entered the wholesale services business to leverage its network
infrastructure for its integrated telecommunications services business. BTI
provides wholesale services to telecommunications carriers and other end-user
customers, including Nextel Communications, GTE, Sprint Mid-Atlantic, BellSouth
Mobility, UUNET, WorldCom, PSINet, ITC DeltaCom and CCI (McLeod). BTI provides
access services over its fiber optic network, which currently extends
approximately 65 route miles in North Carolina, linking Raleigh, Durham and the
Research Triangle Park area.
BTI operates an advanced telecommunications network including digital
switches in Atlanta, Dallas, New York, Orlando and Raleigh interconnected by
leased transmission capacity from major facilities based carriers (including
AT&T, MCI and WorldCom). BTI uses multiple carriers and multiple switches in
order to improve network redundancy and re-route capability. BTI leases network
capacity either on its own or through its membership in the ACCA, an 11-member
trade association co-founded by the Company 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 long distance providers in the United States. In October 1997 BTI entered
into an agreement to lease on an IRU basis for the lesser of 25 years or the
life of the fiber approximately 3,200 route miles of fiber optic network to be
built over 18 months serving markets from New York to Miami and Nashville,
Tennessee. The Company believes that this network will enable it to carry its
intraregional telecommunications traffic over BTI's facilities, thereby reducing
its cost of services by decreasing payments to other carriers for use of their
transport facilities.
BUSINESS STRATEGY
BTI's objective is to strengthen the market position it believes that it
holds as a leading provider of telecommunications services in the southeastern
United States. To achieve this objective, BTI intends to (i) leverage its
current market position, extensive customer base, brand name and network
capacity to aggressively penetrate the local exchange market and enter new
geographic markets while further penetrating existing markets and (ii) expand
its telecommunications network to lower the cost of providing services to its
customers. As part of its expansion strategy, BTI may make acquisitions and
enter into joint ventures or strategic
40
alliances with businesses that are related or complementary to its current
operations. The principal elements of BTI's business strategy include:
PROVIDING INTEGRATED TELECOMMUNICATIONS SERVICES TO SMALL AND MEDIUM-SIZED
BUSINESS CUSTOMERS. BTI believes that there is substantial and growing demand,
particularly in the southeastern United States, among small and medium-sized
business customers for an integrated package of services. BTI offers long
distance, data, Internet access, paging, AIN, operator and other enhanced
services to small and medium-sized businesses, and began to add local telephone
service to its current service offerings in October 1997. BTI believes that
bundling local telephony with its current array of telecommunications services
will enable it to offer "one-stop" integrated telecommunications service and
allow it to leverage its existing infrastructure, increase customer retention
and better penetrate its target markets.
RAPIDLY PENETRATING THE LOCAL EXCHANGE MARKET. BTI intends to be among the
first providers of CLEC services in key markets in the southeastern United
States and to leverage its sales force and existing customer base to rapidly
gain CLEC market share. BTI began offering local exchange services in selected
markets throughout the southeastern United States beginning in October 1997. BTI
currently is in the process of installing a Lucent 5ESS local switch in Raleigh,
where it will begin offering switch-based local exchange services in late 1997.
Following its "smart-build" strategy, BTI will initially resell ILEC services in
its other target markets, and intends to install network infrastructure to
support local switched services as market conditions warrant.
"SMART-BUILDING" ITS NETWORK EXPANSION. BTI's strategy since its inception
has been to add revenue-producing customers before building or acquiring
additional network capacity. BTI believes that using this "smart-build" strategy
reduces the risks associated with speculative network expansion and allows it to
focus its capital expenditures in markets where network expansion will provide
competitive or cost advantages. Given BTI's favorable experience leasing network
capacity at competitive rates, through the ACCA and otherwise, BTI has typically
chosen to lease network capacity to enter new markets prior to building or
purchasing capacity. Following its "smart-build" strategy, in October 1997 BTI
entered into an agreement to lease on an IRU basis for the lesser of 25 years or
the life of the fiber approximately 3,200 route miles of fiber optic network to
be built over 18 months serving markets from New York to Miami and Nashville,
Tennessee. This network will enable BTI to carry its intraregional
telecommunications traffic over its own facilities, thereby reducing its cost of
services by decreasing payments to other carriers for use of their transport
facilities. BTI also intends to follow its "smart-build" strategy in entering
the local exchange market.
BUILDING MARKET SHARE BY FOCUSING ON PERSONALIZED SALES, MARKETING AND
CUSTOMER SERVICE. BTI believes that the key to revenue growth in its target
markets is capturing and retaining customers through effective, personalized
sales, marketing and customer service programs. BTI's direct sales force markets
BTI's entire range of services and is responsible and rewarded for obtaining and
maintaining face-to-face relationships with business customers. BTI seeks to
build long-term relationships with its customers by responding rapidly and
creatively to their telecommunications needs. BTI currently has 22 sales offices
staffed by representatives trained in marketing BTI's services and providing
comprehensive customer service and support. BTI's customer-support software and
network architecture give BTI personnel, along with its dealers and agents,
immediate access to customer data, allowing for quick and effective response to
customer requests and needs. This software also permits BTI to provide its
customers one fully integrated monthly billing statement for all of its current
services and is expected to permit the inclusion of local exchange service as
well.
FOCUSING ON THE SOUTHEASTERN UNITED STATES. BTI intends to continue to
focus on the high-growth southeastern United States in order to leverage its
existing market presence and telecommunications network in the region. In 1996,
BTI derived over 75% of its revenue from North Carolina, South Carolina,
Georgia, Florida and Virginia. BTI believes that its regional focus will enable
it to take advantage of economies of scale in network infrastructure, operations
and maintenance, sales, marketing and management. BTI also believes that its
regional focus will enable it to further develop its long-standing customer and
business relationships in the region. BTI's market presence in the southeastern
United States should provide opportunities for BTI to increase revenues and gain
market share in the region.
LEVERAGING PROVEN MANAGEMENT TEAM. The Company's management team consists
of experienced telecommunications executives led by Peter T. Loftin, Chairman
and Chief Executive Officer of the Company, who founded BTI 13 years ago. Other
members of the team include R. Michael Newkirk, President and Chief Operating
Officer, H.A. (Butch) Charlton, Senior Vice President, Sales, and Brian K.
Branson, Chief Financial
41
Officer. These executives collectively have over 60 years of experience in the
telecommunications industry. See "Management."
MARKET POTENTIAL
The market for local exchange services consists of a number of distinct
service components. These service components are defined by specific regulatory
tariff classifications including: (i) local network services, which generally
include basic dial tone, local area charges, enhanced calling features and
private line services (dedicated point-to-point intraLATA service); (ii) network
access services, which consist of access provided by local exchange carriers to
long distance network carriers; (iii) long distance network services, which
include intraLATA long distance calls; and (iv) other varied services, including
the publication of "white page" and "yellow page" telephone directories and the
sale of business telephone equipment. Industry sources have estimated that the
1995 aggregate revenues of all local exchange carriers approximated $95 billion.
Until recently, there was virtually no competition in the local exchange
markets. In addition, the FCC reported that total long distance (interLATA)
service revenues in the United States in 1995 were $83.8 billion (which includes
network access revenues paid to local exchange carriers).
SERVICES
BTI offers (i) integrated telecommunications services, which currently
include long distance, data, Internet access, paging, AIN, operator and other
enhanced services, with plans to add local exchange services in late 1997, and
(ii) wholesale telecommunications services, including switched, dedicated access
and special access services. For the nine months ended September 30, 1997,
integrated telecommunications services and wholesale services represented 60.2%
and 39.8%, respectively, of the Company's total pro forma revenues.
INTEGRATED TELECOMMUNICATIONS SERVICES. As of September 30, 1997, BTI
provided integrated telecommunications services to over 31,000 small and
medium-sized business customers located primarily in the southeastern United
States and long distance services to over 27,000 residential customers. BTI's
current and planned services include:
LONG DISTANCE. BTI offers a full range of domestic and international
long distance services, including "1+" outbound dialing (switched and
dedicated line) and inbound toll-free service.
LOCAL SERVICES. BTI began offering local exchange services, including
local dial tone and enhanced features such as call forwarding, call
waiting, caller ID and voice mail, in selected markets throughout the
southeastern United States in October 1997. See " -- Implementation of
Local Telecommunications Services."
DATA SERVICES. BTI offers advanced data transmission services, such as
local area networks ("LANs") and wide area networks ("WANs"), to its
customers via dial-up, dedicated point-to-point and frame relay services.
INTERNET ACCESS. BTI offers dial-up and dedicated Internet access and
Web hosting services. The Web browser offered by BTI uses "softcasting(tm)"
to automatically download the latest version of the browser software each
time a user logs on.
PAGING. BTI offers advanced wireless paging services, including
digital and alphanumeric paging, PIN services, voicemail, out-dial
capability, locator service, fax-on-demand and broadcast faxing, through
its own platform facilities in Atlanta.
ADVANCED INTELLIGENT NETWORK APPLICATIONS. BTI offers AIN
functionality and services tailored to the individual needs of its
customers. Services include NPA/NXX routing and menu routing, virtual
private networks and other advanced custom applications.
OPERATOR SERVICES. BTI offers owners of pay telephones, and
multi-telephone facilities, such as hotels, hospitals and universities,
live or automated operators to assist their patrons in placing outbound
long distance calls and to transmit the calls over BTI's network.
OTHER ENHANCED SERVICES. BTI offers conference calling services
(including toll-free access and valet, sub-conferencing and transcription
services), prepaid calling cards, and enhanced calling card services
42
(including features such as voice and fax mail, voice-activated speed
dialing, conference calling and network voice messaging).
WHOLESALE SERVICES. As of September 30, 1997, BTI provided wholesale
switched services to over 50 telecommunications carriers and dedicated access
and special access and private line services to over 100 telecommunications
carriers and other end-user customers, including Nextel Communications, GTE,
Sprint Mid-Atlantic, BellSouth Mobility, UUNET, WorldCom, PSINet, ITC DeltaCom
and CCI (McLeod). BTI's wholesale switched services include origination,
termination, Signaling System 7 ("SS7") connectivity and LATA transport
services. BTI's access services include dedicated access and special access
services. Dedicated access services include end-user to end-user private line
and dedicated data facilities. Special access services include
telecommunications lines that link the points-of-presence ("POPs") of one long
distance carrier, or the POPs of different long distance carriers, in a market
as well as lines that connect an end user to the local POP of its selected long
distance carrier. Private line services provide telecommunications connectivity
between various locations of a customer's operations to internally transmit
voice, video or data traffic.
IMPLEMENTATION OF LOCAL TELECOMMUNICATIONS SERVICES
BTI began offering local exchange services in selected markets throughout
the southeastern United States beginning in October 1997, initially by reselling
ILEC services in its target markets. BTI is currently in the process of
installing a Lucent 5ESS local switch in Raleigh, where it began offering
switch-based local exchange services in October 1997. BTI intends to install
network infrastructure to support local switched services in other markets as
market conditions warrant.
In connection with offering local exchange services, BTI has entered into
the BellSouth Interconnection Agreement to (i) resell BellSouth's local exchange
services and (ii) interconnect BTI's network with BellSouth's network for the
purpose of gaining access to the unbundled network elements necessary to provide
local exchange services. The BellSouth Interconnection Agreement contains "most
favored nation" provisions which grant BTI the right to obtain the benefit of
any arrangements entered into during the term of the agreement between BellSouth
and any other carrier that materially differ from the rates, terms or conditions
of the BellSouth Interconnection Agreement. The BellSouth Interconnection
Agreement expires in January 1999. However, the Interconnection Agreement
requires that no later than January 2, 1998 the parties shall commence the
negotiation of renewal terms to begin January 2, 1999, with the terms and
conditions of the existing BellSouth Interconnection Agreement to continue until
the terms for renewal are agreed upon.
BTI's ability to provide local switched services in its other target
markets is dependent upon obtaining favorable interconnection agreements with
local exchange carriers. BTI has entered into interconnection agreements with
GTE and Sprint, and is currently negotiating interconnection agreements with
other local exchange carriers such as Bell Atlantic. Changes in the regulatory
environment, including the recent Eighth Circuit Court decision could make
negotiating such agreements more difficult and protracted, and there can be no
assurance that BTI will be able to obtain interconnection agreements on terms
acceptable to the Company. See "Risk Factors -- Risks Related to Local Services
Strategy," " -- Regulation" and " -- Dependence on Incumbent Local Exchange
Carriers" and "Business -- Regulation."
SALES AND MARKETING
INTEGRATED TELECOMMUNICATIONS SERVICES. BTI focuses its retail sales
efforts on small to medium-sized businesses in the southeastern United States.
BTI believes that it can effectively compete in this market based upon a
combination of service, product diversity, price and reliability. BTI markets
its integrated telecommunications services primarily through two channels: BTI's
direct sales force (the "Partner Program") and its network of independent
dealers (the "Corporate Partner Program"). BTI also markets long distance
services to the residential market through its Alliance Program and Academic
Edge Program, as well as by direct mail.
43
In 1995, 1996 and the nine months ended September 30, 1997, BTI's direct
sales force generated 72.9%, 69.7% and 63.6% of integrated services revenues,
respectively. BTI's sales personnel call on prospective and existing business
customers, conduct analyses of business customers' telecommunications usage
histories and service needs, and demonstrate how BTI's various service packages
will improve a customer's communications capabilities in a cost-effective
manner. Sales personnel identify potential business customers by several
methods, including customer referral, market research, telemarketing and other
networking alliances such as endorsement agreements with trade associations and
local chambers of commerce. BTI's sales personnel work closely with BTI's
engineers and field support specialists to address customers' network and
service delivery needs and to design new service products and applications for
customers. BTI employed 230 full-time representatives as of September 30, 1997,
including 209 direct sales personnel and 21 field support specialists, in sales
offices located in:
Charlotte, NC
Greensboro, NC
Greenville, NC
Raleigh, NC
Wilmington, NC
Charleston, SC
Columbia, SC
Greenville, SC
Atlanta, GA
Ft. Lauderdale, FL
Jacksonville, FL
Orlando, FL
Tampa, FL
Norfolk, VA
Richmond, VA
Roanoke, VA
Vienna, VA
Knoxville, TN
Nashville, TN
Dallas, TX
Houston, TX
Albany, NY
BTI's Corporate Partner Program, established in 1992, is a network of
independent telephone equipment vendors and other agents authorized by BTI to
market its products and services. As of September 30, 1997, approximately 300
dealers were participating in the Corporate Partner Program. Authorized dealers
receive recurring commissions based on products and services sold, volume of
usage and retention of the customer. In 1995, 1996 and the nine months ended
September 30, 1997, the Corporate Partner Program generated 24.6%, 28.0% and
33.9% of integrated services revenues, respectively. BTI has established dealer
service offices staffed with dealer managers who actively recruit dealers and
field support specialists who handle all customer service and billing activities
associated with sales made under the Corporate Partner Program. BTI has dealer
service personnel in its sales offices in Orlando, Florida; Atlanta, Georgia;
Raleigh, North Carolina; Dallas, Texas; and Vienna, Virginia.
BTI's direct sales force and its authorized dealer agents are trained to
emphasize BTI's customer-focused sales and customer service approach. BTI
reinforces this approach by tying a portion of each sales representative's and
dealer agent's compensation directly to the longevity of their customer
accounts. BTI's marketing strategy is built upon the belief that customers
prefer to have one company serve all of their telecommunications needs. As part
of this strategy, BTI generally assigns to each customer its own dedicated field
support specialist, thereby providing the customer with a single point of
contact to address its telecommunications needs with the right mix of products
and services in a timely manner. The Company believes that this personalized
attention to a business needs, coupled with BTI's ability to provide one fully
integrated billing statement for all of the services that it offers, is very
appealing to both existing and prospective customers.
In order to capitalize on the excess capacity of its network in off-peak hours,
BTI markets long distance services to residential accounts through its Alliance
Program for trade associations and professional organizations and its Academic
Edge Program for colleges and universities, and through direct mail marketing of
its dial-around long distance service. By utilizing off-peak network capacity
and existing infrastructure, these residential-targeted programs produce
incremental revenue for the Company without materially increasing fixed network
costs. As of September 30, 1997, BTI had over 1,000 residential customers
through its Alliance Program and over 6,000 residential customers through its
Academic Edge Program. BTI's Alliance Program enables customers who are members
of organizations that participate in the program to contribute a small portion
of their monthly bill to help fund their organization. As of September 30, 1997,
there were over 160 associations participating in the Alliance Program.
Similarly, BTI's Academic Edge Program was launched in 1994 and caters to the
specialized needs of colleges and universities. Under the program, BTI provides
a revenue share to participating colleges and universities in return for their
selecting BTI as an official campus telecommunications service provider. As of
September 30, 1997, there were over 30 colleges and universities
participating in the Academic Edge Program. BTI recently began direct mail
marketing its dial-around service which enables customers to use BTI's long
distance services without changing their presubscribed long distance carrier by
dialing BTI's five
44
digit access code before dialing the number they are calling. BTI markets its
integrated services through print and radio advertisements, event sponsorships,
trade journals, direct mail and trade forums.
WHOLESALE SERVICES. BTI established a wholesale service sales force in
November 1995. This group markets BTI's wholesale services to telecommunications
carriers and other end-user customers. The Company believes it can compete
effectively in this market based on a combination of price, reliability,
advanced technology, route diversity, ease of ordering and customer service. BTI
markets its wholesale services primarily through six direct sales personnel and
three support specialists located in BTI's sales office in Raleigh. In general,
these sales professionals locate potential customers for BTI's wholesale
services through customer referrals, trade shows and industry alliances. When
calling on a potential customer, BTI's sales professionals work with network
engineers to gain a better understanding of the customer's operations and bulk
telecommunications transmission needs to develop innovative application-specific
solutions to each customer's requirements. BTI markets its wholesale services
through print and radio advertisements, event sponsorships, trade journals,
direct mail and trade forums.
NETWORK FACILITIES
BTI operates an advanced telecommunications network including five digital
switches interconnected by leased transmission capacity. BTI currently has a DSC
DEX 600E tandem switch in Raleigh and DSC DEX 600 switches in Atlanta, Dallas,
New York and Orlando. Following its "smart-build" strategy, BTI may in the
future add new switches in selected markets where the volume of its customer
traffic makes such investments economically viable. BTI has deployed a gateway
pair of DSC Signaling Transfer Points ("STPs") in Atlanta and Raleigh to provide
SS7 common channel signaling throughout its network. The SS7 signaling system
reduces connect time delays and provides additional technical capabilities and
efficiencies for call routing. BTI's network has also been designed to use AIN
technology to allow BTI greater flexibility in data management and feature
development. BTI's investment in digital switching, SS7 signaling and AIN
technology has significantly increased network capacity, which has lowered the
cost of providing services and enabled BTI to sell excess capacity to other
telecommunications carriers.
BTI leases fiber optic network capacity from major facilities-based
carriers (including AT&T, MCI and WorldCom) either on its own or through its
membership in the ACCA, an 11-member trade association co-founded by BTI 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 long distance providers in the United
States. In October 1997 BTI entered into an agreement to lease on an IRU basis
for the lesser of 25 years or the life of the fiber approximately 3,200 route
miles of fiber optic network to be built over 18 months serving markets from New
York to Miami and Nashville, Tennessee. BTI believes that this network will
enable it to carry its intraregional telecommunications traffic over its own
facilities, thereby reducing its cost of services by decreasing payments to
other carriers for use of their transport facilities. The extent and manner of
expansion of BTI's fiber optic network will be based on various factors,
including: (i) the number of its customers and volume of their
telecommunications traffic in a market; (ii) the anticipated operating cost
savings associated with the transmission of the telecommunications traffic in a
given area using Company-owned facilities in lieu of capacity purchased from
other operators; and (iii) the expenditures required to acquire (by
construction, purchase or long-term lease) the required network facilities.
BTI has installed a fiber optic network extending approximately 65 route
miles in North Carolina, linking Raleigh, Durham and the Research Triangle Park
area, to provide services in its Raleigh market. BTI has built this network in a
ring configuration in order to ensure redundancy, deploying throughout a
self-healing SONET architecture, high-quality fiber and advanced transmission
electronics.
COMPETITION
The telecommunications industry is highly competitive. BTI competes
primarily on the basis of customer service, price, product availability,
reliability and variety of service offerings. The ability of BTI to compete
effectively will depend on its ability to maintain high quality services at
prices generally equal to or below those charged by its competitors. In
particular, price competition in the integrated telecommunications services and
wholesale services markets has generally been intense. Many of BTI's competitors
have substantially greater financial, personnel, technical, marketing and other
resources, larger numbers of established customers and more prominent name
recognition than BTI and utilize more extensive transmission networks than BTI.
In particular,
45
RBOCs such as BellSouth are now allowed to provide interLATA long distance
services outside their home regions, as well as interLATA mobile services within
their regions. They will be allowed to provide interLATA long distance services
within their regions after meeting certain requirements of the
Telecommunications Act intended to foster opportunities for local telephone
competition. The RBOCs already have extensive fiber optic cable, switching, and
other network facilities in their respective regions that can be used for their
long distance services. In addition, other new competitors, such as ILECs
(outside their home regions), CLECs, switchless resellers, satellite carriers,
public utilities and cable companies, may enter BTI's current or future markets.
BTI's principal competitor for local exchange services is the ILEC in the
particular market, including BellSouth in virtually all of BTI's initial target
markets. The ILECs will enjoy substantial competitive advantages arising from
their historical monopoly position in the local telephone market, including
their preexisting customer relationship with all or virtually all end users.
Furthermore, BTI will be highly dependent on the competing ILEC for local
network facilities and wholesale services required in order for BTI to assemble
its own products. See "Risk Factors -- Dependence on Incumbent Local Exchange
Carriers." BTI will also face competition from other CLECs, including US LEC,
Intermedia, MCI Metro, and Time Warner, some of whom have already established
local operations in BTI's target markets.
Large long distance carriers, such as AT&T, MCI and Sprint, have begun to
offer a package of local and long distance telecommunications services. In
addition, ILECs are expected to compete in each other's markets in some cases.
For example, in the future RBOCs may provide local services within their
respective geographic regions in competition with independent telephone
companies, as well as outside their regions. BellSouth recently announced its
intention to establish its own CLEC to obtain pricing flexibility to compete in
areas served by the Company. Wireless telecommunications providers may develop
into effective substitutes for wireline local telephone service. AT&T has
announced plans to offer local services using a new wireless technology. AT&T's
proposed wireless system would link residential and business telephones via
radio transmissions to the AT&T network. If successful, this new service could
further enhance AT&T's ability to market, on a nationwide basis, "one-stop"
telecommunications services.
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the telecommunications industry could also increase the
level of competition faced by BTI or BTI's wholesale customers. In December
1996, WorldCom, a national long distance carrier, acquired MFS Communications
Company, Inc., one of the largest CLECs, and, in November 1997, WorldCom, and
MCI announced their agreement to merge. In March 1997, BellSouth and IBM
announced an alliance to provide Internet and Intranet services to businesses in
the southern United States. The telecommunications market is very dynamic, and
additional competitive changes are likely in the future.
REGULATION
OVERVIEW. BTI is subject to federal, state and local regulation. The FCC
exercises jurisdiction over all facilities of, and services offered by,
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain some jurisdiction over the same facilities
and services to the extent they are used to originate or terminate intrastate
common carrier communications. Local governments may require BTI to obtain
licenses, permits or franchises regulating the use of public rights-of-way
necessary to install and operate its networks.
BTI holds various federal and state regulatory authorizations and often
joins other industry members in seeking regulatory reform at the federal and
state levels to open additional telecommunications markets to competition.
BTI provides certain competitive access services as a private carrier on a
non-regulated basis. In general, a private carrier is one that provides services
to customers on a individually negotiated contractual basis, as opposed to a
common carrier that provides services to the public on the basis of generally
available rates, terms and conditions. The Company believes that BTI's private
carrier status is consistent with applicable federal and state laws, as well as
regulatory decisions interpreting and implementing those laws as of the date of
this Prospectus. As a result of the Telecommunications Act of 1996 and similar
state statures and regulatory proceedings, differences between the provision of
telecommunications services as a private carrier versus a non-dominant carrier
have significantly diminished. Therefore, the Company believes that, should laws
or regulatory
46
interpretations change in the future to reclassify BTI's regulatory status,
compliance with such reclassification would not have a material adverse effect
on either the Company's results of operations or financial condition.
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 existing 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 smaller
telephone companies may seek suspension or modification of these duties, and
some companies serving rural areas are exempt from these duties. Some duties are
also imposed on non-incumbent local exchange carriers, such as BTI. The duties
created by the Telecommunications Act include reciprocal compensation, resale,
interconnection, unbundled access, 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 negotiation and pricing of interconnection agreements have been
vacated by the U.S. Eighth Circuit Court of Appeals. 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 interLATA long distance services by the RBOCs and the General
Telephone Operating Companies ("GTOCs"). The RBOCs are now permitted to provide
interLATA long distance service outside those states in which they provide local
exchange service ("out-of-region long distance 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 RBOCs will be allowed to provide
long distance service within the regions in which they also provide local
exchange service ("in-region service") upon specific approval of the FCC and
satisfaction of other conditions, including a checklist of interconnection
requirements. BellSouth has announced its intention to seek such authority by
January 1998. The GTOCs are permitted to enter the long distance market without
regard to limitations by region, although regulatory approvals otherwise
applicable to the provision of long distance service will need to be obtained.
The GTOCs are also subject to the provisions of the Telecommunications Act that
impose interconnection and other requirements on local exchange carriers.
The Telecommunications Act imposes certain restrictions on the RBOCs in
connection with the RBOCs' entry into long distance services. Among other
things, the RBOCs must pursue such activities 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 RBOCs 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 RBOCs must obtain in-region long
distance authority before jointly marketing local and long distance services in
a particular state. Additionally, AT&T and other major carriers serving more
than 5% of the nation's presubscribed long distance access lines are also
restricted, under certain conditions, from packaging their long distance
services and local services provided over RBOC facilities. These restrictions do
not, however, apply to the Company because it does not serve more than 5% of the
nation's presubscribed access lines.
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, ILECs,
including the RBOCs, are, as of the date of this Memorandum, considered dominant
carriers for the provision of interstate access and interexchange services,
while other interstate service providers, such as the Company, are considered
non-dominant carriers. The FCC has recently proposed that the RBOCs offering
out-of-region interstate long distance services be regulated as non-dominant
carriers, as long as such services are offered by an affiliate of the RBOC 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.
As a non-dominant carrier, BTI may install and operate facilities for the
transmission of domestic interstate communications without prior FCC
authorization, although FCC authorization is required for the provision of
international telecommunications by non-dominant carriers. BTI has obtained FCC
authority to provide international services. Services of non-dominant carriers
are subject to relatively limited regulation by the FCC.
47
As of the date of this Memorandum, 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. BTI must offer its interstate
services on a nondiscriminatory basis, at just and reasonable rates, and remains
subject to FCC complaint procedures. Pursuant to these FCC requirements, BTI has
filed and maintains with the FCC a tariff for its interstate 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 BTI maintain tariffs
on file with the FCC for domestic interstate interexchange services. The FCC's
order was issued pursuant to authority granted to the FCC in the
Telecommunications Act to "forebear" from regulating any telecommunications
service provider if the FCC determines that the public interest will be served.
Following a nine-month transition period, relationships between carriers and
their customers will be set by contract. Several parties formally requested the
FCC to reconsider its order, and MCI, Sprint and The American Carriers Telephone
Association have separately appealed the FCC's order to the United States Court
of Appeals for the District of Columbia Circuit. On February 13, 1997, the
United States Court of Appeals for the District of Columbia Circuit stayed the
FCC's order pending judicial review of the appeals. If the appeals are
unsuccessful and the FCC's order becomes effective, BTI believes that the
elimination of the FCC's tariff requirement will permit the Company to respond
more rapidly to changes in the marketplace. In the absence of tariffs, however,
BTI will be required to obtain agreements with its customers regarding many of
the terms of its existing tariffs, and uncertainties regarding such new
contractual terms could increase the risk of claims against BTI from its
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 "Universal Service Order"). The Universal Service Order
affirmed the policy principles for universal telephone service set forth in the
Telecommunications Act, including quality service, affordable rates, access to
advanced services, access in rural and high-cost areas, equitable and
non-discriminatory contributions, specific and predictable support mechanisms,
and access to advanced telecommunications services for schools, health care
providers and libraries. The Universal Service Order added "competitive
neutrality" to the FCC's universal service principles by providing that
universal service support mechanisms and rules should not unfairly advantage or
disadvantage one provider over another, nor unfairly favor or disfavor one
technology over another. The Universal Service Order also requires all
telecommunications carriers providing interstate telecommunications services,
including the Company, to contribute to universal service support. Such
contributions will be assessed based on interstate and international end-user
telecommunications revenues. The Company does not expect the Universal Service
Order to have a material adverse effect on the Company.
The FCC also imposes prior approval requirements on transfers of control
and assignments of operating authorizations. 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 the Company's 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 (the "Initial Interconnection
Decisions"), has ordered the RBOCs 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, interexchange carrier or end user
seeking such interconnection for the provision of interstate access services. As
a result of this decision and the Telecommunications Act, once BTI has entered
into interconnection agreements with local exchange carriers, BTI will be able
to reach most business customers in its metropolitan service areas and can
expand its potential customer base. The FCC has imposed mandatory virtual
collocation obligations on the local exchange carriers. Virtual collocation is a
service in which the local exchange carrier leases or purchases equipment
designated by the interconnector and exerts complete physical control over this
equipment, including central office installation, maintenance and repair. Some
ILECs have voluntarily filed tariffs making "physical collocation" available,
enabling the interconnector to place its equipment in the central office space
of these ILECs. The Telecommunications Act now requires most ILECs to offer
physical collocation.
48
Subsequent to the enactment of the Telecommunications Act, the FCC began a
series of expedited rulemaking proceedings to implement the requirements of the
Telecommunications Act concerning interconnection with local exchange carrier
facilities and other essential terms of the relationships between competing
local carriers. On August 8, 1996, the FCC adopted the Interconnection Decision
to implement the interconnection, resale and number portability provisions of
the Telecommunications Act. Certain provisions of these rules were appealed to
various federal courts of appeals. The Eighth Circuit Court has vacated certain
provisions of the Interconnection Decision, 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 ILECs and other
carriers. All other provisions of the Interconnection Decision remain in effect.
However, the Eighth Circuit Court decision may act to reduce the role of the FCC
in fostering competition in the local service market, including the FCC's
ability to take enforcement action if the Telecommunications Act is violated,
and increases the role of the PUCs. The overall impact of the Eighth Circuit
Court decision on the Company cannot yet be determined and there can be no
assurance that it will not have a material adverse affect on the Company. 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.
In connection with the Initial Interconnection Decisions, the FCC granted
local exchange carriers additional flexibility in pricing their interstate
special and switched access services on a central office specific basis. Under
this pricing scheme, local exchange carriers may establish pricing zones based
on access traffic density and charge different prices for central offices in
each zone. Although there can be no assurance, the Company anticipates that the
FCC will grant local exchange carriers increasing pricing flexibility as the
number of interconnection agreements and competitors increases. On May 7, 1997,
the FCC announced that it is adopting new pricing rules that restructure local
exchange carrier switched transport rates in order to facilitate competition for
switched access. In addition, the FCC adopted rules that will require ILECs to
substantially decrease the prices they charge for switched and special access,
and that will change how access charges are calculated. These changes are
intended to reduce access charges paid by interexchange carriers to local
exchange companies and shift certain usage-based charges to flat-rate, monthly
per-line charges. The FCC has also requested comments on whether to impose
usage-sensitive charges on Internet service providers that are presently exempt
from access charges.
STATE REGULATION. BTI is subject to various state laws and regulations.
Most public utilities commissions subject providers such as BTI 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, BTI also is required to file tariffs setting forth the terms, conditions
and prices for services that are classified as intrastate. BTI also is required
to update or amend its tariffs when it adjusts its rates or adds new products,
and is subject to various reporting and record-keeping requirements.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
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 BTI's compliance with applicable laws or
regulations.
BTI is authorized to offer long distance service in the continental United
States and the District of Columbia. BTI has obtained authority to provide long
distance service in states outside of its target markets because it believes
this capability enhances BTI's ability to attract business customers that have
offices outside of BTI's target markets. BTI may also apply for authority to
provide services in other states in the future. BTI holds certificates to offer
local services in North Carolina and Georgia and has applications pending for
authority to offer local services in Alabama, Florida, Louisiana, Mississippi,
South Carolina, Texas and Virginia. While the Company expects and intends to
obtain necessary operating authority in each jurisdiction where it intends to
operate, there can be no assurance that each jurisdiction will grant the
Company's 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.
49
Furthermore, the Telecommunications Act preserves the ability of states to
impose reasonable terms and conditions of service and other regulatory
requirements. In the last several years, North Carolina, South Carolina,
Georgia, Virginia and Florida have enacted broad changes in their
telecommunications laws that authorize the entry of competitive local exchange
carriers and provide for new regulations to promote competition in local and
other intrastate telecommunications services.
The Company believes that, as the degree of intrastate competition
increases, the states will offer ILECs increasing pricing flexibility. This
flexibility may present ILECs with an opportunity to subsidize services that
compete with BTI's services with revenues generated from non-competitive
services, thereby allowing ILECs to offer competitive services at prices below
the cost of providing the service. The Company cannot predict the extent to
which this may occur or its impact on the Company's business.
LOCAL GOVERNMENT AUTHORIZATIONS. BTI is required to obtain street use and
construction permits and licenses and/or franchises to install and expand its
fiber optic networks using municipal rights-of-way. In some municipalities where
BTI has installed or anticipates constructing networks, it will be required to
pay license or franchise fees 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, ILECs do not pay such franchise fees or pay fees that are substantially
less than those required to be paid by BTI. To the extent that competitors do
not pay the same level of fees as BTI, the Company 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 BTI remove its facilities or abandon its
network in place could have a material adverse effect on the Company.
EMPLOYEES
As of September 30, 1997, the Company employed a total of 540 employees.
The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. None of
the Company's employees are currently represented by a collective bargaining
agreement. The Company believes that its relations with its employees are good.
PROPERTIES
The Company leases offices and space in a number of locations, primarily
for sales offices and network equipment installations. The Company leases
approximately 80,000 square feet of office space for its corporate headquarters
in Raleigh, North Carolina, under a lease expiring in April 2005. The Company
leases space for sales offices in North Carolina, Florida, Georgia, New York,
South Carolina, Tennessee, Texas and Virginia. The leases for these offices
expire between January 1998 and April 2005. In addition the Company leases
rights-of-way, office space and land for its network equipment. The leases for
the office space and land expire between January 1998 and June 2004 and the
leases for the rights-of-way are either perpetual or are renewable through 2023.
The Company believes that its leased facilities are adequate to meet its current
needs and that additional facilities are available to meet its needs for the
foreseeable future.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings that the
Company believes would, individually or in the aggregate, have a material
adverse effect on the Company's financial condition or results of operations.
50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of September 30, 1997:
NAME AGE POSITION(S) WITH COMPANY
- -------------------------- --- -----------------------------------------------
Peter T. Loftin........... 39 Chairman, Chief Executive Officer and Director
R. Michael Newkirk........ 35 President, Chief Operating Officer and Director
H.A. (Butch) Charlton..... 47 Senior Vice President, Sales
Anthony M. Copeland....... 41 Vice President, Secretary and General Counsel
Brian K. Branson.......... 32 Chief Financial Officer, Treasurer and Director
PETER T. LOFTIN founded BTI in November 1983 and has served as Chief
Executive Officer and Chairman of the Board of Directors of BTI since that time.
Mr. Loftin has more than 15 years of experience in the telecommunications
industry. He is a founding member of the North Carolina Long Distance
Association, representing the state's independent long distance carriers. He
also serves 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 and the Board of the Chamber of Commerce of Raleigh, North
Carolina. Mr. Loftin attended North Carolina State University.
R. MICHAEL NEWKIRK joined BTI in 1986 and has served as BTI's Chief
Operating Officer since October 1996, its President since July 1997 and as
Director since August 1997. Mr. Newkirk was Executive Vice President of BTI from
March 1994 until October 1996. Mr. Newkirk has over 15 years of experience in
the telecommunications industry and is Vice President of the ACCA. He also
serves on the Board of Directors of America's Carriers Telecommunications
Association ("ACTA"), a national organization that represents telecommunications
companies before legislative and regulatory bodies.
H.A. (BUTCH) CHARLTON has served as President and CEO of FiberSouth since
April 1997. He has also served as Senior Vice President, Sales of BTI since July
1997. Prior to joining FiberSouth, 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 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 is also
a member of the Wake Technical Community College Telecommunications Industry
Advisory Committee, the Wake Education Partnership-Technology Committee, 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 of BTI in August 1996
and Treasurer and Director of BTI in August 1997. Mr. Branson joined BTI in July
1992 as a financial analyst and served in a variety of financial 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.
INCENTIVE COMPENSATION PLANS
STOCK PLANS
The Company's 1997 Stock Plan (the "1997 Plan") was adopted by the
Company's Board of Directors in August 1997. A total of 500,000 shares of Common
Stock of the Company (the "Common Stock") have been
51
reserved for issuance under the 1997 Plan. As of September 30, 1997, no options
had been granted and no shares had been issued under the 1997 Plan. The 1997
Plan will terminate in August 2007, unless sooner terminated by the Board of
Directors.
Pursuant to the Reorganization, the Company assumed the BTI 1994 Stock Plan
(the "1994 Plan", together with the 1997 Plan, the "Plans") which will terminate
in March 2005, unless sooner terminated by the Board of Directors. A total of
499,890 shares of Common Stock will be reserved for issuance under the 1994
Plan. As of September 30, 1997, no shares had been issued under the 1994 Plan.
Options to purchase 333,260 shares of Common Stock at an exercise price of $1.47
per share were issued in connection with the Share Repurchase.
The Plans provide for grants of "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to
employees (including officers and employee directors) and grants of nonstatutory
options to employees and consultants. The Plans also allow for the grant of
stock purchase rights. The Plans will be administered by the Board of Directors.
The exercise price of incentive stock options granted under the Plans must not
be less than the fair market value of the Common Stock on the date of grant.
With respect to any optionee who owns stock representing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option must be equal to at least 110% of
the fair market value of the Common Stock on the date of grant, and the term of
the option must not exceed five years. The terms of all other options may not
exceed ten years. The aggregate fair market value of Common Stock (determined as
of the date of the option grant) for which incentive stock options may for the
first time become exercisable by any individual in any calendar year may not
exceed $100,000.
In connection with the 1994 Plan, in March 1995 BTI adopted a Senior
Executive Bonus Plan (the "Bonus Plan"). The Bonus Plan provides that Senior
Executive Officers of BTI may earn a portion of the exercise price of their
options under the 1994 Plan upon achievement of certain performance objectives.
401(K) PLAN
The Company maintains an Employees' Retirement Savings Plan (the "401(k)
Plan") for employees who elect to participate. Subject to certain limitations,
participants may contribute up to 15% of their compensation on a pre-tax basis
to the 401(k) Plan. In 1994, 1995 and 1996, BTI contributed matching funds in
amounts equal to 25%, 25% and 50%, respectively, of each dollar of an employee's
contributions, up to 6% of the employee's salary. Amounts attributable to
participant contributions under the 401(k) Plan are fully vested at all times
(with BTI's contributions vesting beginning after three years and becoming fully
vested after five years). Participants are entitled to receive their vested
401(k) Plan accounts, including investment earnings, upon death, retirement or
other termination of employment. The 401(k) Plan will be assumed by the Company
in the Reorganization.
PROFIT SHARING
In 1993, BTI implemented a profit-sharing arrangement, allocating 5% of net
profits (net income before vice president bonuses) to BTI's vice presidents, 5%
of net profits to Peter T. Loftin, Chairman, Chief Executive Officer and a 50%
shareholder of BTI, and 5% of net profits to an employee pool. The employees'
portion was split, with 50% going directly to the employees via payroll and 50%
going to the 401(k) Plan. Amounts were paid bi-annually on January 31 and July
31. In 1996, BTI terminated the portion of the profit-sharing plan related to
Mr. Loftin and the employee pool and reduced the vice presidents' pool to
approximately 2% of profits. This plan was assumed by the Company in the
Reorganization.
52
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information for 1996 concerning
compensation earned by BTI's Chief Executive Officer and BTI's other executive
officers who were paid more than $100,000 in salary and bonus.
SUMMARY COMPENSATION TABLE
1996 ANNUAL
COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- -------------------------------------------------------------------------- -------- -------- ------------
Peter T. Loftin, Chairman and CEO......................................... $500,000 $ 20,763 $190,000(1)
R. Michael Newkirk, President and COO..................................... 100,000 137,706 10,327(2)
Anthony M. Copeland, Vice President and General Counsel................... 100,000 17,586 13,728(3)
- ---------------
(1) Includes $148,000 of relocation expenses and a $42,000 car allowance.
(2) Includes $3,193, representing the taxable portion of certain car lease
payments, and $7,134 of BTI's matching contributions to the 401(k) Plan.
(3) Includes a $10,200 car allowance and $3,528 of BTI's matching contributions
to the 401(k) Plan.
EMPLOYMENT AGREEMENT
In April 1997, H.A. (Butch) Charlton entered into a two-year employment
agreement with FiberSouth pursuant to which Mr. Charlton became President of
FiberSouth. The agreement provides for an annual base salary of $175,000, a
signing bonus of $20,000 and a guaranteed bonus of $50,000 payable in April
1998. BTI has agreed to reimburse Mr. Charlton for up to three months' living
expenses in connection with his relocation to Raleigh, North Carolina. The
agreement also entitles Mr. Charlton to receive stock in FiberSouth. Upon
consummation of the FiberSouth Acquisition, such right was converted into the
right to receive stock options under the 1997 Plan.
STOCK OPTIONS
BTI did not grant any stock options during 1996, and no stock options were
exercised during 1996.
53
CERTAIN TRANSACTIONS
The Company leases on a month-to-month basis a townhouse in Raleigh, North
Carolina for relocation of employees and a condominium in Wilmington, North
Carolina for corporate and customer entertainment from Peter T. Loftin, Chairman
and Chief Executive Officer and a 50% shareholder of the Company. Payments by
the Company for the townhouse were $24,000, $27,500 and $32,500 in 1994, 1995
and 1996, respectively. Payments by the Company for the condominium were
$24,000, $27,500 and $32,500 in 1994, 1995 and 1996, respectively.
The Company also leases a corporate aircraft from an entity controlled by
Mr. Loftin. Payments by the Company for the aircraft, which is subject to a
five-year lease entered into in November 1995, were $28,000 and $343,000 in 1995
and 1996, respectively. This lease is a "dry" lease, which means that the
Company pays all costs of operation of the aircraft. The Company has an option
to renew this lease for an additional five years.
Since 1994, BTI has paid certain operating expenses and provided certain
management services for ComSouth Cable International, Inc. ("ComSouth"), an
undersea fiber optic cable company which is 80% owned by Mr. Loftin. These
expenses totaled $591,304 as of September 30, 1997 and consisted of a note
receivable for $553,144 and accounts receivable of $38,160. The September 30,
1997 total of $591,304 includes expenses of $176,803 and $366,126 were incurred
during the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively.
Since February 1997, BTI has sold certain integrated telecommunications
services through International Communications, Inc. ("ICI"), a company which is
50% owned by Mr. Loftin. BTI pays ICI between a 5% and 20% commission on all
sales through it. Through September 30, 1997, BTI had paid ICI $113,000 in
commissions pursuant to this arrangement.
Pursuant to the Shareholders' Agreement each of Mr. Loftin and the Retiring
Shareholder was entitled to receive distributions in amounts sufficient to pay
their taxes resulting from ownership of BTI while it was an S corporation. For
each shareholder, these distributions were $283,325 and $192,300 for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. In addition, each of them was entitled to receive dividends in an
amount equal to $61,736 per month (the "Additional Dividends"). Each shareholder
received Additional Dividends of $740,835 and $600,898 during the year ended
December 31, 1996 and nine months ended September 30, 1997, respectively.
Pursuant to the Shareholders' Agreement, Mr. Loftin was required to loan the
Additional Dividends paid to him through June 1996 to BTI. This loan, which as
of September 30, 1997 totaled $1,930,000, net of certain advances to Mr. Loftin,
bears interest at prime and is payable over 24 months following the Share
Repurchase in September 1997. The Shareholders' Agreement and the right to
receive Additional Dividends terminated upon consummation of the Share
Repurchase. However, the Company will continue to be required to reimburse BTI's
shareholders for their tax obligations arising from income earned by BTI while
it was an S corporation. The Company believes that any such reimbursements will
not have a material adverse effect on the Company's financial condition or
results of operations.
PRINCIPAL SHAREHOLDERS
As of September 30, 1997, all 10,000,000 shares of the outstanding Common
Stock of the Company were held by Peter T. Loftin, Chairman and Chief Executive
Officer of the Company. In addition, as of that date R. Michael Newkirk,
President and Chief Operating Officer of the Company, held an option to purchase
166,630 shares of Common Stock (or approximately 1.6% of the outstanding shares
of Common Stock on a fully diluted basis).
54
DESCRIPTION OF CREDIT FACILITY
BTI has entered into an amended and restated loan agreement with General
Electric Capital Corporation ("GE Capital") and the other financial institutions
party thereto from time to time, and GE Capital as agent (the "Credit
Agreement"), providing for a $60 million senior secured, reducing, revolving
credit facility to be used for working capital and other purposes, including
capital expenditures.
The following summary of the material provisions of the Credit Facility
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Credit Agreement, a copy of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
The Credit Facility is subject to certain borrowing limits based on
multiples of EBITDA. The Credit Facility will mature on September 17, 2002. The
Company will be required to repay outstanding indebtedness under the Credit
Facility with the proceeds of asset sales.
Amounts drawn under the Credit Facility will bear interest, at BTI's
option, at either (a) a floating rate equal to the Prime Rate, or (b) a fixed
rate equal to LIBOR for the interest period (30, 60 or 90 days) selected by BTI,
plus in each case a percentage rate which will fluctuate (based on BTI's Total
Debt to EBITDA Ratio) from 0.00% to 1.25% for borrowings at the Prime Rate and
from 1.75% to 3.00% for borrowings at LIBOR. For December 31, 1997, the Prime
Rate was 8.50%, and 30-, 60- and 90-day LIBOR were 5.72%, 5.75% and 5.81%,
respectively.
BTI's obligations under the Credit Facility are guaranteed by the Company
and its other subsidiaries and secured by a first priority lien on all current
and future assets of BTI and the Company's other subsidiaries and the Company's
pledge of the stock of BTI and any intercompany notes.
The Credit Facility restricts BTI from declaring and paying dividends or
making other distributions, including dividends or distributions to pay
scheduled interest on the Notes. However, BTI will be permitted to pay dividends
or make other distributions to BTI Telecom to pay scheduled interest on the
Notes, commencing with the seventh scheduled interest payment, unless at the
time of such dividend or distribution an event of default under the Credit
Facility exists or would be caused by such dividend or distribution; provided
that, with respect to any event of default (other than a payment default, a
default in the cash interest coverage ratio, a bankruptcy event with respect to
BTI Telecom or BTI or the loss of a material license, operating authority or
fiber network), BTI will not be prohibited from paying dividends or making other
distributions to BTI Telecom to pay scheduled interest on the Notes for more
than 180 days in any consecutive 360-day period.
The Credit Facility contains a number of covenants, including, among
others, covenants limiting the ability of BTI to incur debt, create liens, pay
dividends, make distributions or stock repurchases, make capital expenditures,
engage in transactions with affiliates, sell assets and engage in mergers and
acquisitions. In addition, the Credit Facility contains affirmative covenants,
including, among others, covenants requiring maintenance of corporate existence,
licenses and insurance, payment of taxes and the delivery of financial and other
information.
The Credit Facility also requires BTI to comply with certain financial
tests and ratios to be determined as of specified measurement dates based on
quarterly and annual financial statement data. BTI is required to have: (i) a
Total Debt to EBITDA Ratio no greater than 6.75:1.0 at December 31, 1997 and
7.25:1.0 at March 31, 1998, with reductions for measurement dates thereafter;
(ii) minimum EBITDA of $9.4 million at December 31, 1997 and $9.0 million at
March 31, 1998, with increases for measurement dates thereafter, in each case
measured for the four consecutive fiscal quarters ending on the measurement
date; and (iii) capital expenditures not to exceed (a) $40.0 million for 1997,
(b) $100.0 million for 1998, plus any unused portion of the 1997 maximum, and
(c) for years after 1998, amounts to be set based on certain operating
performance criteria. In addition, the Company must have, on a consolidated
basis, a Consolidated Interest Coverage Ratio of at least 2.0:1.0 at December
31, 1997; 2.5:1.0 at March 31, 1998; 3.5:1.0 at June 30, 1998 and at the end of
each fiscal quarter thereafter through December 31, 2000; and 1.5:1.0 at the end
of each fiscal quarter thereafter.
Failure to satisfy any of the financial covenants will constitute an event
of default under the Credit Facility, notwithstanding the ability of BTI to meet
its debt service obligations. The Credit Facility also includes other customary
events of default, including, without limitation, a cross-default to other
indebtedness, certain undischarged judgments, bankruptcy and a change of control
of BTI.
55
As used in this section:
"Consolidated Interest Coverage Ratio" means, as of the end of any fiscal
quarter, the ratio of (a) Consolidated Interest Expense for the four consecutive
fiscal quarters ending on the last day of such fiscal quarter to (b) cumulative
EBITDA for such four consecutive quarters.
"Consolidated Interest Expense" means all interest paid or accrued by the
Company and BTI, without duplication, excluding amounts paid from proceeds from
the Pledged Securities held in escrow for payment of interest on the Notes.
"EBITDA" means (i) income before interest income and expense and corporate
income taxes, plus (ii) to the extent deducted in determining such income,
depreciation, amortization and other similar non-cash charges determined in
accordance with generally accepted accounting principles ("GAAP"), and (iii) an
amount equal to any payments with respect to the repurchase of certain stock
options from former employees, minus (iv) to the extent recognized in
determining such income, extraordinary gains, in accordance with GAAP.
"LIBOR" means the rate per annum equal to the offered rate on Eurodollar
deposits for the interest period (30, 60 or 90 days) selected by BTI, as quoted
by Telerate New Service on page 3750 which is the official British Bankers
Association fixing rate recorded at 11:00 a.m. London setting time on the date
two business days prior to the first day of such interest period.
"Prime Rate" means the prime or base rate of interest most recently
published or announced by any of the five largest member banks of the New York
Clearing House Association, which rates normally appear daily in the "Money
Rates" column of THE WALL STREET JOURNAL.
"Total Debt" means, as of any date, the respective then outstanding and
unpaid balances of all indebtedness of BTI including, without limitation,
guarantees, guaranteed indebtedness and amounts drawn down under letters of
credit, but shall not include intercompany debt payable to the Company.
"Total Debt to EBITDA Ratio" means for any fiscal month, the ratio of (a)
Total Debt outstanding on the last day of such fiscal month to (b) cumulative
EBITDA for the 12 consecutive fiscal month period ending on the last day of such
fiscal month.
56
DESCRIPTION OF THE EXCHANGE NOTES
The Initial Notes were, and the Exchange Notes will be, issued under an
indenture (the "Indenture"), dated as of September 22, 1997, between BTI
Telecom, BTI and First Trust of New York, National Association, trustee under
the Indenture (the "Trustee"). A copy of the Indenture is filed as an exhibit to
the Registration Statement of which this Prospectus is a part. For purposes of
the following summary, the Initial Notes and the Exchange Notes are sometimes
referred to collectively as the "Notes." The following summary contains a
description of certain provisions of the Indenture, but does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act of 1939,
as amended. For definitions of certain capitalized terms used in the following
summary, see " -- Certain Definitions."
GENERAL
The terms of the Exchange Notes will be identical in all material respects
to the Initial Notes, except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Initial Notes and (ii) Holders of the
Exchange Notes will not be entitled to certain rights of nolders of Initial
Notes under the Registration Rights Agreement.
The Exchange Notes will be unsecured (except to the extent described under
" -- Security" below) unsubordinated obligations of the Company, initially
limited to $250.0 million aggregate principal amount, and will mature on
September 15, 2007. Each Exchange Note will bear interest at the rate of 10 1/2%
per annum from the Closing Date or from the most recent Interest Payment Date to
which interest has been paid or provided for, payable semiannually (to Holders
of record at the close of business on the March 1 or September 1 immediately
preceding the Interest Payment Date) on March 15 and September 15, of each year,
commencing March 15, 1998.
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof. See " -- Book-Entry; Delivery and Form." No service charge
will be made for any registration of transfer or exchange of Exchange Notes, but
the Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Exchange
Notes offered hereby and any additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
PAYMENT AND PAYING AGENTS
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, The City of New York
(which initially will be the corporate trust office of the Trustee, First Trust
of New York, National Association, 100 Wall Street, New York, New York 10005)
and in Luxembourg (which initially will be at the offices of the Paying Agent
and Transfer Agent at Banque Generale Du Luxembourg at 50 Avenue J.F. Kennedy,
Luxembourg); PROVIDED that, at the option of the Company, payment of interest
may be made by check mailed to the Holders at their addresses as they appear in
the Security Register. For so long as the Exchange Notes are listed on the
Luxembourg Stock Exchange and the rules on such stock exchange shall so require,
the Company shall maintain a Paying Agent and a Transfer Agent in Luxembourg.
NOTICES
For so long as the Exchange Notes are listed on the Luxembourg Stock
Exchange and the rules of the Luxembourg Stock Exchange so requires, all notices
regarding the Exchange Notes will be valid if published in one daily newspaper
of general circulation in Luxembourg. It is expected that publication of notices
will be made in the Luxembourger Wort or, if publication in Luxembourg is not
practicable, publication shall be made in another principal city in Europe in a
newspaper of general circulation. Any such notice shall be deemed to have been
given on the date of such publication or, if published more than once or on
different dates, on the date of the first such publication in the required
newspaper or newspapers.
57
OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, on or after September 15, 2002 and
prior to maturity, upon not less than 30 nor more than 60 days' prior notice
mailed by first class mail to each Holder's last address, as it appears in the
Security Register, at the following Redemption Prices (expressed in percentages
of principal amount), plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
that is prior to the Redemption Date to receive interest due on an Interest
Payment Date), if redeemed during the 12-month period commencing September 15,
of the years set forth below:
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------ ----------------
2002.................................................................... 105.250%
2003.................................................................... 102.625
2004 and thereafter..................................................... 100.000
In addition, at any time prior to September 15, 2000, the Company may
redeem up to 35% of the aggregate principal amount of the initial Notes and the
Exchange Notes from the proceeds of one or more Public Equity Offerings
following which a Public Market occurs, at any time or from time to time in
part, at a Redemption Price (expressed as a percentage of principal amount) of
110.5%, plus accrued interest to the Redemption Date (subject to the rights of
Holders of record on the relevant Regular Record Date that is prior to the
Redemption Date to receive interest due on an Interest Payment Date); PROVIDED
that after any such redemption at least $162.5 million aggregate principal
amount of initial Notes and the Exchange Notes remains outstanding.
If less than all of the Notes are to be redeemed at any time, the Trustee
will select the Notes, or portions thereof, for redemption in compliance with
the requirements of the principal national securities exchange, if any, on which
the Notes are listed or, if the Notes are not listed on a national securities
exchange, on a pro rata basis, by lot or by such other method as the Trustee in
its sole discretion shall deem to be fair and appropriate; PROVIDED that no Note
of $1,000 in principal amount or less shall be redeemed in part. If any Note is
to be redeemed in part only, the notice of redemption relating to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original Note.
All notices required under this subheading shall be given in accordance
with the "Notices" provision above.
SECURITY
The Indenture requires that a portion of the proceeds from the Offering
remain subject to the Pledge Agreement and be invested in Pledged Securities in
such amounts and maturities as will be sufficient upon receipt of scheduled
interest and principal payments of such securities, in the opinion of a
nationally recognized firm of independent public accountants selected by the
Company, to provide for payment in full of the first six scheduled interest
payments due on the Initial Notes and the Exchange Notes. Approximately $74.1
million of such proceeds are held by the Trustee as security for and to fund the
first six interest payments on the Initial Notes and the Exchange Notes.
The Pledged Securities are pledged to the Trustee for the benefit of the
Holders of the Initial Notes and the Exchange Notes pursuant to the Pledge
Agreement and are being held by the Trustee in the Pledge Account. Pursuant to
the Pledge Agreement, immediately prior to an Interest Payment Date, the Company
may either deposit with the Trustee from funds otherwise available to the
Company cash sufficient to pay the interest scheduled to be paid on such date or
the Company may direct the Trustee to release from the Pledge Account proceeds
sufficient to pay interest then due on the Initial Notes and the Exchange Notes.
A failure to pay interest on the Initial Notes or the Exchange Notes in a timely
manner through the first six scheduled interest payment dates will constitute an
immediate Event of Default under the Indenture, with no grace or cure period.
The Pledged Securities and Pledge Account will also secure the repayment of the
principal amount and premium on the Initial Notes and the Exchange Notes.
The Notes are not guaranteed by any Company subsidiary, and no subsidiary's
stock is pledged as collateral for the Notes. Under the Pledge Agreement, once
the Company makes the first six scheduled interest payments on the Exchange
Notes, all of the remaining Pledged Securities, if any, will be released from
the Pledge Account and thereafter the Exchange Notes will be unsecured.
58
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company entered into the Registration Rights Agreement with the
Placement Agents, for the benefit of the holders of Initial Notes, pursuant to
which the Company agreed to file the Registration Statement (of which this
Prospectus is a part) with the Commission. The Registration Rights Agreement
provides that the Company will, at its cost, use its best efforts to cause the
Registration Statement to be filed with the Commission and to have the Exchange
Offer consummated not later than 60 days after such Registration Statement has
been declared effective by the Commission. Upon the effectiveness of the
Registration Statement, the Company will offer the Exchange Notes in exchange
for surrender of the Initial Notes. The Company has agreed to keep the Exchange
Offer open for not less than 20 business days after the date notice of the
Exchange Offer is mailed to the holders of Initial Notes. For each Initial Note
surrendered to the Company pursuant to the Exchange Offer, the holder of such
Initial Note will receive an Exchange Note having a principal amount equal to
that of the surrendered Initial Note. Under existing interpretations of the
staff of the Commission, the Exchange Notes would be freely transferable by
holders other than affiliates of the Company after the Exchange Offer without
further registration under the Securities Act if the holder of the Exchange
Notes represents that it is acquiring the Exchange Notes in the ordinary course
of its business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Company, as such terms are interpreted by the staff of the
Commission; provided that broker-dealers ("Participating Broker-Dealers")
receiving Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The staff of the
Commission has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to Exchange Notes with the
prospectus contained in the Registration Statement under certain circumstances.
Under the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements to use this Prospectus in connection with the resale of
such Exchange Notes.
A holder of Initial Notes who wishes to exchange such Initial Notes for
Exchange Notes in the Exchange Offer will be required to represent that, among
other things, any Exchange Notes to be received by it will be acquired in the
ordinary course of its business and that at the time of the commencement of the
Exchange Offer it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of the
Exchange Notes and that it is not an "affiliate" of the Company, as defined in
Rule 405 of the Securities Act, or if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
The Company has filed the Registration Statement (of which this Prospectus
is a part) and will commence the Exchange Offer pursuant to the Registration
Rights Agreement. In the event that applicable interpretations of the staff of
the Commission do not permit the Company to effect the Exchange Offer, or under
certain other circumstances, the Company has agreed, at its cost, to use its
best efforts to file and cause to become effective a shelf registration
statement (the "Shelf Registration Statement") with respect to resales of the
Initial Notes and to keep the Shelf Registration Statement effective until the
expiration of the time period referred to in Rule 144(k) under the Securities
Act or such shorter period that will terminate when all Initial Notes covered by
the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement. The Company has agreed, in the event a Shelf
Registration Statement is filed, among other things, to provide to each Holder
for whom such Shelf Registration Statement was filed copies of the prospectus
which is a part of the Shelf Registration Statement, to notify each such Holder
when the Shelf Registration Statement has become effective and to take certain
other actions as are required to permit unrestricted resales of the Initial
Notes. A Holder selling such Initial Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
In the event the Exchange Offer is not consummated and a Shelf Registration
Statement is not declared effective on or prior to March 22, 1998, the interest
rate on the Initial Notes will be increased by .5% per annum until the Exchange
Offer is consummated or the Shelf Registration is declared effective.
59
Initial Notes not tendered in the Exchange Offer shall accrue interest at
the rate of 10 1/2% per annum and be subject to all of the terms and conditions
specified in the Indenture and to the transfer restrictions described in
"Transfer Restrictions."
This summary of certain provisions of the Registration Rights Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
RANKING
The Indebtedness evidenced by the Exchange Notes will rank PARI PASSU in
right of payment with all existing and future unsubordinated indebtedness of the
Company and senior in right of payment to all existing and future subordinated
indebtedness of the Company. As of September 30, 1997, the Company had (on an
unconsolidated basis) no indebtedness outstanding other than the Notes. The
Company is permitted to incur indebtedness to finance the acquisition of
equipment, inventory and network assets and up to $100.0 million of other
indebtedness and is permitted to secure any such indebtedness. The Exchange
Notes will be effectively subordinated to such security interests to the extent
of such security interests.
The Company is a holding company which conducts substantially all of its
business through subsidiaries. The Company's subsidiaries have no direct
obligation to pay amounts due on the Notes and will not guarantee the Notes. As
a result, the Notes will be effectively subordinated to all existing and future
indebtedness and other liabilities (including trade payables) of the Company's
subsidiaries. As of September 30, 1997, the Company's subsidiaries had
approximately $34.4 million of liabilities (excluding intercompany payables),
including approximately $2.0 million of indebtedness (including capital leases).
The Company will be dependent upon access to the cash flow or assets of its
subsidiaries to make payments on the Notes and the Company's ability to obtain
such access may be limited by law. See "Risk Factors -- Holding Company
Structure" and " -- Priority of Secured Debt."
CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the covenants and
other provisions of the Indenture. Reference is made to the Indenture for the
definition of any other capitalized term used herein for which no definition is
provided.
"Acquired Assets" means (i) the Capital Stock of any Person that becomes a
Restricted Subsidiary after the Closing Date and (ii) the real or personal
property of any Person that becomes a Restricted Subsidiary after the Closing
Date.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary; PROVIDED that Indebtedness of such
Person which is redeemed, defeased, retired or otherwise repaid at the time of
or immediately upon consummation of the transactions by which such Person
becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person (other than a Restricted Subsidiary)
in which any Person (other than the Company or any of its Restricted
Subsidiaries) has a joint interest and the net income (or loss) of any
Unrestricted Subsidiary, except (x) with respect to net income, to the extent of
the amount of dividends or other distributions actually paid to the Company or
any of its Restricted Subsidiaries by such other Person or such Unrestricted
Subsidiary during such period and (y) with respect to net losses, to the extent
of the amount of cash contributed by the Company or any Restricted Subsidiary to
such Person during such period; (ii) solely for the purposes of calculating the
amount of Restricted Payments that may be made pursuant to clause (C) of the
first paragraph of the "Limitation on Restricted Payments" covenant described
below (and in such case, except to the extent includable pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any of its Restricted
60
Subsidiaries or all or Substantially All of the property and assets of such
Person are acquired by the Company or any of its Restricted Subsidiaries; (iii)
the net income of any Restricted Subsidiary to the extent that the declaration
or payment of dividends or similar distributions by such Restricted Subsidiary
of such net income is not at the time permitted by the operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to such Restricted Subsidiary; (iv) any
gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except
for purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below, any amount paid or accrued as dividends on
Preferred Stock (other than accrued dividends which, pursuant to the terms of
the Preferred Stock, will not be payable prior to the first anniversary after
the Stated Maturity of the Notes) of the Company or any Restricted Subsidiary
owned by Persons other than the Company and any of its Restricted Subsidiaries;
(vi) all extraordinary gains and extraordinary losses; and (vii) any
compensation expense paid or payable solely with Capital Stock (other than
Redeemable Stock) of the Company or any options, warrants or other rights to
acquire Capital Stock (other than Redeemable Stock) of the Company.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; PROVIDED that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or Substantially All of the Capital Stock of
any Restricted Subsidiary or (ii) all or Substantially All of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or Substantially All of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock of or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; PROVIDED that "Asset
Sale" shall not include (a) sales, transfers or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets with a Fair Market Value (as certified in an Officers' Certificate)
not in excess of $1 million in any transaction or series of related transactions
or (c) sales, transfers or other dispositions of assets for consideration at
least equal to the Fair Market Value of the assets sold, transferred or
otherwise disposed of to the extent the consideration received would satisfy
clause (B) of the "Limitation on Assets Sales" covenant described below,
PROVIDED that after giving pro forma effect to such exchange, the Consolidated
Leverage Ratio shall be no greater than the Consolidated Leverage Ratio
immediately prior to such exchange.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of
61
each successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal payments.
"BTI Refinancing" means the execution and delivery, on or prior to the
Closing Date, of the Credit Agreement.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by Peter T. Loftin and his Affiliates on
such date and (b) after the occurrence of a Public Market, a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other
than Peter T. Loftin and his Affiliates, becomes the ultimate "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total
voting power of the Voting Stock of the Company on a fully diluted basis and
such ownership represents a greater percentage of the total voting power of the
Voting Stock of the Company, on a fully diluted basis, than is held by Peter T.
Loftin and his Affiliates on such date; or (ii) individuals who on the Closing
Date constitute the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination by the Board of Directors
for election by the Company's stockholders was approved by a vote of at least
two-thirds of the members of the Board of Directors then in office who either
were members of the Board of Directors on the Closing Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office.
"Closing Date" means September 22, 1997, the date on which the Notes are
originally issued under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
62
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the Transactions, all as determined on a consolidated basis (without taking
into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); PROVIDED that, in making the
foregoing calculation, (A) PRO FORMA effect shall be given to any Indebtedness
to be Incurred or repaid on the Transaction Date; (B) PRO FORMA effect shall be
given to Asset Dispositions and Asset Acquisitions (including giving PRO FORMA
effect to the application of proceeds of any Asset Disposition) that occur from
the beginning of the Four Quarter Period through the Transaction Date (the
"Reference Period"), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; (C) PRO FORMA effect shall be given
to asset dispositions and asset acquisitions (including giving PRO FORMA effect
to the application of proceeds of any asset disposition) that have been made by
any Person that has become a Restricted Subsidiary or has been merged with or
into the Company or any Restricted Subsidiary during such Reference Period and
that would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted Subsidiary as if such
asset dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; PROVIDED
that, to the extent that clause (B) or (C) of this sentence requires that PRO
FORMA effect be given to an Asset Acquisition or Asset Disposition, such PRO
FORMA calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business of
the Person, that is acquired or disposed of for which financial information is
available; and (D) the aggregate amount of Indebtedness outstanding as of the
end of the Reference Period will be deemed to include the total amount of funds
outstanding and/or available on the Transaction Date under any revolving credit
or similar facilities of the Company or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Credit Agreement" means the Second Amended and Restated Loan Agreement
dated September 22, 1997, between BTI and GE Capital and the other financial
institutions party thereto from time to time, with GE Capital as agent, together
with any agreements, instruments and documents executed or delivered pursuant to
or in connection with such credit agreement, in each case as such credit
agreement or such agreements, instruments or documents may be amended,
supplemented, extended, renewed, replaced or otherwise modified from time to
time. See "Description of Credit Facility."
63
"Credit Facilities" means revolving credit or working capital facilities or
similar facilities made available from time to time to the Company and its
Restricted Subsidiaries.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Fair Market Value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; PROVIDED that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the Fair
Market Value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the capital contribution or sale
of Capital Stock and (y) in the event the aggregate Fair Market Value of any
other property (other than cash or cash equivalents) received by the Company
exceeds $10 million, the Fair Market Value of such property shall be determined
by a nationally recognized investment banking firm and set forth in their
written opinion which shall be delivered to the Trustee.
"FiberSouth Acquisition" means the acquisition by BTI of substantially all
the assets of FiberSouth, Inc. (other than its cable television assets) for
approximately $31.0 million and the repayment of up to $5.5 million of
indebtedness of FiberSouth, Inc. in connection therewith.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including, without limitation, those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that computations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the Transactions and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinions Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); PROVIDED that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Holder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Acquired Indebtedness; PROVIDED that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness. The terms "Incurrence" and "Incurred"
shall have corresponding meanings.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations
64
described in (i) or (ii) above or (v), (vi) or (vii) below) entered into in the
ordinary course of business of such Person to the extent such letters of credit
are not drawn upon or, if drawn upon, to the extent such drawing is reimbursed
no later than the third Business Day following receipt by such Person of a
demand for reimbursement), (iv) all obligations of such Person to pay the
deferred and unpaid purchase price of property or services, which purchase price
is due more than six months after the date of placing such property in service
or taking delivery and title thereto or the completion of such services, except
Trade Payables, (v) all Capitalized Lease Obligations of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person; PROVIDED that the
amount of such Indebtedness shall be the lesser of (A) the Fair Market Value of
such asset at such date of determination and (B) the amount of such
Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person
to the extent such Indebtedness is Guaranteed by such Person and (viii) to the
extent not otherwise included in this definition, obligations under Currency
Agreements and Interest Rate Agreements. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date (or, in the
case of a revolving credit or other similar facility, the total amount of funds
outstanding and/or available on the date of determination) of all unconditional
obligations as described above and, with respect to contingent obligations as
described above, the maximum liability upon the occurrence of the contingency
giving rise to the obligation, PROVIDED that (A) the amount outstanding at any
time of any Indebtedness issued with original issue discount is the face amount
of such Indebtedness less the remaining unamortized portion of the original
issue discount of such Indebtedness at the time of its issuance as determined in
conformity with GAAP, (B) money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the interest
on such Indebtedness shall not be deemed to be "Indebtedness" and (C)
Indebtedness shall not include any liability (including any liability arising
under a tax indemnification agreement with a shareholder of the Company at the
time the Company was an S corporation) for federal, state, local or other taxes
(including penalties and interest, if any).
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the Fair
Market Value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including, without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant described below. For
purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on
Restricted Payments" covenant described below, (i) "Investment" shall include
the Fair Market Value of the assets (net of liabilities (other than liabilities
to the Company or any of its Subsidiaries)) of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an Unrestricted Subsidiary,
(ii) the Fair Market Value of the assets (net of liabilities (other than
liabilities to the Company or any of its Subsidiaries)) of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding Investments
and (iii) any property transferred to or from any Person shall be valued at its
Fair Market Value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or
65
cash equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP, and (b) with respect
to any capital contribution or issuance or sale of Capital Stock, options,
warrants or other rights to acquire Capital Stock or Indebtedness, the proceeds
of such capital contribution or issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes or payable as a result thereof.
"Offer to Purchase" means an offer by the Company to purchase Notes from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a facsimile transmission or
letter setting forth the name of such Holder, the principal amount of Notes
delivered for purchase and a statement that such Holder is withdrawing his
election to have such Notes purchased; and (vii) that Holders whose Notes are
being purchased only in part will be issued new Notes equal in principal amount
to the unpurchased portion of the Notes surrendered; PROVIDED that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. On the Payment Date, the Company shall (i) accept
for payment on a pro rata basis Notes or portions thereof tendered pursuant to
an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay
the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions thereof
so accepted together with an Officers' Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the Holders of Notes so accepted payment in an amount equal to
the purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered; PROVIDED that each Note purchased and each new Note issued
shall be in a principal amount of $1,000 or integral multiples thereof. The
Company will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. The Company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means: (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary, PROVIDED that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) a Temporary Cash
Investment; (iii) commission, payroll, travel and similar advances to cover
matters that are expected at the time of such
66
advances ultimately to be treated as expenses in accordance with GAAP; (iv)
stock, obligations or securities received in satisfaction of judgments; (v)
Investments in prepaid expenses, negotiable instruments held for collection, and
lease, utility and workers' compensation, performance and other similar
deposits; and (vi) Interest Rate Agreements and Currency Agreements to the
extent permitted under clause (iv) of the "Limitation on Indebtedness" covenant
described below.
"Permitted Liens" means: (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provisions, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
(including, without limitation, Acquired Assets) acquired after the Closing
Date; PROVIDED that (a) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with the "Limitation on Indebtedness"
covenant described below, to finance the cost (including, without limitation,
the cost of design, development, construction, acquisition, installation,
improvement, transportation or integration) of the real or personal property
subject thereto and such Lien is created prior to, at the time of or within six
months after the latest of the acquisition, the completion of construction or
the commencement of full operation of such real or personal property; PROVIDED
that in the case of Acquired Assets, the Lien secures the Indebtedness Incurred
to purchase the Capital Stock of the Person to make such Person a Restricted
Subsidiary, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to or
cover any real or personal property other than such real or personal property
and any improvements on such real or personal property and any proceeds thereof;
(vii) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
PROVIDED that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired
and any proceeds thereof; (xii) Liens in favor of the Company or any Restricted
Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order
against the Company or any Restricted Subsidiary that does not give rise to an
Event of Default; (xiv) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (xv) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods; (xvi) Liens
encumbering customary initial deposits and margin deposits, and other Liens that
are either within the general parameters customary in the industry and incurred
in the ordinary course of business, in each case securing Indebtedness under
Interest Rate Agreements and Currency Agreements and forward contracts, options,
future contracts, futures options or similar agreements or arrangements designed
solely to protect the Company or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities; (xvii)
Liens arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Company and its Restricted Subsidiaries prior to the
Closing Date;
67
(xviii) Liens on or sales of receivables, including related intangible assets
and proceeds thereof; and (xix) Liens that secure Indebtedness with an aggregate
principal amount not to exceed $5 million at any time outstanding.
"Pledge Account" means the accounts established with the Trustee pursuant
to the terms of the Pledge Agreement for the purchase of the Pledged Securities.
"Pledge Agreement" means the Pledge and Security Agreement, dated as of the
Closing Date, made by BTI and Business Telecom in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. Government securities to be purchased
and held in the Pledge Account in accordance with the Pledge Agreement.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable in any material respect
to the holders of such Capital Stock than the provisions contained in
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below are to the holders of the Notes and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock pursuant to such provision prior to the Company's repurchase of such Notes
as are required to be repurchased pursuant to the "Limitation on Asset Sales"
and "Repurchase of Notes upon a Change of Control" covenants described below.
"Reorganization" means the merger of BTI with a wholly owned subsidiary of
BTI Telecom pursuant to which (i) the shareholders of BTI receive shares of
Capital Stock (other than Redeemable Stock) of BTI Telecom, (ii) BTI becomes a
wholly owned subsidiary of BTI Telecom and (iii) BTI will be converted from an S
corporation to a C corporation.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Share Repurchase" means the purchase, on or prior to the Closing Date, by
BTI of all outstanding Capital Stock of BTI not owned by Peter T. Loftin for
approximately $28.5 million.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiary or (ii) as of
the end of such fiscal year, was the owner of more than 10% of the consolidated
assets of the Company and its Restricted Subsidiaries, all as set forth on the
most recently available consolidated financial statements of the Company for
such fiscal year.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
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"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in the
Telecommunications Business that by its terms, or by the terms of any agreement
or instrument pursuant to which such Indebtedness is Incurred, (i) is expressly
made subordinate in right of payment to the Notes and (ii) provides that no
payment of principal, premium or interest on, or any other payment with respect
to, such Indebtedness may be made prior to the payment in full of all of the
Company's obligations under the Notes; PROVIDED that such Indebtedness may
provide for and be repaid at any time from the proceeds of the sale of Capital
Stock (other than Redeemable Stock) of the Company after the Incurrence of such
Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Substantially All" of the assets of a corporation has no established
definition under New York law, which governs the Indenture. Thus, for example,
if the Company were to engage in a transaction in which it disposed of less than
all of its assets, a question of interpretation could arise as to whether such
disposition was of "substantially all" of its assets. As a consequence, in such
an event the Company might not make an Offer to Purchase unless a Holder were to
convince the Company or a court of competent jurisdiction that the transaction
was a disposition of "substantially all" of the Company's assets.
"Telecommunications Business" means the development, ownership or operation
of one or more telephone, telecommunications or information systems or the
provision of telephony, telecommunications or information services (including,
without limitation, any voice, video transmission, data or Internet services)
and any related, ancillary or complementary business.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof; (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor; (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above; (iv) commercial paper, maturing not more than one year after the
date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard & Poor's Ratings Services; and (v)
securities with maturities of six months or less from the date of acquisition
issued or fully and unconditionally guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Services or Moody's Investors Service, Inc.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Transactions" means, collectively, the BTI Refinancing, the FiberSouth
Acquisition, the Reorganization, the Share Repurchase and the sale of the Notes.
"U.S. Government Securities" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised
69
by and acting as an agency or instrumentality of the United States of America
(x) the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America or (y) that are rated at least
"Aaa" (or the then equivalent grade) by Moody's Investors Service, Inc. or "AAA"
(or the then equivalent grade) by Standard & Poor's Ratings Services.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
"Limitation on Restricted Payments" covenant described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that (i) no Default or Event of Default shall have occurred
and be continuing at the time of or after giving effect to such designation and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such time, have been
permitted to be Incurred for all purposes of the Indenture. Any such designation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); PROVIDED that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds thereof, the Consolidated Leverage Ratio would
be less than or equal to 7 to 1, for Indebtedness Incurred on or prior to
September 30, 1999, or less than or equal to 5 to 1, for Indebtedness Incurred
thereafter.
Notwithstanding the foregoing, the Company, and (except as specified below)
any Restricted Subsidiary, may Incur each and all of the following: (i)
Indebtedness in an aggregate principal amount outstanding or available at any
time not to exceed $100 million, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales" covenant
described below; (ii) Indebtedness owed (A) to the Company and evidenced by a
promissory note or (B) to any Restricted Subsidiary; PROVIDED that any event
which results in such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other than to the
Company or another Restricted Subsidiary) shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness not permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of which are used
to refinance or refund, then outstanding Indebtedness (other than Indebtedness
Incurred under clause (i), (ii), (iv), (vi), (ix), (x) or (xi) of this
paragraph) and any refinancings of such new Indebtedness in an amount not to
exceed the amount so refinanced or refunded (plus premiums, accrued interest,
fees and expenses); PROVIDED that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is PARI PASSU in right of
payment with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is PARI PASSU in right of payment with
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
of instrument pursuant to which such new Indebtedness is outstanding, is
70
expressly made PARI PASSU in right of payment with, or subordinate in right of
payment to the remaining Notes, (B) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made subordinate in
right of payment to the Notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded; and
PROVIDED FURTHER that in no event may Indebtedness of the Company be refinanced
by means of any Indebtedness of any Restricted Subsidiary pursuant to this
clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business, (B) under Currency Agreements
and Interest Rate Agreements; PROVIDED that such agreements (a) are designed
solely to protect the Company or its Subsidiaries against fluctuations in
foreign currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder or (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the extent
the net proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change of Control or (B) deposited to
defease all of the Notes as described below under "Defeasance"; (vi) Guarantees
of the Notes and Guarantees of Indebtedness of the Company by any Restricted
Subsidiary, PROVIDED the Guarantee of such Indebtedness is permitted by and made
in accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness Incurred to finance
the cost (including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) to acquire equipment,
inventory or network assets (including acquisitions by way of a Capitalized
Lease and acquisitions of the Capital Stock of a Person that becomes a
Restricted Subsidiary to the extent of the Fair Market Value of the equipment,
inventory or network assets so acquired) by the Company or a Restricted
Subsidiary after the Closing Date; (viii) Indebtedness of the Company not to
exceed, at any one time outstanding, two times (A) the Net Cash Proceeds
received by the Company after the Closing Date as a capital contribution or from
the issuance and sale of its Capital Stock (other than Redeemable Stock) to a
Person that is not a Subsidiary of the Company, to the extent such Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or
clause (iii), (iv) or (vi) of the second paragraph of the "Limitation on
Restricted Payments" covenant described below to make a Restricted Payment and
(B) 80% of the Fair Market Value of property (other than cash and cash
equivalents) received by the Company after the Closing Date from a contribution
of capital or the sale of its Capital Stock (other than Redeemable Stock) to a
Person that is not a Subsidiary of the Company, to the extent such capital
contribution or sale of Capital Stock has not been used pursuant to clause
(iii), (iv) or (ix) of the second paragraph of the "Limitation on Restricted
Payments" covenant described below to make a Restricted Payment; PROVIDED that
such Indebtedness does not mature prior to the Stated Maturity of the Notes and
has an Average Life longer than the Notes; (ix) Strategic Subordinated
Indebtedness; (x) Indebtedness Incurred to finance Asset Acquisitions (and
refinancings of such Indebtedness) in an aggregate principal amount outstanding
at any time not to exceed $50 million, less the amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales" covenant
described below; PROVIDED that immediately after giving effect to the Incurrence
of such Indebtedness and the consummation of such Asset Acquisition, the
Company's Consolidated Leverage Ratio would be (A) less than or equal to the
Company's Consolidated Leverage Ratio immediately prior to such transactions and
(B) less than or equal to 7 to 1; and (xi) Indebtedness of the Company (in
addition to Indebtedness permitted under clauses (i) through (x) above) in an
aggregate principal amount outstanding or available at any time not to exceed
$25 million, less any amount of such Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described below.
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(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded due solely to the result of
fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under the
Credit Agreement on or prior to the Closing Date shall be treated as Incurred
pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (3) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses (other than Indebtedness referred to in clause (1) of the preceding
sentence), the Company, in its sole discretion, may classify such item of
Indebtedness in one or more of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Redeemable Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders, PROVIDED that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by Persons
other than the Company or any of its Restricted Subsidiaries, (ii) purchase,
redeem, retire or otherwise acquire for value any shares of Capital Stock of (A)
the Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes (other than, in each case, the purchase, repurchase or acquisition of
Indebtedness in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in any case due within one year after the date of
such purchase, repurchase or acquisition) or (iv) make any Investment, other
than a Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) above being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment: (A) a Default or Event of Default shall have occurred and be
continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant or (C) the
aggregate amount of all Restricted Payments (the amount, if other than in cash,
to be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) made after the Closing
Date shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (excluding, for purposes of such
computation, income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on the first
day of the fiscal quarter immediately following the Closing Date and ending on
the last day of the last fiscal quarter preceding the Transaction Date for which
reports have been filed with the Commission or provided to the Trustee pursuant
to the "Commission Reports and Reports to Holders" covenant PLUS (2) the
aggregate Net Cash Proceeds received by the Company after the Closing Date from
a capital contribution or the issuance and sale permitted by the Indenture to a
Person who is not a Subsidiary of the Company of (a) its Capital Stock (other
than Redeemable Stock), (b) any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Redeemable Stock or
any options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes) and (c) Indebtedness of the Company that has been exchanged for or
converted into Capital Stock of the Company (other than Redeemable Stock), in
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each case except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (viii) of the second paragraph under the
"Limitation on Indebtedness" covenant, PLUS (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments and
reductions in Investments made pursuant to clause (vi) of the second paragraph
of this "Limitation on Restricted Payments" covenant) in any Person resulting
from payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or proceeds is
included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in such case as provided in the definition of "Investments"), not to exceed, in
each case, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at such
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes.
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Redeemable Stock) of the Company (or options, warrants
or other rights to acquire such Capital Stock); (iv) the making of any principal
payment or the repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness of the Company which is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent offering of shares of the Capital Stock (other than
Redeemable Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions to dissenting
stockholders pursuant to applicable law in connection with a consolidation,
merger or transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially all
of the property and assets of the Company; (vi) Investments in any Person the
primary business of which is related, ancillary or complementary to the business
of the Company and its Restricted Subsidiaries on the date of such Investments;
PROVIDED that the aggregate amount of Investments made pursuant to this clause
(vi) does not exceed the sum of (x) $25 million plus (y) the amount of Net Cash
Proceeds received by the Company after the Closing Date as a capital
contribution or from the sale of its Capital Stock (other than Redeemable Stock)
to a Person who is not a Subsidiary of the Company, except to the extent such
Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) under
the "Limitation on Indebtedness" covenant or to make Restricted Payments
pursuant to clause (C)(2) of the first paragraph, or clauses (iii) or (iv) of
this paragraph, of this "Limitation on Restricted Payments" covenant, plus (z)
the net reduction in Investments made pursuant to this clause (vi) resulting
from distributions on or repayments of such Investments or from the Net Cash
Proceeds from the sale of any such Investment (except in each case to the extent
any such payment or proceeds is included in the calculation of Adjusted
Consolidated Net Income) or from such Person becoming a Restricted Subsidiary
(valued in each case as provided in the definition of "Investments"), PROVIDED
that the net reduction in any Investment shall not exceed the amount of such
Investment; (vii) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company to the extent
necessary, in the judgment of the Board of Directors, to prevent the loss or
secure the renewal or reinstatement of any license or franchise held by the
Company or any Restricted Subsidiary from any governmental agency; (viii) the
purchase, redemption, retirement or other acquisition for value of shares of
Capital Stock of the Company, or options to purchase such shares, held by
directors, employees, or former directors or employees of the Company or any
Restricted Subsidiary (or their estates or beneficiaries under their estates),
other than an Affiliate of the Company, upon their death, disability,
retirement, termination of employment or pursuant to the terms of any agreement
under which such shares of Capital Stock or options were issued; PROVIDED that
the aggregate consideration paid for such purchase, redemption, retirement or
other acquisition for value of such shares of Capital Stock or options after the
Closing Date does not exceed $5 million in the aggregate (unless such
repurchases are made with the proceeds of insurance policies and the shares of
Capital Stock are repurchased from the executors, administrators, testamentary
trustees, heirs, legatees or beneficiaries); (ix) Investments acquired as a
capital contribution to the Company or in exchange for Capital Stock (other than
Redeemable Stock) of the Company; (x) distributions to shareholders (or former
shareholders of BTI) in respect of any
73
liability for federal, state, local or other taxes (including penalties and
interest, if any) under a tax indemnification agreement relating to the time BTI
was an S corporation; or (xi) the Share Repurchase and the Reorganization;
PROVIDED that, except in the case of clauses (i), (iii) and (iv), no Default or
Event of Default shall have occurred and be continuing, or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (ix)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii), (iv) and (vi) thereof, shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this "Limitation
on Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is PARI PASSU in right of payment with the
Notes, then the Net Cash Proceeds of such issuance shall be included in clause
(C) of the first paragraph of this "Limitation on Restricted Payments" covenant
only to the extent such proceeds are not used for such redemption, repurchase or
other acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Agreement, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements; PROVIDED
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by the Company or any Restricted
Subsidiary and existing at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (iv) in the case of clause (iv) of the first paragraph of
this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary; (v) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or (vi) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by the Company) and (C) the Company
determines that any such encumbrance or restriction will not materially affect
the Company's ability to make principal or interest payments on the Notes.
74
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted by the "Limitation on Liens"
covenant described below or (2) restricting the sale or other disposition of
property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary, (ii) issuances of director's qualifying shares, or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale or (iv) issuances or sales of Common Stock of a
Restricted Subsidiary, PROVIDED that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU in
right of payment with, or subordinate in right of payment to, the Notes
("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives, and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee; PROVIDED that this
paragraph shall not be applicable to (x) any Guarantee of any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or (y) any Guarantee of any Restricted
Subsidiary of Indebtedness Incurred (I) under Credit Facilities pursuant to
clause (i) of the second paragraph of the "Limitation on Indebtedness" covenant
or (II) pursuant to clause (vii) of the second paragraph of the "Limitation on
Indebtedness" covenant. If the Guaranteed Indebtedness is (A) PARI PASSU in
right of payment with the Notes, then the Guarantee of such Guaranteed
Indebtedness shall be PARI PASSU in right of payment with, or subordinated in
right of payment to, the Subsidiary Guarantee or (B) subordinated in right of
payment to the Notes, then the Guarantee of such Guaranteed Indebtedness shall
be subordinated in right of payment to the Subsidiary Guarantee at least to the
extent that the Guaranteed Indebtedness is subordinated in right of payment to
the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable in any material respect to the Company or
such Restricted Subsidiary than could be obtained, at the time of such
transaction or, if such transaction is pursuant to a written
75
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to: (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
(x) any tax-sharing agreement between the Company and any other Person with
which the Company files a consolidated tax return or with which the Company is
part of a consolidated group for tax purposes and (y) any tax-indemnity
agreement between the Company and any shareholder (or former shareholder of BTI)
at the time BTI was an S corporation; (v) any Restricted Payments not prohibited
by the "Limitation on Restricted Payments" covenant; or (vi) the Transactions.
Notwithstanding the foregoing, any transaction covered by the first paragraph of
this "Limitation on Transactions with Stockholders and Affiliates" covenant and
not covered by clauses (ii) through (vi) of this paragraph, the aggregate amount
of which exceeds $1 million in value, must be approved or determined to be fair
in the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to: (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
PROVIDED that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens securing obligations under Credit
Facilities Incurred under clause (i) of the second paragraph of the "Limitation
on Indebtedness" covenant; or (vi) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if: (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
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LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the Fair Market Value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed $10 million, then the Company
shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months
after the date Net Cash Proceeds so received exceed $10 million (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Subsidiaries, or (B) invest an amount equal to such
excess Net Cash Proceeds, or the amount of such Net Cash Proceeds not so applied
pursuant to clause (A) (or enter into a definitive agreement committing to so
invest within 12 months after the date of such agreement), in capital assets of
a nature or type or that are used in a business (or in a Person having capital
assets of a nature or type, or engaged in a business) similar or related to the
nature or type of the property and assets of, or the business of, the Company
and its Restricted Subsidiaries existing on the date of such investment (as
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) and (ii) apply (no later than
the end of the 12-month period referred to in clause (i)) such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this "Limitation on Asset Sales" covenant. The amount of
such excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes plus, in
each case, accrued interest to the Payment Date.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of the Shelf Registration Statement
(the "Registration") and (ii) the date that is six months after the Closing
Date, in either case whether or not the Company is then required to file reports
with the Commission, the Company shall file with the Commission the annual,
quarterly and other reports and other information required by Section 13(a) or
15(d) of the Exchange Act (unless the Commission will not accept such a filing,
in which case the Company shall provide such documents to the Trustee). The
Company shall mail or cause to be mailed copies of such reports and information
to Holders and the Trustee within 15 days after the date it files such reports
and information with the Commission or after the date it would have been
required to file such reports and information with the Commission had it been
subject to such sections of the Exchange Act; PROVIDED, HOWEVER, that the copies
of such reports and information mailed to Holders may omit exhibits, which the
Company will supply to any Holder at such Holder's request. In addition, at all
times prior to the earlier of (i) the date of the Registration and (ii) six
months after the Closing Date, the Company shall, at its cost, deliver to each
Holder of the Notes quarterly and annual reports substantially equivalent to
those which would be required by the Exchange Act. In addition, at all times
prior to the Registration, upon the request of any Holder or any prospective
purchaser of the Notes designated by a Holder, the Company shall supply to such
Holder or such prospective purchaser the information required under Rule 144A
under the Securities Act.
REPURCHASE OF EXCHANGE NOTES UPON A CHANGE OF CONTROL
The Company shall commence, within 30 days after the occurrence of a Change
of Control, and consummate an Offer to Purchase for all Exchange Notes then
outstanding, at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest to the Payment Date.
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There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Exchange Notes) required by the foregoing covenant (as
well as may be contained in other securities of the Company which might be
outstanding at the time). The foregoing covenant requiring the Company to
repurchase the Exchange Notes will, unless consents are obtained, require the
Company to repay all indebtedness then outstanding which by its terms would
prohibit such Exchange Note repurchase, either prior to or concurrently with
such Exchange Note repurchase.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) defaults in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) defaults in the payment of interest on any Note
when the same becomes due and payable, which defaults continue for a period of
30 days; PROVIDED that a failure to make any of the first six scheduled interest
payments on the Notes on the applicable Interest Payment Date will constitute an
Event of Default with no grace or cure period; (c) defaults in the performance
or breach of the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the assets of the
Company or mandatory redemption, or the failure to make or consummate an Offer
to Purchase in accordance with the "Limitation on Asset Sales" or the
"Repurchase of Notes upon a Change of Control" covenant or "Special Mandatory
Redemption and Repurchase Offer" provisions described above; (d) defaults in the
performance or breach of any covenant or agreement of the Company in the
Indenture or under the Notes (other than a default specified in clause (a), (b)
or (c) above), which default or breach continues for a period of 30 consecutive
days after written notice by the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, (e) there occurs with
respect to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $5 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $5 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 60 consecutive days;
(h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors; or (i) the Pledge Agreement shall cease to be in full force and
effect or enforceable in accordance with its terms, other than in accordance
with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a
78
declaration of acceleration, such principal, premium, if any, and accrued
interest shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (e) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall automatically become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes, by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see " -- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the performance of the Company and its Restricted Subsidiaries
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or Substantially All of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof, and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company on
all of the Notes and under the Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a PRO
FORMA basis, the Company or any Person becoming the successor obligor of the
Notes shall have Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction;
(iv) immediately after giving effect to such transaction on a PRO FORMA basis,
the Company, or any Person becoming the successor obligor of
79
the Notes, as the case may be, could Incur at least $1.00 of Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant described
above; PROVIDED, HOWEVER, that this clause (iv) shall not apply to a
consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a
positive net worth, PROVIDED that in connection with any such merger or
consolidation, no consideration (except Capital Stock (other than Redeemable
Stock) in the surviving Person or the Company (or a Person that owns directly or
indirectly all of the Capital Stock of the surviving Person or the Company
immediately following such transaction)) shall be issued or distributed to the
shareholders of the Company; and (v) the Company delivers to the Trustee an
Officers' Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv) above) and an Opinion of Counsel, in each
case stating that such consolidation, merger or transfer and such supplemental
indenture comply with this provision and that all conditions precedent provided
for herein relating to such transaction have been complied with; PROVIDED,
HOWEVER, that clauses (iii) and (iv) above do not apply if, in the good faith
determination of the Board of Directors of the Company, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of the Company; and PROVIDED
FURTHER that any such transaction shall not have as one of its purposes the
evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
and unpaid interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, (B) the Company has
delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that
Holders will not recognize income, gain or loss for federal income tax purposes
as a result of the Company's exercise of its option under this "Defeasance"
provision and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, which Opinion of Counsel
must be based upon (and accompanied by a copy of) a ruling of the Internal
Revenue Service to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is no longer
required or (y) a ruling directed to the Trustee received from the Internal
Revenue Service to the same effect as the aforementioned Opinion of Counsel and
(ii) an Opinion of Counsel to the effect that the creation of the defeasance
trust does not violate the Investment Company Act of 1940 and after the passage
of 123 days following the deposit, the trust fund will not be subject to the
effect of Section 547 of the United States Bankruptcy Code or Section 15 of the
New York Debtor and Creditor Law, (C) immediately after giving effect to such
deposit on a PRO FORMA basis, no Event of Default, or event that after the
giving of notice or lapse of time or both would become an Event of Default,
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day, after the date of such deposit, and such deposit
shall not result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which the Company or any of its Subsidiaries is bound, and (D) if
at such time the Notes are listed on a national securities exchange, the Company
has delivered to the Trustee an Opinion of Counsel to the effect that the Notes
will not be delisted as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (d) under "Events of Default" with respect to such covenants
and clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and
that clauses (e) and (f) under "Events of Default" shall be deemed not to be
Events of Default, upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
80
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
The Company and the Trustee, without the consent of the Holders, may amend
the Indenture for certain specified purposes, including, without limitation, (i)
curing ambiguities, defects or inconsistencies and (ii) other changes so long as
any such change does not adversely affect the rights of any Holders in any
material respect. Modifications and amendments of the Indenture may be made by
the Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Notes; PROVIDED,
HOWEVER, that no such modification or amendment may, without the consent of each
Holder affected thereby, (i) change the Stated Maturity of the principal of, or
any installment of interest on, any Note, (ii) reduce the principal of, or
premium, if any, or interest on, any Note, (iii) change the place or currency of
payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes or (vii) reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is necessary
for waiver of compliance with certain provisions of the Indenture or for waiver
of certain defaults.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form without interest coupons. Notes sold in offshore transactions in
reliance on Regulation S under the Securities Act will initially be represented
by one or more temporary global Notes in definitive, fully registered form
without interest coupons (each a "Temporary Regulation S Global Note") and will
be deposited with the Trustee as custodian for, and registered in the name of a
nominee of, DTC for the accounts of Euroclear and Cedel Bank. The Temporary
Regulation S Global Note will be exchangeable for one or more permanent global
Notes (each a "Permanent Regulation S Global Note"; and together with the
Temporary Regulation S Global Notes, the "Regulation S Global Note") on or after
the 40th day following the Closing Date upon certification that the beneficial
interests in such global Note are owned by non-U.S. persons. Prior to the 40th
day after the Closing Date, beneficial interests in the Temporary Regulation S
Global Note may be held only through Euroclear or Cedel Bank.
Notes sold in reliance on Rule 144A will be represented by one or more
permanent global Notes in definitive, fully registered form without interest
coupons (each a "Restricted Global Note"; and together with the Regulation S
Global Note, the "Global Notes") and will be deposited with the Trustee as
custodian for, and registered in the name of, a nominee of DTC.
Each Global Note (and any Notes issued for exchange therefor) will be
subject to certain restrictions on transfer set forth therein as described under
"Transfer Restrictions."
Notes originally purchased by or transferred to Institutional Accredited
Investors who are not qualified institutional buyers ("Non-Global Purchasers")
will be in registered form without interest coupons ("Certificated Notes"). Upon
the transfer of Certificated Notes initially issued to a Non-Global Purchaser to
a qualified institutional buyer or in accordance with Regulation S, such
Certificated Notes will, unless the relevant Global
81
Note has previously been exchanged in whole for Certificated Notes, be exchanged
for an interest in a Global Note. For a description of the restrictions on the
transfer of Certificated Notes, see "Transfer Restrictions."
THE GLOBAL NOTES. Ownership of beneficial interests in a Global Note will
be limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Ownership of beneficial interests in a
Global Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Qualified institutional buyers
may hold their interests in a Restricted Global Note directly through DTC if
they are participants in such system, or indirectly through organizations which
are participants in such system.
Investors may hold their interests in a Regulation S Global Note directly
through Cedel Bank or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such systems.
Investors may hold their interest in a Regulation S Global Note directly through
Cedel Bank and Euroclear will hold interests in the Regulation S Global Notes on
behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner of
an interest in a Global Note will be able to transfer that interest except in
accordance with the applicable procedures of DTC, in addition to those provided
for under the Indenture and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
The Company expects that DTC will take any action permitted to be taken by
a Holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interest in a Global Note is credited and only in
respect of such portion of the aggregate principal amount of Exchange Notes as
to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Exchange Notes, DTC will
exchange the applicable Global Note for Certificated Notes, which it will
distribute to its participants and which may be legended as set forth under the
heading "Transfer Restrictions."
The Company understands that DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A under the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates and certain other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
82
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note among
participants of DTC, Euroclear and Cedel Bank, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel Bank or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
The information in this section concerning DTC, Cedel Bank and Euroclear
and the book-entry system of each organization has been obtained from sources
that the Company believes to be reliable.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by the Company within 90 days or, if an
Event of Default under the Indenture has occurred and is continuing, the Company
will issue Certificated Notes, which may bear the legend referred to under
"Transfer Restrictions," in exchange for the Global Notes representing such
Notes. Upon the exchange of the entire Global Notes for Certificated Notes, the
Global Notes will be cancelled by the Trustee.
Holders of an interest in a Global Note may receive Certificated Notes,
which may bear the legend referred to under "Transfer Restrictions" in
accordance with the DTC's rules and procedures in addition to those provided for
under the Indenture.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, shareholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; PROVIDED, HOWEVER, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The Company has received the opinion of Wyrick Robbins Yates & Ponton LLP
(the "Tax Opinion") with respect to the material United States federal income
tax consequences to holders resulting from their exchange of the Initial Notes
for the Exchange Notes and the ownership and disposition of Exchange Notes under
currently applicable federal income tax law. The following summary and the Tax
Opinion are both based upon the provisions of the Internal Revenue Code of 1986,
as amended, the final, temporary and proposed regulations promulgated
thereunder, and administrative rulings and judicial decisions now in effect, all
of which are subject to change (possibly with retroactive effect) or different
interpretations. Neither the following summary nor the Tax Opinion is binding on
the Internal Revenue Service ("IRS") and there can be no assurance that the IRS
will take a similar view with respect to the tax consequences described below.
No ruling has been or will be requested by the Issuer from the IRS on any tax
matters relating to the Exchange Notes or the Exchange Offer. Neither this
discussion nor the Tax Opinion purports to address all of the possible federal
income tax consequences or any state, local or foreign tax consequences of the
acquisition, ownership and disposition of the Initial Notes, the
83
Exchange Notes or the Exchange Offer. Both this discussion and the Tax Opinion
are limited to investors who will hold the Initial Notes and the Exchange Notes
as capital assets and do not address the federal income tax consequences that
may be relevant to particular investors in light of their unique circumstances
or to certain types of investors (such as dealers in securities, insurance
companies, financial institutions, foreign corporations, partnerships, trusts,
nonresident individuals and tax-exempt entities) who may be subject to special
treatment under federal income tax laws. PERSONS CONSIDERING THE PURCHASE,
OWNERSHIP OR DISPOSITION OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR
SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR INTERNATIONAL TAXING JURISDICTION.
The Tax Opinion, a copy of which has been filed as an Exhibit to the
Registration Statement of which this Prospectus forms a part, states that:
(i) The Initial Notes and the Exchange Notes will be treated as
indebtedness of the Company.
(ii) The exchange of the Initial Notes for Exchange Notes pursuant to the
Exchange Offer will not be treated as an "exchange" because the Exchange Notes
will not be considered to differ materially in kind or extent from the Initial
Notes. Rather, the Exchange Notes received by a Holder of the Initial Notes will
be treated as a continuation of the Initial Notes in the hands of such Holder.
Accordingly, there will be no federal income tax consequences to Holders
exchanging the Initial Notes for the Exchange Notes pursuant to the Exchange
Offer. The holding period of Exchange Notes in the hands of a Holder will
include the holding period of the Initial Notes exchanged for such Exchange
Notes.
(iii) A Holder of an Initial Note or an Exchange Note will be required to
report stated interest on the Initial Note and the Exchange Note as interest
income in accordance with the Holder's method of accounting for tax purposes.
Because the Initial Notes were issued at par there is no original issue discount
pursuant to the de minimis exception to the "original issue discount" rules.
(iv) A Holder's tax basis in an Initial Note will generally be the Holder's
purchase price for the Initial Note. If a Holder of an Initial Note exchanges
the Initial Note for an Exchange Note pursuant to the Exchange Offer, the tax
basis of the Exchange Note immediately after such exchange will equal the
Holder's tax basis in the Initial Note immediately prior to the exchange.
(v) The sale, exchange, redemption or other disposition of an Initial Note
or an Exchange Note, except in the case of an exchange pursuant to the Exchange
Offer (see the above discussion), generally will be a taxable event. A Holder
generally will recognize gain or loss equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon such
sale, exchange, redemption or other taxable disposition of the Initial Note or
the Exchange Note (except to the extent attributable to accrued interest) and
(ii) the Holder's adjusted tax basis in such debt instrument. Such gain or loss
will be capital gain or loss, and will be mid-term if the Initial Notes or
Exchange Notes have been held for longer than a year but no more than 18 months
at the time of sale or other disposition, and will be long-term if the Initial
Notes or the Exchange Notes have been held for more than 18 months at the time
of the sale or other disposition.
PURCHASERS OF INITIAL NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Initial Notes other than at par, including those
provisions of the Internal Revenue Code relating to the treatment of "market
discount" and "amortizable bond premium." Any such purchaser should consult its
tax advisor as to the consequences to it of the acquisition, ownership and
disposition of Initial Notes.
BACKUP WITHHOLDING
Unless a Holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Issuer and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Initial Notes and
the Exchange Notes, and (2) proceeds of sale of the Initial Notes and the
Exchange Notes, must be withheld and remitted to the United States Treasury.
Therefore, each Holder should complete and sign the Substitute Form W-9 included
with the Letter of Transmittal so as to provide the information and
certification necessary to avoid backup withholding. However,
84
certain Holders (including, among others, certain foreign individuals) are not
subject to these backup withholding and reporting requirements. For a foreign
individual Holder to qualify as an exempt foreign recipient, that Holder must
submit a statement, signed under penalties of perjury, attesting to that
individual's exempt foreign status. Such statements can be obtained from the
Issuer. For further information concerning backup withholding and instructions
for completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the Substitute
Form W-9 if the Initial Notes are held in more than one name), contact the
Company's Controller, BTI Corporate Center, 4300 Six Forks Road, Raleigh, North
Carolina 27609, telephone (800) 849-9100.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to backup withholding will be
reduced by the amount of tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Initial Notes where such Initial Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period not to exceed 180 days after the Expiration Date, it will
furnish additional copies of this Prospectus, as amended or supplemented, to any
broker-dealer that reasonably requests such documents for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Exchange Notes will constitute a new issue of securities with no
established trading market. While the Company plans to apply for listing of the
Exchange Notes on the Luxembourg Stock market, the Company does not intend to
list the Exchange Notes on any U.S. national securities exchange or to seek
approval for quotation through any automated quotation system. The Company has
been advised by the Placement Agents that following completion of the Exchange
Offer, the Placement Agents intend to make a market in the Exchange Notes.
However, the Placement Agents are not obligated to do so and any market-making
activities with respect to the Exchange Notes may be discontinued at any time
without notice. Accordingly, no assurance can be given that an active public or
other market will develop for the Exchange Notes or as to the liquidity of or
the trading market for the Exchange Notes. If a trading market does not develop
or is not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may cease at any time. If a
public trading market develops for the Exchange Notes, future trading prices of
the Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, the market for similar securities, the financial
conditions and results of operations of the Company and other factors beyond the
control of the Company, including general economic conditions. Notwithstanding
the registration of the Exchange Notes in the Exchange Offer, holders who are
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) may publicly offer for
85
sale or resell the Exchange Notes only in compliance with the provisions of Rule
144 under the Securities Act or any other available exemptions under the
Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers, and will
indemnify the holders of the Initial Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the Notes offered hereby is being passed upon for the
Company by Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina, counsel
for the Company.
EXPERTS
The financial statements of BTI Telecom Corp. and FiberSouth, Inc. at
December 31, 1996 and 1995 and for the three years in the period ended December
31, 1996 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is not currently subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement (of which this
Prospectus is a part), the Company will become subject to the informational
requirements of the Exchange Act. In addition, the Indenture provides that,
regardless of whether the Company is required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as would be required to be filed with the Commission if the
Company were subject to the reporting requirements of the Exchange Act. The
Company will supply, or cause the Trustee to supply, to each holder of Exchange
Notes, without cost, copies of such reports or other information.
The Company has filed the Registration Statement (of which this Prospectus
is a part) under the Securities Act with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement. For
further information about the Company and the Exchange Offer, reference is made
to the Registration Statement and to the financial statements, exhibits and
schedules filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each such
document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission or, in
the case of certain such documents, by accessing the Commission's World Wide Web
site at http://www.sec.gov.
The Company is required by the terms of the Indenture to furnish the
Trustee with annual reports containing consolidated financial statements audited
by their independent public accountants and with quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
86
GLOSSARY
ACCESS -- Telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
ACCESS CHARGES -- The fees paid by long distance carriers to local exchange
carriers for originating and terminating long distance calls on their local
network.
AT&T -- AT&T Corp.
BELLSOUTH -- BellSouth Telecommunications, Inc.
BELLSOUTH MOBILITY -- BellSouth Mobility Inc.
CCI (MCLEOD) -- Consolidated Communications, Inc., a subsidiary of
McLeodUSA Incorporated.
CENTRAL OFFICES -- The switching centers or central switching facilities of
the local exchange carriers.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- A company authorized by
regulatory agencies to provide service in competition with the ILECs.
COLLOCATION -- The ability of a competitor carrier to connect its network
to the local exchange carriers' central offices. Physical collocation occurs
when a competitor carrier places its network connection equipment inside the
local exchange carrier central offices. Virtual collocation is an alternative to
physical collocation pursuant to which the local exchange carrier permits a
competitor carrier to connect its network to the local exchange carrier's
central offices on comparable terms, even though the competitor carrier's
network connection equipment is not physically located inside the central
offices.
DEDICATED -- Local telecommunications lines reserved for use by particular
customers, generally for connection between the customer's location and an
interexchange carrier POP.
DIALING PARITY -- The ability of a competing local or toll service provider
to provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation.
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
DS-1, DS-3 -- Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-1 service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 45 megabits per second.
GTE -- GTE Corporation.
GTOCS -- General Telephone Operating Companies.
IBM -- International Business Machines Corporation.
ILEC -- The incumbent local exchange carrier (typically one of the RBOCs
created by the divesture of AT&T).
INTERCONNECTION -- Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premise to facilitate such interconnection.
INTERCONNECTION DECISION -- The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act.
Portions of this order have been stayed by the U.S. Eighth Circuit Court of
Appeals.
INTERLATA -- Telecommunications services originating in a LATA and
terminating outside of that LATA.
INTERMEDIA -- Intermedia Communications, Inc.
87
INTRALATA -- Telecommunications services originating and terminating in the
same LATA.
ITC DELTACOM -- ITC^DeltaCom, Inc.
LATA (LOCAL ACCESS AND TRANSPORT AREA) -- A geographic area composed of
contiguous local exchanges, usually but not always within a single state. There
are approximately 200 LATAs in the United States.
LOCAL EXCHANGE -- A geographic area determined by the local exchange
carrier in which calls generally are transmitted without toll charges to the
calling or called party.
LOCAL EXCHANGE CARRIER -- A company providing local telephone services.
LONG DISTANCE CARRIERS (INTEREXCHANGE CARRIERS) -- Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.
LUCENT -- Lucent Technologies Inc.
MCI -- MCI Communications Corporation.
MCI METRO -- MCI Metro Access Transmission Services, Inc.
NEXTEL COMMUNICATIONS -- Nextel Communications, Inc.
NUMBER PORTABILITY -- The ability of an end user to change local exchange
carriers while retaining the same telephone number.
OC-N -- Standard telecommunications industry measurements for optical
transmission capacity distinguishable by bit rate transmitted per second and the
number of voice or data transmissions that can be simultaneously transmitted
through fiber optic cable. "N" represents the number of DS-3s involved. For
example, an OC-3 is generally equivalent to three DS-3s and has a bit rate of
155.52 megabits per second and can transmit 2,016 simultaneous voice or data
transmissions. An OC-12 has a bit rate of 622.08 megabits per second and can
transmit 8,064 simultaneous voice or data transmissions. An OC-48 has a bit rate
of 2488.32 megabits per second and can transmit 32,256 simultaneous voice or
data transmissions.
POPS (POINTS OF PRESENCE) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PSINET -- PSINet Inc.
PRIVATE LINE -- A dedicated telecommunications connection between end user
locations.
"PUC" OR "PUBLIC UTILITIES COMMISSION" -- A state regulatory body,
established in most states, which regulates utilities, including telephone
companies providing intrastate services.
RBOCS -- Regional Bell Operating Companies.
RECIPROCAL COMPENSATION -- The same compensation of a new competitive local
exchange carrier for termination of a local call by the local exchange carrier
on its network as the new competitor pays the local exchange carrier for
termination of local calls on the local exchange carrier network.
RESALE -- Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
ROUTE MILES -- The number of miles of the telecommunications path in which
fiber optic cables are installed.
SELF-HEALING RING -- A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub facility
with one or more network nodes. Traffic is routed between the hub and each of
the nodes simultaneously in both a clockwise and a counterclockwise direction.
In the event of a cable cut or component failure along one of these paths,
traffic will continue to flow along the alternate path so that no traffic is
lost. In the event of a catastrophic node failure, other nodes will be
unaffected because traffic will continue to flow along whichever path (primary
or alternate) does not pass through the affected node. The switch from the
primary to the alternate path will be imperceptible to most users.
88
SPRINT -- Sprint Corporation.
SPRINT MID-ATLANTIC -- Sprint Mid-Atlantic, Inc.
"SS7" OR "SIGNALING SYSTEM 7" SERVICES -- Signaling System 7 network
services utilize common channel signaling, which reduces connect time delays and
directs calls.
SWITCH -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
SWITCHED ACCESS TRANSPORT SERVICES -- Transportation of switched traffic
along dedicated lines between the local exchange carrier central offices and
long distance carrier POPs.
SWITCHED TRAFFIC -- Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange carrier's
central offices.
TIME WARNER -- Time Warner Communications.
US LEC -- US LEC of North Carolina, L.L.C.
UUNET -- UUNET Technologies, Inc.
UNBUNDLED ACCESS -- Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.
WORLDCOM -- WorldCom, Inc.
89
INDEX TO THE FINANCIAL STATEMENTS
BTI TELECOM CORP.
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (Unaudited).......... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the
Nine Months Ended September 30, 1996 and 1997 (Unaudited)............................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and
1996 and for the Nine Months Ended September 30, 1997 (Unaudited)..................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the
Nine Months Ended September 30, 1996 and 1997 (Unaudited)............................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
FIBERSOUTH, INC.
Report of Independent Auditors........................................................................... F-16
Balance Sheets as of December 31, 1995 and 1996.......................................................... F-17
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months
Ended September 30, 1996 and 1997 (Unaudited)......................................................... F-18
Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996 and for
the Nine Months Ended September 30, 1997 (Unaudited).................................................. F-19
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months
Ended September 30, 1996 and 1997 (Unaudited)......................................................... F-20
Notes to Financial Statements............................................................................ F-21
BTI TELECOM CORP. UNAUDITED PRO FORMA FINANCIAL INFORMATION
Pro Forma Financial Data................................................................................. F-24
Unaudited Pro Forma Condensed Statement of Operations for the Year Ended December 31, 1996............... F-25
Unaudited Pro Forma Condensed Statement of Operations for the Nine Months Ended September 30, 1997....... F-26
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, 1995 and 1996, and the related consolidated statements
of operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Raleigh, North Carolina
February 21, 1997
F-2
BTI TELECOM CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 305,840 $ 496,510 $ 78,233,461
Restricted cash..................................................... -- -- 24,649,021
Marketable equity securities........................................ 266,918 7,791 7,791
Accounts receivable, less allowance of $2,335,000 and $3,034,000 at
December 31, 1995 and 1996, respectively, and $3,758,000 at
September 30, 1997............................................... 14,801,168 21,605,693 23,942,119
Accounts and notes receivable from related parties (Note 6)......... 210,202 567,984 591,304
Prepaid expenses and other current assets........................... 708,772 639,985 1,301,292
Inventories......................................................... 644,050 719,027 571,971
----------- ----------- -------------
Total current assets.................................................. 16,936,950 24,036,990 129,296,959
Equipment, furniture and fixtures (Note 3):
Data processing equipment........................................... 3,762,629 5,281,764 6,336,925
Telephone service equipment......................................... 17,852,269 22,682,446 34,868,190
Paging equipment.................................................... 824,074 1,417,571 1,551,479
Office furnishings and equipment.................................... 2,302,650 2,736,666 2,832,116
Leasehold improvements.............................................. 921,304 1,951,446 2,744,110
Vehicles............................................................ 386,217 245,015 255,547
Construction in progress............................................ -- -- 106,496
----------- ----------- -------------
26,049,143 34,314,908 48,694,863
Accumulated depreciation and amortization........................... (9,256,709) (12,816,841) (18,464,826)
----------- ----------- -------------
16,792,434 21,498,067 30,230,037
Other assets:
Line access fees.................................................... 4,571,356 5,160,212 5,729,410
Deferred financing costs............................................ -- -- 9,321,201
Other............................................................... 275,173 945,621 942,065
----------- ----------- -------------
4,846,529 6,105,833 15,992,676
Accumulated amortization............................................ (2,607,268) (3,417,081) (3,470,478)
----------- ----------- -------------
2,239,261 2,688,752 12,522,198
Restricted cash, non-current.......................................... -- -- 49,444,256
----------- ----------- -------------
Total assets.......................................................... $35,968,645 $48,223,809 $ 221,493,450
----------- ----------- -------------
----------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $17,484,317 $16,665,127 $ 22,335,051
Accrued expenses and other payables................................. 1,970,380 2,643,335 4,572,989
Unearned revenue.................................................... 589,052 726,660 804,940
Shareholder notes payable (Note 7).................................. 1,411,282 1,938,408 924,393
Lease allowance, current............................................ 36,540 89,316 91,506
Current portion of capital lease obligations (Note 3)............... 627,698 382,893 90,919
Current portion of long-term debt (Note 4).......................... -- 850,052 --
Deferred tax liability, current..................................... -- -- 648,000
----------- ----------- -------------
Total current liabilities............................................. 22,119,269 23,295,791 29,467,798
Capital lease obligations, less current portion (Note 3).............. 540,546 95,635 24,404
Long-term debt, less current portion (Note 4)......................... 10,973,913 21,750,622 --
Senior notes.......................................................... -- -- 250,000,000
Shareholder notes payable, less current portion....................... -- -- 1,006,100
Lease allowance, less current portion................................. 438,358 707,363 675,579
Deferred tax liability, less current portion.......................... -- -- 2,135,436
Accrued compensation expense.......................................... -- -- 908,779
Other long-term liabilities........................................... -- -- 405,330
Shareholders' equity (deficit):
Common Stock, no par value, authorized 100,000,000 shares, issued
and outstanding 20,000,000 shares at December 31, 1995 and 1996
and 10,000,000 at September 30, 1997............................. 73,336 73,336 36,668
Additional paid-in-capital.......................................... 326,684 326,684 707,500
Unrealized gain on equity securities................................ 82,085 2,345 2,345
Retained earnings................................................... 1,414,454 1,972,033 (63,876,489)
----------- ----------- -------------
Total shareholders' equity (deficit).................................. 1,896,559 2,374,398 (63,129,976)
----------- ----------- -------------
Total liabilities and shareholders' equity (deficit).................. $35,968,645 $48,223,809 $ 221,493,450
----------- ----------- -------------
----------- ----------- -------------
See accompanying notes.
F-3
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
Revenue......................... $91,547,763 $114,536,706 $148,780,816 $106,237,643 $145,145,510
Cost of services................ 54,424,983 68,199,125 90,820,467 62,884,645 101,238,476
----------- ------------ ------------ ------------ ------------
Gross profit.................... 37,122,780 46,337,581 57,960,349 43,352,998 43,907,034
Selling, general and
administrative expenses....... 33,671,250 44,732,343 53,791,036 40,688,329 43,753,394
----------- ------------ ------------ ------------ ------------
Income from operations.......... 3,451,530 1,605,238 4,169,313 2,664,669 153,640
Other income (expense):
Interest expense.............. (749,661) (1,296,707) (1,695,324) (1,366,903) (2,108,730)
Gain on sale of marketable
securities................. -- 62,298 131,910 -- --
----------- ------------ ------------ ------------ ------------
Net income (loss) before income
taxes......................... 2,701,869 370,829 2,605,899 1,297,766 (1,955,090)
Income taxes:
Deferred...................... -- -- -- -- 2,210,000
----------- ------------ ------------ ------------ ------------
Net income (loss)............... $ 2,701,869 $ 370,829 $ 2,605,899 $ 1,297,766 $ (4,165,090)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Pro forma net income (loss)
(Note 9) (unaudited).......... $ 1,567,084 $ 215,081 $ 1,511,421 $ 752,704 $ (4,165,090)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Pro forma earnings (loss) per
share (unaudited)............. $ .08 $ .01 $ .08 $ .04 $ (.21)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
Weighted average shares
outstanding................... 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
See accompanying notes.
F-4
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN INVESTMENT RETAINED SHAREHOLDERS'
STOCK CAPITAL GAINS EARNINGS EQUITY (DEFICIT)
-------- ---------- ---------- ------------ ----------------
Balance at December 31, 1993............... $ 73,336 $ 326,684 $ -- $ 3,588,983 $ 3,989,003
Dividends ($.13 per common share)........ -- -- -- (2,635,945) (2,635,945)
Net income............................... -- -- -- 2,701,869 2,701,869
Unrealized gains on investments.......... -- -- 15,444 -- 15,444
-------- ---------- ---------- ------------ ----------------
Balance at December 31, 1994............... 73,336 326,684 15,444 3,654,907 4,070,371
Dividends ($.13 per common share)........ -- -- -- (2,611,282) (2,611,282)
Net income............................... -- -- -- 370,829 370,829
Increase in unrealized gains............. -- -- 66,641 -- 66,641
-------- ---------- ---------- ------------ ----------------
Balance at December 31, 1995............... 73,336 326,684 82,085 1,414,454 1,896,559
Dividends ($.10 per common share)........ -- -- -- (2,048,320) (2,048,320)
Net income............................... -- -- -- 2,605,899 2,605,899
Decrease in unrealized gains............. -- -- (79,740) -- (79,740)
-------- ---------- ---------- ------------ ----------------
Balance at December 31, 1996............... 73,336 326,684 2,345 1,972,033 2,374,398
Repurchase of shares (unaudited)......... (36,668) (326,684) -- (27,922,087) (28,285,439)
Compensation related to stock options
(unaudited)........................... -- 707,500 -- -- 707,500
Acquisition of Fiber South (unaudited)... -- -- (32,174,949) (32,174,949)
Dividends (unaudited) ($.08 per common
share)................................ -- -- -- (1,586,396) (1,586,396)
Net loss (unaudited)..................... -- -- -- (4,165,090) (4,165,090)
-------- ---------- ---------- ------------ ----------------
Balance at September 30, 1997
(unaudited).............................. $ 36,668 $ 707,500 $ 2,345 $(63,876,489) $(63,129,976)
-------- ---------- ---------- ------------ ----------------
-------- ---------- ---------- ------------ ----------------
See accompanying notes.
F-5
BTI TELECOM CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -----------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------- ------------- -------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)............................ $ 2,701,869 $ 370,829 $ 2,605,899 $ 1,297,766 $ (4,165,090)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation............................... 2,651,644 2,402,736 4,101,249 3,205,758 3,732,558
Amortization............................... 97,259 670,632 370,374 50,768 812,442
Loss (gain) on disposal of fixed assets.... -- 15,471 682 13,704 (2,164)
Non-cash compensation expense related to
stock options............................ -- -- -- -- 707,500
Deferred interest expense on shareholder
note..................................... -- 92,990 156,709 113,741 (7,915)
Changes in operating assets and
liabilities:
Accounts and notes receivable, including
related parties........................ (4,223,390) (1,177,441) (7,162,307) (5,367,954) (2,160,998)
Prepaid expenses......................... (726,166) 1,067,459 68,787 (19,145) (159,594)
Inventories.............................. (207,880) (775,743) (629,894) (328,475) 147,056
Accounts payable, accrued expenses and
unearned revenue....................... 5,508,308 6,304,419 (8,627) (669,870) 5,960,171
Lease allowance.......................... -- 474,898 321,781 258,509 (29,594)
Deferred taxes........................... -- -- -- -- 2,210,000
Deferred promotional discounts........... 429,211 -- -- -- --
----------- ------------ ------------- ------------- -------------
Net cash provided by (used in) operating
activities................................. 6,230,855 9,446,250 (175,347) (1,445,198) 7,044,372
INVESTING ACTIVITIES
Proceeds from disposals of property and
equipment.................................. -- -- 187,643 25,300 194,025
Purchases of marketable equity securities.... (95,371) (254,008) -- -- --
Sales of marketable equity securities........ -- 250,441 179,387 178,363 --
Change in restricted cash.................... -- -- -- -- (74,093,277)
Purchases of equipment, furniture and
fixtures................................... (3,626,248) (9,710,756) (8,000,851) (5,340,701) (7,404,712)
Purchase of FiberSouth....................... -- -- -- -- (35,280,900)
Line access fees............................. (808,368) (1,007,110) (588,856) (350,291) (569,198)
----------- ------------ ------------- ------------- -------------
Net cash used in investing activities........ (4,529,987) (10,721,433) (8,222,677) (5,487,329) (117,154,062)
FINANCING ACTIVITIES
Change in checks issued not yet presented for
payment.................................... 73,884 (104,614) -- -- --
Proceeds from shareholder's notes payable.... 41,134 556,846 370,417 370,417 --
Payments on line-of-credit borrowings........ 500,000 (500,000) -- -- --
Payments on short-term borrowings............ 700,000 (700,000) -- -- --
Proceeds from long-term borrowings........... 1,235,052 28,907,308 165,944,830 119,776,703 218,673,659
Payments on long-term borrowings............. (334,091) (19,370,042) (154,318,069) (110,169,651) (241,274,333)
Proceeds from Senior notes................... -- -- -- -- 250,000,000
Payments on capital leases................... (1,280,902) (4,424,429) (689,716) (504,086) (363,205)
Increase in deferred financing costs and
other assets............................... -- (172,764) (670,448) (1,045,304) (9,317,645)
Reacquisition of common stock................ -- -- -- -- (28,285,439)
Dividends paid............................... (2,635,945) (2,611,282) (2,048,320) (1,677,903) (1,586,396)
----------- ------------ ------------- ------------- -------------
Net cash (used in) provided by financing
activities................................. (1,700,868) 1,581,023 8,588,694 6,750,176 187,846,641
(Decrease) increase in cash and cash
equivalents................................ -- 305,840 190,670 (182,351) 77,736,951
Cash at beginning of period.................. -- -- 305,840 305,840 496,510
----------- ------------ ------------- ------------- -------------
Cash at end of period........................ $ -- $ 305,840 $ 496,510 $ 123,489 $ 78,233,461
----------- ------------ ------------- ------------- -------------
----------- ------------ ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest....................... $ 741,000 $ 1,171,000 $ 1,480,000 $ 1,557,729 $ 2,508,639
----------- ------------ ------------- ------------- -------------
----------- ------------ ------------- ------------- -------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Transfer of paging equipment from inventory
to equipment............................... $ 154,042 $ 339,573 $ 554,917 $ -- $ --
----------- ------------ ------------- ------------- -------------
----------- ------------ ------------- ------------- -------------
Capital lease obligations incurred (Note
2)......................................... $ 1,416,777 $ 102,592 $ -- $ -- $ --
----------- ------------ ------------- ------------- -------------
----------- ------------ ------------- ------------- -------------
See accompanying notes.
F-6
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OF THE COMPANY
The Company, which began operations in 1984, provides telecommunications
services, primarily to commercial customers located in the southeastern United
States.
BASIS OF PRESENTATION
During 1997, Business Telecom, Inc. was reorganized into a new corporate
structure consisting of BTI Telecom Corp. as parent company and Business
Telecom, Inc. as a wholly owned subsidiary. The consolidated financial
statements include the accounts of BTI Telecom Corp. (the "Company") and
Business Telecom, Inc. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
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.
INVESTMENTS IN EQUITY SECURITIES
As of January 1, 1994, the Company implemented the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under this
pronouncement, securities are classified as held-to maturity, available-for-sale
or trading securities. Held-to-maturity securities are carried at amortized
cost. Available-for-sale and trading securities are carried at estimated fair
value. Unrealized holding gains and losses are carried as a separate component
of shareholders' equity for available-for-sale securities and are reported in
earnings for trading securities. In 1995 and 1996, the Company's marketable
equity securities were classified as available-for-sale and carried at fair
market value.
The following is a summary of available-for-sale securities:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
December 31, 1995:
Available-for-sale securities.................................. $184,833 $ 85,357 $3,272 $ 266,918
December 31, 1996:
Available-for-sale securities.................................. $ 5,446 $ 4,210 $1,865 $ 7,791
Estimated fair value represents market value of the securities at December
31, 1995 and 1996.
INCOME TAXES
The Company has elected to be taxed for federal and state income tax
purposes as an S corporation under provisions of the Internal Revenue Code.
Consequently income, losses and credits are passed through directly to the
shareholders, rather than being taxed at the corporate level.
REVENUE RECOGNITION
Revenue for telecommunications services is recognized as services are
performed. Because of 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. This revenue, which has been earned but not yet billed to customers, is
included in accounts receivable. Accounts receivable included $2,998,707,
$2,869,997 and $6,374,833 in accrued revenue at December 31, 1995 and 1996 and
September 30, 1997, respectively.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated on the basis of cost, which is
being amortized over the estimated useful lives of the assets principally by the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.
F-7
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
To more accurately match the depreciable useful lives with actual economic
lives, during 1996 the Company changed the estimated average useful lives used
to compute depreciation for some of its leasehold improvements from 35 years to
between five and 20 years. The effect of this change was a decrease in net
income of $35,000 in 1996. The Company made a similar estimate revision in 1995,
changing the useful life for most of its switching equipment from 5 years to 7
years. The effect of this change was an increase in net income of $650,000 in
1995. These changes did not affect cash flow.
LONG LIVED ASSETS
Upon indication of impairment, the Company's policy for assessing
impairment of long lived assets is to calculate the undiscounted projected
future cash flows of the asset expected to be generated over the remaining
useful life of the asset. This amount is compared to the carrying value of the
asset to determine if the asset is impaired. Based on the application of this
policy, no impairments were recognized during 1995 or 1996 or for the nine
months ended September 30, 1997.
LINE ACCESS FEES AND OTHER ASSETS
Line access fees are capitalized and amortized over the estimated period
the related lines will be used by the Company (60 months) using the
straight-line method.
Other assets consist primarily of loan origination fees and related
financing costs amortized ratably over the life of the loan (see Note 3).
Deferred promotional discounts on sales to customers are amortized over the
term of the customer's contract.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
cost flow assumption) or market, and consist primarily of paging equipment.
Paging equipment may also be leased to customers, at which time it is
reclassified from inventory to equipment, furniture and fixtures.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ADVERTISING EXPENSE
Statement of Position 93-7 "Reporting on Advertising Costs" was implemented
by the Company during the year ended December 31, 1995. As a result, the Company
capitalized approximately $254,000 in direct response advertising costs in 1996
of which approximately $172,000 remained unamortized at December 31, 1996. The
costs are amortized into expense over the estimated future benefit period. The
remaining costs of advertising are expensed as incurred. The Company expensed
$163,190, $170,825 and $600,553 in advertising costs during 1994, 1995 and 1996,
respectively.
RECLASSIFICATIONS
Certain amounts in the December 31, 1994 and 1995 financial statements have
been reclassified to conform to the December 31, 1996 presentation. These
reclassifications had no material effect on net income or shareholders' equity
as previously reported.
F-8
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements include all adjustments
(consisting of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position of the
Company as of September 30, 1997 and the results of operations and cash flows
for the nine-month periods ended September 30, 1996 and 1997. Operating results
for the nine months ended September 30, 1997 are not necessarily indicative of
the results to be expected for future interim periods or the entire year. All
interim financial data presented is unaudited.
2. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument subject to potential
concentration of credit risk is trade accounts receivable which are unsecured.
As of December 31, 1996, the Company had no significant concentrations of credit
risk with individual customers. The Company uses the allowance method of
accounting for uncollectible accounts receivable. Management believes that
adequate provision has been made for uncollectible accounts as of December 31,
1996. The following table sets forth certain information about the Company's
allowance for doubtful accounts for the years ended December 31, 1994, 1995 and
1996:
BALANCE AT CHARGED TO UNCOLLECTIBLE BALANCE
BEGINNING OF COSTS AND ACCOUNTS AT END OF
DESCRIPTION PERIOD EXPENSES WRITTEN OFF PERIOD
- --------------------------------------------------------- ------------ ---------- ------------- ----------
Year ended December 31, 1994:
Allowance for doubtful accounts........................ $ 461,000 $1,172,000 $ 601,000 $1,032,000
------------ ---------- ------------- ----------
------------ ---------- ------------- ----------
Year ended December 31, 1995:
Allowance for doubtful accounts........................ $ 1,032,000 $1,997,000 $ 694,000 $2,335,000
------------ ---------- ------------- ----------
------------ ---------- ------------- ----------
Year ended December 31, 1996:
Allowance for doubtful accounts........................ $ 2,335,000 $3,440,000 $ 2,741,000 $3,034,000
------------ ---------- ------------- ----------
------------ ---------- ------------- ----------
Nine months ended September 30, 1997 (unaudited):
Allowance for doubtful accounts........................ $ 3,034,000 $2,808,000 $ 2,084,000 $3,758,000
------------ ---------- ------------- ----------
------------ ---------- ------------- ----------
3. LEASES
The Company acquired telephone equipment, furniture and fixtures with an
aggregate cost of $102,529 in 1995 and $0 in 1996, under capital lease
agreements which expire at various times through 1998. At the end of the lease
terms, the Company has the option to purchase the equipment for a nominal
amount.
Equipment, furniture and fixtures includes the following amounts for
capital leases:
DECEMBER 31,
------------------------
1995 1996
---------- ----------
Equipment, furniture and fixtures..................................................... $2,305,826 $2,193,419
Less allowance for amortization....................................................... 929,648 1,189,230
---------- ----------
$1,376,178 $1,004,189
---------- ----------
---------- ----------
Amortization of capital leases is included in amortization expense.
F-9
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. LEASES -- Continued
Future minimum lease payments, by year and in the aggregate, under capital
leases with remaining terms of one year or more consisted of the following at
December 31, 1996:
1997........................................................................ $ 406,406
1998........................................................................ 100,042
----------
Total minimum lease payments................................................ 506,448
Amounts representing interest............................................... (27,920)
----------
478,528
Current portion............................................................. (382,893)
----------
$ 95,635
----------
----------
During 1995, the Company entered into an operating lease for an airplane
with a company under common management. Rent expense related to this lease was
approximately $28,000 and $343,000 for the year ending December 31, 1995 and
1996, respectively. Amounts related to the lease which are included in the
payment horizon categories below are $342,557 per year for 1997 through 1999 and
$285,464 for the year 2000.
The Company rents its facilities and certain office and other equipment
under operating leases which contain 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:
1997................................... $ 3,804,555
1998................................... 3,607,736
1999................................... 3,304,467
2000................................... 2,652,855
2001................................... 1,778,992
Thereafter............................. 6,328,432
-----------
$21,477,037
-----------
-----------
Total rent expense was $1,230,633, $2,841,242 and $3,913,850 (including
facilities rents of $48,000, $55,000 and $65,000, respectively, paid to a
related party) in 1994, 1995 and 1996, respectively.
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
At December 31, 1995 and 1996, long-term debt outstanding consisted of the
following amounts owed to one finance company, secured by substantially all of
the Company's assets:
1995 1996
----------- -----------
Revolving credit facility for borrowings up to $20,000,000, due June 2001.......... $10,973,913 $ 7,699,942
Term loan payable in two quarterly installments of $250,000 beginning in August
1997 and fourteen quarterly installments of $450,000 thereafter with remaining
balance due June 2001............................................................ -- 10,000,000
Capital expenditures facility, payable in equal quarterly installments beginning
August 1997 with remaining balance due June 2001................................. -- 4,900,732
----------- -----------
10,973,913 22,600,674
Less current portion............................................................... -- 850,052
----------- -----------
$10,973,913 $21,750,622
----------- -----------
----------- -----------
The Company's loans described above bear interest, at the Company's option,
either at the 30-day LIBOR rate (5.53% at December 31, 1996) or the bank's prime
rate (8.25% at December 31, 1996), in each case plus an applicable "margin"
which varies between the ranges specified below based on the Company's financial
position as measured by defined ratios.
F-10
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY -- Continued
30-DAY PRIME
LIBOR PLUS PLUS
---------------- ----------------
Revolving Credit Facility.............. 1.50% -- 2.75% 0.00% -- 1.25%
Term Loan.............................. 2.00% -- 3.25% 0.50% -- 1.75%
Capital Expenditures Facility.......... 2.50% -- 3.75% 1.00% -- 2.25%
The loans also contain various financial covenants with which the Company
must comply on a quarterly basis. At December 31, 1996, the Company was in
compliance with these requirements.
Principal maturities of the above indebtedness during each of the following
five years are as follows:
1997................................... $ 850,052
1998................................... 2,500,105
1999................................... 2,500,105
2000................................... 2,500,105
2001................................... 14,250,307
-----------
$22,600,674
-----------
-----------
In connection with the issuance of the senior notes (see Note 11), all of
the outstanding debt under the revolving credit facility, term loan and capital
expenditures facility was repaid in full.
The Company estimates that the fair value of debt instruments approximates
the carrying value based upon its effective current borrowing rate for debt with
similar terms and remaining maturities. Disclosure about fair value of financial
instruments is based upon information available to management as of December 31,
1996. Although management is not aware of any factors that would significantly
affect the fair value of amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date.
The Company has a commitment from a financial institution for letters of
credit up to $3,000,000. At December 31, 1995 and 1996, the Company had $490,000
and $621,000, respectively, of letters of credit outstanding to various vendors.
The letters of credit were issued as security for trade payables and certain
fixed asset purchases of the Company. They expire at various times through 1997,
unless extension provisions are elected by the Company.
5. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan and Trust covering substantially all
employees. Participants may elect to defer up to 15% of their salary, not to
exceed $9,500 annually, which was the maximum allowed by the Internal Revenue
Service in 1996. The Company matched 25% of employee contributions in 1994 and
1995 and 50% of employee contributions in 1996, up to 6% of each employee's
salary. Employer contributions for the years ended December 31, 1994, 1995 and
1996 were $88,220, $120,309 and $251,512, respectively. Plan administrative
expenses incurred by the Company for the years ended December 31, 1994, 1995 and
1996 were $17,400, $22,153 and $20,383, respectively.
In 1993, the Company implemented a profit-sharing arrangement, allocating
5% of net profits (net income before vice president bonuses) to the Company's
vice presidents, 5% of net profits to an owner of the company, and 5% of net
profits to an employee pool. The employees' portion was split, with 50% going
directly to the employees via payroll and 50% going to the 401(k) Plan. Amounts
were paid bi-annually on January 31 and July 31. In 1996, the Company terminated
the portions of the profit sharing plan related to an owner of the Company and
the employee pool, and the portion of net profits allocated to the Company's
vice presidents was changed from 5% to approximately 2%. The expense associated
with this profit-sharing arrangement was $364,223, $63,837 and $65,989 in 1994,
1995 and 1996, respectively.
F-11
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. RELATED PARTY TRANSACTIONS
The Company has historically funded certain operating expenses of two
entities with common ownership. Accounts receivable from these entities included
$210,202 and $567,984 at December 31, 1995 and 1996, respectively. In 1995 and
1996, the Company paid approximately $1.4 million to FiberSouth, Inc., a Company
related through Common ownership, for local access services.
7. COMMON STOCK REPURCHASE AGREEMENT
In July 1992, the Company entered into an agreement with one of its
shareholders (the "Retiring Shareholder") to purchase the outstanding common
shares held by this shareholder's estate upon his death. The agreement was
amended in June 1996. Under the amended agreement, the Company may at its option
purchase the outstanding shares from the shareholder at any time. The purchase
price under the amended agreement was negotiated between the Company and the
Retiring Shareholder.
Pursuant to the agreement, the Company is required to make monthly
distributions to each shareholder of $61,736 beginning in July 1992 until
closing of the repurchase. The 1992 agreement required that an escrow account be
established into which the non-Retiring Shareholder was required to deposit his
pro rata share of these distributions. Under the provisions of the 1992
agreements, the non-Retiring Shareholder remitted those funds back to the
Company in exchange for subordinated notes payable. The 1996 amended agreement
allows the non-Retiring Shareholder to retain his pro rata share of the monthly
distributions. The $1,411,282 and $1,938,408 balance in shareholder notes
payable at December 31, 1995 and 1996, respectively, represents the amounts
remitted back to the Company by the non-Retiring Shareholder under the original
agreement, plus accrued interest at the prime rate. At December 31, 1995 and
1996, this amount was payable on demand. During September 1997, the note was
amended to include a 24-month repayment schedule.
8. STOCK OPTIONS
In 1994, the Company formalized the 1994 Stock Plan (the "1994 Plan").
Under the terms of the 1994 Plan, the Company committed to grant certain options
to an officer and two former employees of the Company effective at the time the
Company purchased the outstanding shares of the Retiring Shareholder. The
measurement date for compensation related to these options did not occur until
the repurchase of the shares from the Retiring Shareholder. The repurchase of
the shares from the Retiring Shareholder was consummated on September 22, 1997.
Accordingly, the Company recognized compensation expense of approximately $2.1
million in connection with the options at the measurement date. Since certain of
the employees to whom the options were committed were no longer employed by the
Company, the accrued compensation includes provisions for the estimated amounts
to be paid to these former employees in connection with their option commitments
for 333,260 shares as well as other accrued amounts. Also included in the $2.1
million is $707,500 in non-cash compensation expense representing the difference
in the fair value of the options and the exercise price at the date of grant for
options granted to an existing officer. The Company did not grant any options
under the 1994 Plan during the years ended December 31, 1995 and 1996.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument.
However, it also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting methodology required by APB
Opinion No. 25 must make pro forma disclosures of net income (loss) and, if
presented, earnings (loss) per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plan
under APB Opinion No. 25. In accordance with SFAS No. 123, the Company has
computed, for pro forma disclosure purposes, the value of all
F-12
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. STOCK OPTIONS -- Continued
options for shares of the Company's common stock granted to employees of the
Company using the minimum value option method and the following weighted average
assumptions in 1997:
Risk-free interest rate............................... 5.46%
Expected dividend yield............................... 0%
Expected lives........................................ 1.5 years
The weighted average fair value of the 166,630 options granted at an
exercise price of $1.47 in 1997 was approximately $4.40 (this number of options
excludes the options to acquire 333,260 shares committed to former employees for
which the Company has provided for the estimated amounts to be paid to these
former employees in connection with the options). No options were forfeited or
exercised in 1997. The Company's pro forma information for the nine months ended
September 30, 1997 had the Company accounted for this plan in accordance with
SFAS No. 123 is as follows:
Pro forma net loss................................. $(4,174,532)
Pro forma loss per share........................... $ (.21)
9. INCOME TAXES
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS 109) as
if the Company had been a C Corporation subject to federal and state income
taxes throughout all periods presented. No pro forma financial information has
been presented for the nine months ended September 30, 1997 since the Company
has converted to C Corporation status as of that date. Accordingly, all deferred
tax assets and liabilities and related income tax expense associated with the
retroactive adoption of SFAS 109 are reflected in the Company's balance sheet
and statement of operations as of and for the nine months ended September 30,
1997.
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- -------- ----------
Earnings before pro forma adjustments..................................... $ 2,701,869 $370,829 $2,605,899
Pro forma statement:
Provision for income taxes to increase tax expense to estimated
effective rate of 42%................................................ 1,134,785 155,748 1,094,478
----------- -------- ----------
Pro forma net income.................................................... $ 1,567,084 $215,081 $1,511,421
----------- -------- ----------
----------- -------- ----------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 109 (SFAS 109), "Accounting for Income Taxes," in
February 1992. Because of its conversion from S Corporation to C Corporation
status (see Note 11), the Company adopted the provisions of this standard, the
cumulative effect of which is reflected in its financial statements for the nine
months ended September 30, 1997.
The provision for income taxes for the nine months ended September 30, 1997
consists of the following:
Deferred:
Federal........................................... $1,796,000
State............................................. 414,000
----------
$2,210,000
----------
----------
F-13
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES -- Continued
A reconciliation of the provision for income taxes to income tax expense,
computed by applying the statutory federal income tax rate to pre-tax earnings
at September 30, 1997, is as follows:
Income tax expense at statutory federal rate........ $ --
Increase (decrease) resulting from:
Stock options..................................... (647,000)
FiberSouth asset purchase......................... 555,000
Cumulative effect of SFAS 109 adoption............ 2,124,000
Other............................................. 178,000
----------
$2,210,000
----------
----------
The tax effects of temporary differences at September 30, 1997 that give
rise to significant portions of deferred tax assets and deferred tax liabilities
are presented below:
Deferred tax liabilities:
Tax over book depreciation........................ $1,440,000
Line install fees................................. 777,000
FiberSouth asset purchase......................... 555,000
Accrual to cash conversion........................ 93,000
----------
Total deferred tax liabilities...................... 2,865,000
Deferred tax assets:
Stock options..................................... 647,000
Group insurance reserve........................... 82,000
----------
Total deferred tax assets........................... 729,000
----------
Net deferred tax liabilities........................ $2,136,000
----------
----------
The Company's deferred income tax expense for the nine months ended
September 30, 1997 results from the following:
Excess of tax over financial reporting:
Depreciation...................................... $1,440,000
Line install fees................................. 777,000
Stock options..................................... (647,000)
FiberSouth asset purchase......................... 555,000
Other items, net.................................. 85,000
----------
$2,210,000
----------
----------
10. COMMITMENTS
The Company is in negotiations with a municipality to finalize the terms of
the Company's planned $3.1 million charitable contribution to partially fund the
construction of a performing arts center. The contribution, which will be in a
combination of cash and in-kind (telephone and data transmission service), will
be paid over a ten year period beginning in 1998.
On October 31, 1997, the Company signed a contract for the right to use
certain optical fibers in a fiber optic communication system. Under the
agreement, the Company will pay approximately $50.1 million over the
construction period of the system (estimated to be 18 months), approximately $10
million of which is due in December 1997. Payments under the agreement will be
capitalized and amortized over the shorter of the useful life of the asset or
the term of the agreement.
F-14
BTI TELECOM CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. ISSUANCE OF SENIOR NOTES AND RELATED TRANSACTIONS
In September 1997, the Company issued ten-year notes (the "Notes") with a
principal value of $250.0 million (the "Offering"). The Notes bear interest at
the rate of 10 1/2% per annum, payable semiannually in cash on each March 15 and
September 15, commencing March 15, 1998 and mature in 2007. Pursuant to the
pledge agreement executed in connection with the issuance of the Notes, the
Company utilized $74.1 million of the loan proceeds to purchase a portfolio of
pledged securities that are being held as security for the payment of the first
six scheduled interest payments due on the Notes. The payments to be made in
1998, $24,649,021, represent the current portion of restricted cash in the
balance sheet and the remaining balance is included in restricted cash,
non-current.
Prior to the consummation of the Reorganization, the net proceeds from the
Offering were held and invested in U.S. government securities. Upon consummation
of the Reorganization, a portion of the proceeds held were used to purchase a
portfolio of U.S. government securities that will be held as security for the
first six scheduled interest payments on the notes.
In connection with the Offering, the Company also consummated the following
transactions:
(i) The Company entered into an amended and restated credit facility which
will provide the Company with up to $60.0 million of availability to
be used for working capital and other uses, including capital
expenditures. The Company repaid all indebtedness outstanding under
its existing credit agreement together with accrued interest thereon.
(ii) The Company repurchased the 50% interest in the Company not held by
the Company's Chairman and Chief Executive Officer under the terms of
the Common Stock Repurchase Agreement (See Note 7).
(iii) Effective September 30, 1997, the Company acquired certain assets and
the related business of FiberSouth, Inc. ("FiberSouth") for cash and
assumption of debt. The acquisition was accounted for using the
historical basis of the assets acquired under the provisions of AIN
No. 39 of APB No. 16, "Business Combinations". The transaction
resulted in the acquisition of approximately $3.1 million in net
assets and a corresponding charge to equity of $32.2 million.
Accordingly, the acquisition is reflected in the Company's statement
of financial position at September 30, 1997. The operations of
FiberSouth, Inc. from January 1, 1997 through the effective date of
the transaction are not reflected in the Company's statement of
operations for the nine months ended September 30, 1997.
(iv) The Company converted from an S corporation to a C corporation
subject to income tax (the "Reorganization").
12. SUBSEQUENT EVENT
The Company intends to establish a 1997 Stock Plan (the "1997 Plan") for
the purpose of attracting and retaining certain key employees of the Company.
The 1997 Plan will provide that an aggregate of 500,000 of the Company's
authorized shares will be reserved for issuance. In the case of initial grants,
the exercise price will be fixed by the compensation committee on the date of
grant.
F-15
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
FIBERSOUTH, INC.
We have audited the accompanying balance sheets of FiberSouth, Inc. as of
December 31, 1995 and 1996 and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FiberSouth, Inc. at December
31, 1995 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
FEBRUARY 21, 1997, EXCEPT FOR NOTE 5,
AS TO WHICH THE DATE IS MAY 2, 1997
F-16
FIBERSOUTH, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------
1995 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 211,327 $ --
Accounts receivable -- trade........................................................ 41,453 201,418
Inventory supplies.................................................................. 229,213 --
Other current assets................................................................ 36,999 29,235
---------- ----------
Total current assets.................................................................. 518,992 230,653
Equipment, furniture and fixtures:
Telephone service equipment......................................................... 4,783,410 6,007,307
Office, computer and other equipment................................................ 110,062 127,236
Leasehold improvements.............................................................. 112,905 147,853
Construction in progress............................................................ 73,331 --
---------- ----------
5,079,708 6,282,396
Accumulated depreciation............................................................ (284,219) (708,564)
---------- ----------
4,795,489 5,573,832
Other assets:
Organization costs.................................................................. 79,761 85,443
Loan origination costs.............................................................. 22,025 116,604
---------- ----------
101,786 202,047
Accumulated amortization............................................................ (26,012) (47,680)
---------- ----------
75,774 154,367
Prepaids and other long-term assets................................................... 400,903 436,107
---------- ----------
Total assets.......................................................................... $5,791,158 $6,394,959
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks issued not yet presented for payment......................................... $ -- $ 29,346
Accounts payable and accrued expenses (Note 4)...................................... 831,806 341,343
Accounts payable -- related party................................................... 146,731 321,319
Deferred revenue -- related party (Note 4).......................................... 75,000 --
Current portion of long-term debt (Note 3).......................................... 504,113 969,117
---------- ----------
Total current liabilities............................................................. 1,557,650 1,661,125
Deferred rent......................................................................... 7,825 4,549
Long-term debt, less current portion (Note 3)......................................... 3,874,979 4,317,531
Shareholders' equity:
Common Stock, $1.00 par value -- authorized 100,000, issued and outstanding 100
shares........................................................................... 100 100
Retained earnings................................................................... 350,604 411,654
---------- ----------
Total shareholders' equity............................................................ 350,704 411,754
---------- ----------
Total liabilities and shareholders' equity............................................ $5,791,158 $6,394,959
---------- ----------
---------- ----------
See accompanying notes.
F-17
FIBERSOUTH, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
Revenue (Note 4)............................ $ 603,921 $1,518,372 $2,522,535 $1,621,839 $4,161,231
Cost of services............................ 28,520 188,297 796,288 493,705 2,520,790
--------- ---------- ---------- ---------- ----------
Gross profit................................ 575,401 1,330,075 1,726,247 1,128,134 1,640,441
Other operating expenses.................... 116,079 145,170 164,095 102,773 321,062
Selling, general and administrative
expenses.................................. 291,338 1,002,285 1,451,602 1,076,091 1,570,233
--------- ---------- ---------- ---------- ----------
Net income (loss)........................... $ 167,984 $ 182,620 $ 110,550 $ (50,730) $ (250,854)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Net income (loss) per share................. $1,679.84 $ 1,826.20 $ 1,105.50 $ (507.30) $ (2508.54)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Weighted average shares outstanding......... 100 100 100 100 100
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
See accompanying notes.
F-18
FIBERSOUTH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
TOTAL
SHAREHOLDERS'
COMMON RETAINED EQUITY
STOCK EARNINGS (DEFICIT)
------ ------------ -------------
Balance at December 31, 1993........................................... $ -- $ -- $ --
Issuance of 100 shares of $1.00 par value common stock............... 100 -- 100
Net income........................................................... -- 167,984 167,984
------ ------------ -------------
Balance at December 31, 1994........................................... 100 167,984 168,084
Net income........................................................... -- 182,620 182,620
------ ------------ -------------
Balance at December 31, 1995........................................... 100 350,604 350,704
Dividends ($495.00 per common share)................................. -- (49,500) (49,500)
Net income........................................................... -- 110,550 110,550
------ ------------ -------------
Balance at December 31, 1996........................................... 100 411,654 411,754
Dividends (unaudited) ($310,262.32 per common share)................. -- (31,026,232) (31,026,232)
Net loss (unaudited)................................................. -- (250,854) (250,854)
------ ------------ -------------
Balance at September 30, 1997 (unaudited).............................. $100 $(30,865,432) $ (30,865,332)
------ ------------ -------------
------ ------------ -------------
See accompanying notes.
F-19
FIBERSOUTH, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)........................ $ 167,984 $ 182,620 $ 110,550 $ (50,730) $ (250,854)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation........................... 52,265 231,954 424,345 309,192 407,468
Amortization........................... 4,179 21,833 21,668 7,446 5,718
Write-off of loan origination costs.... -- -- -- -- (66,626)
Changes in operating assets and
liabilities:
Accounts receivable -- trade........ -- (41,453) (159,965) 42,082 2,670
Accounts receivable -- related
party............................. (115,096) 115,096 -- -- --
Inventory supplies.................. (262,668) 33,455 229,213 (34,855) --
Other current assets................ -- (36,999) 7,764 9,099 (27,683)
Deferred revenue -- related party... -- 75,000 (75,000) (75,000) --
Deferred rent....................... 7,182 643 (3,276) (2,529) (2,359)
Accounts payable and accrued
expenses.......................... 108,353 740,453 (490,463) (19,555) 2,130,061
Accounts payable -- related
parties........................... -- 129,731 174,588 (139,470) 1,045,730
Other long-term liabilities......... -- -- -- -- 167,944
---------- ---------- ---------- ---------- ------------
Net cash (used in) provided by operating
activities............................. (37,801) 1,452,333 239,424 45,680 3,412,069
INVESTING ACTIVITIES
Purchases of equipment, furniture and
fixtures............................... (1,907,892) (3,171,816) (1,202,688) (971,340) (522,368)
Transfer of construction in progress to
fixed assets........................... -- -- -- 73,331 --
Construction in progress................. -- -- -- -- (106,495)
Payments for other assets................ (251,971) (250,718) (135,465) (188,820) 4,140
---------- ---------- ---------- ---------- ------------
Net cash used in investing activities.... (2,159,863) (3,422,534) (1,338,153) (1,086,829) (624,723)
FINANCING ACTIVITIES
Sale of net assets to BTI Telecom
Corp................................... -- -- -- -- 35,250,900
Proceeds from long-term borrowings....... 2,500,000 1,905,000 1,535,000 1,046,949 650,000
Payments on long-term borrowings......... -- (25,908) (627,444) -- (5,936,648)
Issuance of common stock................. 100 -- -- -- --
Dividends paid........................... -- -- (49,500) -- (31,026,232)
---------- ---------- ---------- ---------- ------------
Net cash provided by (used in) financing
activities............................. 2,500,100 1,879,092 858,056 1,046,949 (1,061,980)
---------- ---------- ---------- ---------- ------------
Increase (decrease) in cash and cash
equivalents............................ 302,436 (91,109) (240,673) 5,800 1,725,366
Cash and cash equivalents (checks issued
not yet presented for payment) at
beginning of period.................... -- 302,436 211,327 211,327 (29,346)
---------- ---------- ---------- ---------- ------------
Cash and cash equivalents (checks issued
not yet presented for payment) at end
of period.............................. $ 302,436 $ 211,327 $ (29,346) $ 217,127 $ 1,696,020
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest................... $ 22,431 $ 296,363 $ 518,721 $ 429,654 $ 471,682
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
See accompanying notes.
F-20
FIBERSOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OF THE COMPANY
FiberSouth, Inc. (the "Company"), which began operations in 1994, provides
local telephone service, primarily to commercial customers located in the
southeastern United States.
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.
INCOME TAXES
The Company has elected to be taxed for federal and state income tax
purposes as an S corporation under provisions of the Internal Revenue Code.
Consequently income, losses and credits are passed through directly to the
shareholders, rather than being taxed at the corporate level.
REVENUE RECOGNITION
Revenue for telecommunications services is recognized at the time services
are provided to customers.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated on the basis of cost, which is
being amortized over the estimated useful lives of the assets principally by the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes.
LONG LIVED ASSETS
Upon indication of impairment, the Company's policy for assessing
impairment of long lived assets is to calculate the undiscounted projected
future cash flows of the asset expected to be generated over the remaining
useful life of the asset. This amount is compared to the carrying value of the
asset to determine if the asset is impaired. Based on the application of this
policy, no impairments were recognized during 1995 or 1996 or for the nine
months ended September 30, 1997.
OTHER ASSETS
Organization costs are capitalized and amortized ratably over sixty months.
Loan origination fees are capitalized and amortized over the term of the
related loan (60 months) using the straight line method.
Other assets consist of prepaid right-of-way fees to owners of property
where the Company has constructed cable lines. The fees are amortized ratably
over the life of the contract (ten years).
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured. The
Company uses the allowance method of accounting for uncollectible accounts
receivable. As of December 31, 1996, the Company had no significant
concentrations of outstanding accounts receivable with individual customers.
RECLASSIFICATION
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation.
F-21
FIBERSOUTH, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements include all adjustments
(consisting of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the results of operations and
cash flows of the Company for the nine months ended September 30, 1996 and 1997.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be achieved for the entire year. All
interim financial data presented is unaudited. The Company was acquired by BTI
Telecom Corp., a related company, on September 22, 1997. The transaction was
effective on September 30, 1997. The results of operations of the company are
included herein from January 1, 1997 through the effective date of the
transaction. The results of operations of the Company from September 22, 1997 to
September 30, 1997 were not material in relation to the Company's results of
operations for the nine-month period taken as a whole.
2. LEASES
The Company rents its facilities and equipment under operating leases which
expire at various times through the year 2000. Future minimum lease payments
under the leases are as follows:
1997...................................... $ 92,342
1998...................................... 28,917
1999...................................... 21,733
2000...................................... 1,440
--------
$144,432
--------
--------
Total rent expense was $43,333, $49,556 and $102,325 in 1994, 1995 and
1996, respectively.
3. LONG-TERM DEBT
At December 31, 1995 and 1996, the Company had long-term debt consisting of
the following:
DECEMBER 31,
------------------------
1995 1996
---------- ----------
Note payable to a bank, payable in monthly installments of $47,500 including interest
at 9.50% with remaining balance payable in full in November 1999.................... $2,474,092 $2,181,225
Note payable to a bank, payable in monthly installments of interest only at 10.00%
until February 1996 and monthly installments of $9,300 thereafter including interest
at 10.00% with remaining balance payable in full in January 2000.................... 500,000 447,568
Note payable to a bank, payable in monthly installments of interest only at 8.75%
until May 1996 and monthly installments of $25,240 thereafter, including interest at
8.75% with remaining balance payable in full in April 2000.......................... 1,405,000 1,299,676
Note payable to a bank, payable in monthly installments of $14,300 including interest
at 8.25% with remaining balance payable in full in January 2001..................... -- 603,231
Note payable to a bank, payable in monthly installments of $4,000 including interest
at 7.50% with remaining balance payable in full in February 2001.................... -- 174,881
Note payable to a bank, payable in monthly installments of $8,700 including interest
at 8.30% with remaining balance payable in full in March 2001....................... -- 378,455
Note payable to a bank, payable in monthly installments of $4,320 including interest
at 8.50% with remaining balance payable in full in August 2001...................... -- 201,612
---------- ----------
4,379,092 5,286,648
Less current portion.................................................................. 504,113 969,117
---------- ----------
$3,874,979 $4,317,531
---------- ----------
---------- ----------
All notes payable described above are secured by the fixed assets of the
Company and an interest in a network lease agreement. The notes are also
personally guaranteed by a shareholder of the Company.
F-22
FIBERSOUTH, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. LONG-TERM DEBT -- Continued
Following are maturities of long-term debt by year:
1997.................................... $ 969,117
1998.................................... 983,579
1999.................................... 2,049,432
2000.................................... 1,199,096
2001.................................... 85,424
----------
$5,286,648
----------
----------
Interest expense was $35,625, $360,110 and $494,044 in 1994, 1995 and 1996,
respectively.
The Company estimates that the fair value of notes payable approximates the
carrying value based upon its effective current borrowing rate for debt with
similar terms and remaining maturities. Disclosure about fair value of financial
instruments is based upon information available to management as of December 31,
1996. Although management is not aware of any factors that would significantly
affect the fair value of amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date.
4. RELATED PARTY TRANSACTIONS
The Company has an agreement with BTI Telecom Corp., a company affiliated
with the Company through common ownership, whereby the Company provides local
telephone service to BTI for approximately $115,000 per month. This affiliate
accounted for 100%, 91% and 55% of the Company's total revenue in 1994, 1995 and
1996, respectively. Deferred revenue resulting from the contract was $75,000 and
$0 at December 31, 1995 and 1996, respectively. The agreement also stipulates
that the Company will pay two percent of monthly revenues to the affiliate for
provision of management services. The Company paid $12,000, $30,000 and $50,000
to this affiliate in 1994, 1995 and 1996, respectively, for management fees. The
Company also owed the affiliate $147,000 and $321,000 at December 31, 1995 and
1996, respectively for expenses incurred on behalf of the Company.
The Company also paid $100,000 in consulting fees to a shareholder in 1994.
5. SUBSEQUENT EVENT
On May 2, 1997, the Company obtained borrowings under a promissory note
from a bank for working capital purposes in the amount of $650,000 bearing
interest at prime plus one percent (8.25% at December 31, 1996). The note is
secured by the fixed assets of the Company and personally guaranteed by a
shareholder of the Company.
6. SALE OF ASSETS (UNAUDITED)
Effective September 30, 1997, all of the Company's operating assets were
sold to its affiliate, BTI Telecom Corp.
F-23
PRO FORMA FINANCIAL DATA
The accompanying unaudited pro forma condensed statements of operations of
BTI Telecom Corp. (the "Company") for the year ended December 31, 1996 and the
nine months ended September 30, 1997 give effect to the following transactions
(collectively, the "Transactions"): (i) the amendment and restatement of the
existing credit agreement (the "Original Credit Facility") of Business Telecom,
Inc. ("BTI") (as amended, the "Credit Facility") and the repayment of all
indebtedness outstanding under the Original Credit Facility together with
accrued interest thereon (collectively the "BTI Refinancing"); (ii) the sale by
the Company on September 22, 1997 of $250.0 million aggregate principal amount
of Senior Notes due 2007 (the "Notes") in a private placement (the "Offering");
(iii) the merger of BTI with a wholly owned subsidiary of the Company, pursuant
to which BTI became a wholly owned subsidiary of the Company and was converted
from an S corporation to a C corporation subject to federal and state income tax
(the "Reorganization"); and (iv) the acquisition of substantially all of the
assets of FiberSouth, Inc. ("FiberSouth") by BTI for $31.0 million and the
repayment of $5.4 million of FiberSouth's indebtedness in connection therewith
(the "FiberSouth Acquisition"). The unaudited pro forma condensed statements of
operations have been prepared to reflect the Transactions as if they were
consummated on January 1, 1996. No unaudited pro forma condensed balance sheet
of the Company has been presented because the Transactions were consummated and
recorded in the books and records of the Company as of September 30, 1997. The
pro forma adjustments are based on the historical financial statements of BTI
and FiberSouth and the effect of the FiberSouth Acquisition accounted for using
the historical basis of the assets acquired under the provisions of AIN #39 of
APB No. 16 and giving effect to the Transactions under the assumptions and
adjustments described in the accompanying supplemental notes. In the opinion of
management, the pro forma financial information provides all adjustments
necessary to reflect the effects of the Transactions.
The pro forma information is not intended to be indicative of the actual
results that would have been achieved had the Transactions in fact been
consummated on January 1, 1996, nor does it purport to be indicative of the
future consolidated operating results of the Company. Such pro forma financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto of BTI and FiberSouth included elsewhere in this
Prospectus.
F-24
BTI TELECOM CORP.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
BTI FIBERSOUTH
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ---------- ------------ ------------
Revenue......................................... $148,780,816 $2,522,535 $ (1,380,000)(a) $149,923,351
Cost of services................................ 90,820,467 796,288 (1,380,000)(a) 90,236,755
------------ ---------- ------------ ------------
Gross profit.................................... 57,960,349 1,726,247 -- 59,686,596
Selling, general and administrative expenses.... 53,791,036 1,133,873 -- 54,924,909
------------ ---------- ------------ ------------
Income from operations.......................... 4,169,313 592,374 -- 4,761,687
Interest expense, net......................... 1,695,324 481,824 27,245,000(b) 27,762,707
(1,659,441)(c)
Gain on sale of marketable securities......... 131,910 -- -- 131,910
------------ ---------- ------------ ------------
Net income (loss)............................... $ 2,605,899 $ 110,550 $(25,585,559)(d) $(22,869,110)
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
- ---------------
(a) Represents the elimination of revenue generated by FiberSouth for services
provided to BTI and the related reduction in cost of services for BTI.
(b) Represents (i) the estimated additional interest expense of $26,250,000
related to the Notes, (ii) the amortization of $860,000 of debt issuance
costs relating to the Offering and (iii) the amortization of $135,000 of
financing fees related to the Credit Facility. Excludes interest expense on
any borrowings that may be made by the Company under the Credit Facility
prior to the consummation of the Reorganization and $3,742,360 of interest
income that would have been earned on the $74,093,277 of proceeds from the
Offering required to be placed in a pledged account to secure and fund the
first six scheduled interest payments (including .5% interest per annum in
the event that the exchange offer relating to the Notes is not consummated
within six months after the initial sale of the Notes) on the Notes. Under
the terms of the indenture relating to the Notes, the amounts placed in the
pledged account are required to be invested in U.S. government securities
which will secure the Notes.
(c) Represents the elimination of the $1,177,617 of interest expense of BTI
under the Original Credit Facility repaid in the BTI Refinancing and the
elimination of $481,824 of interest expense (including the amortization of
debt issuance costs) related to the indebtedness of FiberSouth repaid in
connection with the FiberSouth Acquisition.
(d) Net income (loss) does not include a pro forma adjustment for income taxes
due to the pro forma net loss position.
F-25
BTI TELECOM CORP.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
BTI FIBERSOUTH
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------ ---------- ------------ ------------
Revenue........................................... $145,145,510 $4,161,231 $ (1,035,000)(a) $148,271,741
Cost of services.................................. 101,238,476 2,520,790 (1,035,000)(a) 102,724,266
------------ ---------- ------------ ------------
Gross profit...................................... 43,907,034 1,640,441 -- 45,547,475
Selling, general and administrative expenses...... 43,753,394 1,419,613 -- 45,173,007
------------ ---------- ------------ ------------
Income from operations............................ 153,640 220,828 -- 374,468
Interest expense, net........................... 2,108,730 471,682 20,433,750(b) 21,339,675
(1,674,487)(c)
Income taxes.................................... 2,210,000 -- --(d) 2,210,000
------------ ---------- ------------ ------------
Net loss.......................................... $ (4,165,090) $ (250,854) $(18,759,263) $(23,175,207)
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
- ---------------
(a) Represents the elimination of revenue generated by FiberSouth for services
provided to BTI and the related reduction in cost of services for BTI.
(b) Represents (i) the interest expense of $19,687,500 related to the Notes,
(ii) the amortization of $645,000 of debt issuance costs relating to the
Offering and (iii) the amortization of $101,250 of financing fees related to
the Credit Facility. Excludes interest expense on any borrowings that may be
made by the Company under the Credit Facility prior to the consummation of
the Reorganization and the $2,806,770 of interest income that would have
been earned on the $74,093,277 of proceeds from the Offering required to be
placed in a pledged account to secure and fund the first six scheduled
interest payments (including .5% interest per annum in the event that the
exchange offer relating to the Notes is not consummated within six months
after the initial sale of the Notes) on the Notes. Under the terms of the
indenture relating to the Notes, the amounts placed in the pledged account
are required to be invested in U.S. government securities which will secure
the Notes.
(c) Represents the elimination of the $1,310,005 of interest expense related to
the debt of BTI under the Original Credit Facility repaid in the BTI
Refinancing and the elimination of $364,482 of interest expense (including
the amortization of debt issuance costs) related to the indebtedness of
FiberSouth repaid in connection with the FiberSouth Acquisition.
(d) Pro forma net loss for the nine months ended September 30, 1997 does not
include an adjustment for income taxes due to the pro forma net loss.
F-26
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation and Bylaws include provisions to
(i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the fullest extent permitted
by Section 55-8-30(e) of the North Carolina Business Corporation Act (the "North
Carolina Law"), and (ii) require the Registrant to indemnify its directors and
officers to the fullest extent permitted by Sections 55-8-50 through 55-8-58 of
the North Carolina Law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Sections 55-8-51 and 55-8-57 of the North
Carolina Law, a corporation generally has the power to indemnify its present and
former directors, officers, employees and agents against expenses incurred by
them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful. The
Registrant believes that these provisions are necessary to attract and retain
qualified persons as directors and officers. These provisions do not eliminate
the directors' duty of care, and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under North Carolina Law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for acts or omissions that the director
believes to be contrary to the best interests of the Registrant or its
shareholders, for any transaction from which the director derived an improper
personal benefit, for acts or omissions involving a reckless disregard for the
director's duty to the Registrant or its shareholders when the director was
aware or should have been aware of a risk of serious injury to the Registrant or
its shareholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, for improper transactions between the director
and the Registrant and for improper distributions to shareholders and loans to
directors and officers. These provisions do not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant's Bylaws require the Registrant to indemnify in directors
and officers against expenses, judgments, fines, settlement and other amounts
actually and reasonably incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interest of the Registrant and,
with respect to any criminal proceeding, had no reasonable cause to believe his
or her conduct was unlawful. The Registrant's Bylaws also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The Placement Agreement filed as Exhibit 1.1 to this Registration Statement
provides for indemnification by the Placement Agents of the Registrant and its
directors and officers, and by the Registrant of the Placement Agents, for
certain liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), or otherwise.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
1.1 * Placement Agreement dated September 17, 1997, among BTI Telecom Corp., Business Telecom, Inc.,
and Morgan Stanley & Co. Incorporated and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
2.1 * Agreement and Plan of Merger dated 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 Incorporation of BTI Telecom Corp.
3.2 * 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 10 1/2% 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.
5.1 * Opinion of Wyrick Robbins Yates & Ponton LLP.
8.1 Tax Opinion of Wyrick Robbins Yates & Ponton LLP.
10.1 * 1994 Stock Plan.
10.2 * 1997 Stock Plan.
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.
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.
11.1 * Computation of Earnings Per Common Share.
12.1 * Computation of Ratio of Earnings to Fixed Charges.
21.1 * Subsidiaries of BTI Telecom Corp.
23.1 Consent of Ernst & Young LLP.
23.2 Consents of Wyrick Robbins Yates & Ponton LLP (contained in Exhibits 5.1 and 8.1).
24.1 * Power of Attorney.
25.1 * Statement of Eligibility of Trustee.
27.1 * Financial Data Schedule for the Year Ended December 31, 1996 and the Nine Months Ended
September 30, 1997.
99.1 * Form of Letter of Transmittal.
99.2 * Form of Notice of Guaranteed Delivery.
- ---------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
No schedules have been included because the information required to be set
forth therein is disclosed in the financial statements or is not applicable.
II-2
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Raleigh, State of
North Carolina, on January 29, 1998.
BTI TELECOM CORP.
By: /s/_____PETER T. LOFTIN*_______
PETER T. LOFTIN
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------------------------------ ---------------------------------- -----------------
/s/ PETER T. LOFTIN* Chairman, Chief Executive Officer January 29, 1998
PETER T. LOFTIN and Director (Principal
Executive Officer)
/s/ R. MICHAEL NEWKIRK* President, Chief Operating Officer January 29, 1998
R. MICHAEL NEWKIRK and Director
/s/ BRIAN K. BRANSON Chief Financial Officer, Treasurer January 29, 1998
BRIAN K. BRANSON and Director (Principal
Financial and Accounting
Officer)
*By: /s/ BRIAN K. BRANSON Attorney-in-fact January 29, 1998
BRIAN K. BRANSON
II-4
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------
1.1 * Placement Agreement dated September 17, 1997, among BTI Telecom Corp.,
Business Telecom, Inc., and Morgan Stanley & Co. Incorporated and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated.
2.1 * Agreement and Plan of Merger dated 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 Incorporation of BTI Telecom Corp.
3.2 * 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 10 1/2% 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.
5.1 * Opinion of Wyrick Robbins Yates & Ponton LLP.
8.1 Tax Opinion of Wyrick Robbins Yates & Ponton LLP.
10.1 * 1994 Stock Plan.
10.2 * 1997 Stock Plan.
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.
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.
11.1 * Computation of Earnings Per Common Share.
12.1 * Computation of Ratio of Earnings to Fixed Charges.
21.1 * Subsidiaries of BTI Telecom Corp.
23.1 Consent of Ernst & Young LLP.
23.2 Consents of Wyrick Robbins Yates & Ponton LLP (contained in Exhibits 5.1
and 8.1).
24.1 * Power of Attorney.
25.1 * Statement of Eligibility of Trustee.
27.1 * Financial Data Schedule for the Year Ended December 31, 1996 and the
Nine Months Ended September 30, 1997.
99.1 * Form of Letter of Transmittal.
99.2 * Form of Notice of Guaranteed Delivery.
- ---------------
* Previously filed.