Birch Turns to Chapter 11

KANSAS CITY, Mo. -- Birch Telecom announced today that, in order to allow the Company to compete more effectively in a changed regulatory environment and to continue to provide high quality local, long distance and Internet services to its more than 130,000 customers, the Company and its subsidiaries have filed voluntary petitions to restructure under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware in Wilmington.

The Company also announced today that Mike Cassity has resigned as chief executive officer, effective immediately. He has been replaced by Gregory C. Lawhon, who has served as Senior Vice President and General Counsel of Birch since it was founded in 1997. Lawhon was selected by the Board of Directors based on his extensive experience managing Birch's wholesale business and his uncompromising faith in Birch's refocused business strategy. Lawhon has developed strong relationships with the incumbent carriers with whom Birch does business. His expertise will greatly benefit the Company as it looks to expand its presence in the wholesale market, while continuing to maintain its facilities business. "I am excited about the opportunity to make Birch a stronger Company as we focus on a strategy that maximizes profitability in the new regulatory environment," said Lawhon. "On behalf of the Board of Directors, I would like to thank Mike Cassity for his hard work and contributions to Birch. We wish him well in his future endeavors," Lawhon added.

Discussing the Chapter 11 filing, Lawhon said, "We evaluated several options for restructuring our debt and concluded that, in light of all circumstances facing the Company, filing for Chapter 11 is the most effective course of action for Birch. The Chapter 11 process will allow us to substantially improve our balance sheet and capital structure while we continue to operate our business and focus on what we have always offered our customers, namely reliable service, easy conversion, better prices and a better way of doing business."

Birch expects its operations to continue without interruption during the Chapter 11 process and said that its customers will not experience changes in services or quality. In conjunction with the Chapter 11 filing, the Company's senior lenders have committed to provide debtor-in-possession (DIP) financing to fund the Company's operations during the Chapter 11 proceedings. The Company believes that, upon Court approval, the DIP financing, combined with the Company's operating revenue, will provide sufficient funding for operations during the Chapter 11 process, including post-petition obligations to suppliers.

The Company said that an operational and financial restructuring was necessitated, in part, by the regulatory ruling earlier this year by the Federal Communications Commission (FCC), which eliminated certain unbundling obligations that had required the local Bell companies to provide cost- effective network access to competitive local exchange carriers (CLECs), such as Birch. This change substantially increased Birch's costs for access to the incumbent telephone network, causing significant losses in margin and requiring Birch to re-evaluate its sales and marketing strategy.

Earlier this week, Birch announced significant reductions to its workforce as part of an operational restructuring and a change in the Company's sales and marketing strategy. As a result, many of the employee reductions were cuts in its direct sales force. Additionally, Birch reiterated that it is continuing to provide its full range of local, long distance and Internet services to its customers without interruption. The Company intends to expand its local and long distance phone services and, in line with its refocused sales and marketing strategy, is continuing to take new orders through a variety of sales channels in its different regions.

Earlier this year, Birch signed a commercial agreement with BellSouth under which Birch provides wholesale local phone services throughout the nine- state BellSouth region in the southeast United States. Since then, Birch has met and exceeded its sales goals in that region and continues to attract and retain new customers. Additionally, Birch recently signed a five-year commercial wholesale telecom agreement with SBC Communications. This agreement will allow the Company to continue to provide wholesale local and long distance phone service to customers in Kansas, Missouri, Oklahoma and Texas; accept orders for new services; and accommodate requests for moving, adding or changing lines.

However, as part of the Company's revamped sales and marketing strategy, it has closed down its sales offices in those markets and will be instead selling new services through inside-sales channels. In addition to contracts with BellSouth and SBC, Birch owns and operates its own integrated voice and data network. The Company will continue to provide services and support to its on-network customers and sell its voice and data services through its inside-sales force.

"We appreciate the ongoing loyalty and support of our employees during what has been a period of great uncertainty and transition for Birch," Lawhon said. "I thank them for their dedication and hard work, which is critical to our success. I also thank our customers and suppliers for their support during this restructuring process. The management team is committed to making this restructuring successful and leading Birch toward a brighter future."

Birch Telecom