UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
Commission File Number: 0-24061
US LEC CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 56-2065535
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 NORTH TRYON STREET, SUITE 1000
CHARLOTTE, NORTH CAROLINA 28202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 319-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF ACT: NONE.
Securities registered pursuant to Section 12(g) of Act: Class A Common
Stock, par value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock of the registrant held by
non-affiliates of the registrant was $ 454,741,141 as of March 17, 2000 based on
the closing sales price on The Nasdaq National Market as of that date. For
purposes of this calculation only, affiliates are deemed to be directors and
executive officers of the registrant.
As of March 17, 2000, there were 10,443,541 shares of Class A Common
Stock and 17,075,270 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year
ended December 31, 1999 are incorporated by reference into Part I, Part II and
Part IV of this report. Portions of the registrant's Proxy Statement for its
Annual Meeting of Stockholders to be held on May 9, 2000 are incorporated by
reference into Part III of this report.
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US LEC CORP.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
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Item 1: Business 3
Item 2: Properties 21
Item 3: Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters 22
Item 6: Selected Consolidated Financial Data 22
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations 22
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 22
Item 8: Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22
PART III
Item 10: Directors and Executive Officers of the Registrant 22
Item 11: Executive Compensation 22
Item 12: Security Ownership of Certain Beneficial Owners and Management 22
Item 13: Certain Relationships and Related Transactions 23
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 24
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PART I
ITEM 1. BUSINESS
THE COMPANY
US LEC Corp. ("US LEC" or the "Company") is a provider of integrated
telecommunications services, including: local, long distance, data, Internet and
enhanced services to customers in selected markets in North Carolina, Georgia,
Tennessee, Florida, Virginia, Alabama, Pennsylvania, Mississippi, South
Carolina, Kentucky, Washington D.C. and Maryland. The Company is also currently
certified to provide telecommunications services in Delaware, New Jersey, Texas,
Massachusetts, New York and Ohio. The predecessor to US LEC was incorporated in
June 1996 after passage of the Telecommunications Act of 1996 ("Telecom Act"),
which enhanced the competitive environment for local exchange services. On
December 31, 1996, the original corporation was merged into US LEC L.L.C., a
limited liability company. On December 31, 1997, in anticipation of an initial
public offering, US LEC L.L.C. was merged into US LEC. US LEC initiated service
in North Carolina in March 1997, becoming one of the first competitive local
exchange carriers ("CLEC") in North Carolina to provide switched local exchange
services. US LEC's network is comprised of seventeen Lucent 5ESS(R) AnyMedia(TM)
digital switches in Charlotte, Raleigh/Durham, Greensboro/Winston Salem,
Atlanta, Memphis, Nashville, Knoxville, Orlando, Miami, Tampa/St. Petersburg,
Jacksonville, Norfolk/Virginia Beach, Richmond, Birmingham, Philadelphia,
Northern Virginia/Washington D.C., and Baltimore, in addition to an Alcatel
MegaHub(R) 600ES switch in Charlotte. The Company primarily serves
telecommunications-intensive customers including businesses, universities,
financial institutions, professional service firms and practices, hospitals,
enhanced service providers, Internet service providers, hotels, and government
agencies. As of February 29, 2000, the Company had over 52,500 business trunks,
over 34,100 Internet service provider ("ISP")/enhanced service provider ("ESP")
trunks, and over 15,100 business lines in service.
BUSINESS STRATEGY
US LEC's objective is to become a leading provider of integrated
telecommunications and data services to its existing and target customers and to
increase its market share by increasing its product portfolio and by providing
exceptional customer service. The principal elements of US LEC's business
strategy include:
DEPLOY A CAPITAL-EFFICIENT NETWORK. US LEC utilizes a "smart-build"
strategy of purchasing and deploying switching equipment and leasing the
required fiber optic transmission capacity from competitive access providers
("CAPs"), other CLECs and incumbent local exchange carriers ("ILECs").
Management believes the Company's switch-based, leased-transport strategy
enables it to enter markets and generate revenue and positive cash flow more
rapidly than if the Company first constructed its own transmission facilities.
By leasing fiber transport, this smart-build strategy also reduces the up-front
capital expenditures required to build a network and enter new markets and avoid
the risk of "stranded" investment in under-utilized fiber networks. Management
also believes that the Company's ability to align its leased transmission costs
with customer orders permits a higher return on invested capital.
FOCUS OF OPERATIONS. The Company focuses its network build out and
marketing presence in target markets composed of Tier I cities (major
metropolitan areas such as Atlanta, Miami, Washington D.C. and Philadelphia) and
Tier II cities (mid-size metropolitan areas such as Greensboro, Tampa and
Nashville). The Company has selected its target markets based on a number of
considerations, including the number of potential customers and other
competitors in such markets and the presence of multiple transmission facility
suppliers. The Company currently focuses on markets in the Southeast and
Mid-Atlantic United States. Management believes that the Company's clustered
network will enable it to take advantage of calling patterns and capture an
increasing portion of customer traffic on its network.
TARGET TELECOMMUNICATIONS-INTENSIVE CUSTOMERS. The Company focuses its
primary sales efforts on telecommunications-intensive customers including
businesses, universities, financial institutions, professional service firms and
practices, hospitals, enhanced service providers, ISP's, hotels, and government
agencies. The volume of usage generated by the Company's target customers allows
the Company to efficiently concentrate the telecommunications traffic of its
customers. In addition, the Company frequently is able to sell enhanced, long
distance and data services to complement its core local services. This further
enhances network utilization
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and thereby improves margins, as fixed network costs are spread over a larger
base of minutes of use. Unlike many other CLECs, the Company does not resell
ILEC services.
INSTALL A ROBUST TECHNOLOGY PLATFORM. The Company has chosen the
5ESS(R) Any Media(TM) digital switch manufactured by Lucent Technologies, Inc.
("Lucent") to provide a consistent technology platform throughout its network.
US LEC currently has 17 Lucent switches active throughout its network. To
enhance its service offerings, the Company deployed an Alcatel MegaHub(R) 600ES
("Alcatel") tandem switch in Charlotte. The Alcatel switch complements the
Lucent switches and improves US LEC's ability to provide enhanced services. The
Company has also deployed an Advanced Intelligent Network ("AIN") platform. This
AIN platform positions US LEC for enhanced services as well as allows the
Company Signaling System No. 7 ("SS7") connectivity independent of the ILECs.
EMPLOY AN EXPERIENCED SALES FORCE. Management believes that the
Company's success in a particular market is enhanced by employing a direct sales
force with extensive local market and telecommunications sales experience. The
Company employed this strategy in building its sales force. Salespeople with
experience in a particular market provide the Company with extensive knowledge
of the Company's target customer base and in many cases have existing
relationships with target customers.
IMPLEMENT EFFICIENT PROVISIONING PROCESSES WITH STATE-OF-THE-ART BACK
OFFICE SUPPORT. Management believes that a critical aspect of the success of a
CLEC is timely and effective provisioning systems, which includes the process of
transitioning ILEC customers to the Company's network. The Company focuses on
implementing effective and timely provisioning practices to efficiently
transition customers from the ILEC or other CLECs to the Company with minimal
disruption of the customer's operations. Among other things, US LEC is approved
by Lockheed Martin as a provider of Local Number Portability ("LNP") for its
customers. In addition, the US LEC Network Operations Center ("NOC") houses the
tools to monitor its network. The NOC provides network surveillance, real-time
alarm notification, dispatch services, and 24 hour x 7 day a week availability
and notification.
OFFER A BROAD RANGE OF PRODUCTS AND SERVICES. US LEC offers customers a
broad range of telecommunication services, which can be bundled. Management
believes a broad product range, competitive pricing, and an opportunity to
bundle services gives US LEC customers an exceptional value. Local network
access is available in many forms including Integrated Services Digital Network
("ISDN"), Primary Rate Interface ("PRI"), T1 Access and Channel Access ("DSO").
Multiple local access services are also available, including business lines,
Private Branch Exchange ("PBX") trunks and Foreign Exchange trunks. US LEC also
offers its customers calling card, enhanced toll-free, digital private line,
dedicated high-speed internet access and competitively priced long distance
service, including intrastate, interstate, international and toll-free calls. US
LEC's efforts to add additional data products (such as frame relay and digital
subscriber line (DSL)) is consistent with the predominant trend in the
telecommunications industry of adding data products and services to traditional
voice products. To further this objective, the Company has deployed its
Asynchronous Transfer Mode ("ATM") and AIN platforms. These systems provide the
Company the ability to develop and offer advanced communications products and
services, such as Frame Relay and e-commerce services that are critical to
businesses throughout the United States.
US LEC'S NETWORK
During 1999, the Company installed new Lucent 5ESS(R) Any Media(TM)
digital switches in five new cities, bringing the total to 16 local switches at
the end of 1999. During the first quarter of 2000, the Company activated its
seventeenth Lucent switch in Baltimore. The Company has announced plans to
activate additional Lucent switches in Chattanooga, Charleston, New York,
Boston, Pittsburgh, Atlanta, Louisville, New Orleans and West Palm Beach
bringing its total number of switches to 26 in addition to an Alcatel MegaHub(R)
600ES switch in Charlotte.
US LEC utilizes a "smart build" strategy of purchasing and deploying
switching equipment and leasing fiber optic transmission capacity from CAPs,
other CLECs and ILECs.
Calls originating with a US LEC customer are transported over leased
lines to the US LEC switch and can either be terminated directly on the
Company's network or routed to a long distance carrier, an ILEC or another CLEC,
depending on the location of the call recipient. Similarly, calls originating
from the public switched telephone network and destined for a US LEC customer
are routed through the US LEC switch and delivered to call recipients via leased
transmission facilities.
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The Company has signed interconnection agreements with various ILECs,
including BellSouth Telecommunications, Inc. ("BellSouth"), GTE, Sprint, Bell
Atlantic and other carriers. These agreements provide the framework for the
Company to serve its customers when other local carriers are involved. The
agreement with BellSouth covers all states in BellSouth's operating area in
which US LEC operates. The interconnection agreement with BellSouth expired on
December 31, 1999 but continues in force until new interconnection agreement is
reached. When signed, the new agreement will be effective as of January 1, 2000.
PRODUCTS AND SERVICES
The Company provides local dial-tone services to customers. Local
access is available in many different forms including ISDN, PRI, T1 Access and
Channel Access. The Company's network is designed to allow a customer to easily
increase or decrease capacity and utilize enhanced services as the
telecommunications requirements of the customer change. The Company also
provides access to third party directory assistance and operator services.
US LEC provides domestic and international long distance services for
completing intrastate, interstate and international calls. The Company also
provides toll-free services and typical enhanced services such as voice mail.
The Company is also adding data products to its portfolio of products.
Most notably, the Company now offers US LECnet, a direct, dedicated, high-speed
connection to the Internet. With US LECnet, the Company can bundle voice, data
and Internet access all on a single, converged, high-speed, digital access
facility. US LECnet can also be provisioned on separate facilities.
The Company's ability to bundle local, long distance and data services
allows it to offer its customers more efficient use of transport facilities and
allows it to aggregate customers' monthly recurring and usage charges on a
single, consolidated invoice.
SALES AND MARKETING
SALES. US LEC is building a highly motivated and experienced direct
sales force. The Company recruits salespeople with strong sales backgrounds in
its existing and target markets, including salespeople from long distance
companies, telecommunications equipment manufacturers, network systems
integrators, CLECs and ILECs. The Company expanded its sales force from 98
salespeople at December 31, 1998 to 180 salespeople at December 31, 1999 and
management expects to further increase the Company's sales force to
approximately 300 salespeople by the end of 2000. The Company plans to continue
to attract and retain highly qualified salespeople by offering them an
opportunity to work with an experienced management team in an entrepreneurial
environment and to participate in the potential economic rewards made available
through a results-oriented compensation program. The Company also utilizes
independent sales agents to identify and maintain customers.
MARKETING. In its existing markets, US LEC seeks to position itself as
a high quality alternative to ILECs for local telecommunication services by
offering network reliability, bundled products and superior customer support at
competitive prices. The Company is building its reputation and brand identity by
working closely with its customers to develop services tailored to their
particular needs and by implementing targeted product offerings and promotional
efforts.
The Company primarily uses three service marks: US LEC, a logo that
includes US LEC, and THE COMPETITIVE TELEPHONE COMPANY. These service marks have
been registered either on the principal or the supplemental register of the U.S.
Patent and Trademark Office for uses related to telecommunications services. The
Company also has pending trademark applications for these marks.
CUSTOMER SERVICE. Management believes that the Company's ability to
provide superior customer service is a key factor in acquiring new customers and
reducing churn of existing customers. The Company has developed a customer
service strategy that is designed to effectively meet the service requirements
of its target customers. The principal salesperson for each customer provides
the first line of customer service by identifying and resolving any customer
needs. An account development representative is assigned to each customer to
supervise all aspects of customer relations and to provide a single point of
contact for all customer service issues. To support this locally-based team, the
Company also has a centrally based customer service and NOC team.
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BILLING. US LEC outsources the preparation of customer bills, which are
available in a variety of formats to meet a customer's specific needs. US LEC
offers customers simplicity and convenience by sending one bill for all services
and the bill is sent out within a few days after the billing cycle.
SIGNIFICANT CUSTOMER
In fiscal 1997, 1998, and 1999, BellSouth, operating in the majority of
the Company's markets, accounted for approximately 65%, 80%, and 70%,
respectively, of the Company's net revenue (before reduction for the $12.0
million and $27.8 million allowance in 1998 and 1999, respectively, described in
Note 6 to the Company's consolidated financial statements). The majority of this
revenue for 1998 and 1999 was generated from reciprocal compensation. Although
reciprocal compensation owed to the Company by BellSouth is not a customer
relationship in the traditional sense, BellSouth is shown here due to the
significant contribution to revenue. At December 31, 1997, 1998, and 1999,
BellSouth accounted for 67%, 94%, and 92% of the Company's total accounts
receivable before allowance, respectively. The majority of such receivables and
revenues are in dispute. The majority of these disputed receivables and revenues
have resulted from traffic associated with Metacomm, LLC ("Metacomm"), a
customer of the Company and BellSouth, and which became a related party to the
Company during 1998 (see Notes 6 and 8 to the Company's consolidated financial
statements).
EMPLOYEES
As of December 31, 1999, the Company employed 460 people. The Company
expects to employ over 750 people by the end of 2000. The Company considers its
employee relations to be very good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of US LEC Corp:
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Name Age Position
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Richard T. Aab 50 Chairman of the Board and Director
Tansukh V. Ganatra 56 Vice Chairman, Chief Executive Officer and Director
Aaron D. Cowell, Jr. 37 President
Michael K. Robinson 43 Executive Vice President and Chief Financial Officer
Robert D. Ingram 54 Executive Vice President-Engineering and Chief Technical Officer
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RICHARD T. AAB co-founded US LEC in June 1996 and has served as
Chairman of the Board of Directors since that time. He also served as Chief
Executive Officer from June 1996 until July 1999. In 1982, he co-founded ACC
Corp., a publicly-traded international telecommunications company that was
acquired by Teleport Communications Group, Inc. ("Teleport") in 1998. Teleport
was subsequently acquired by AT&T. Between 1982 and 1997, Mr. Aab held various
positions with ACC Corp. including Chairman and Chief Executive Officer and
served as a director. Under Mr. Aab's leadership, ACC Corp. participated in the
introduction of competition into local and long distance telecommunications
markets in the United States, Canada and the United Kingdom.
TANSUKH V. GANATRA co-founded US LEC in June 1996 and has served as a
director since that time. He also served as President and Chief Operating
Officer from June 1996 until July 1999, when he was named President and Chief
Executive Officer. In January 2000, he was named Vice Chairman and Chief
Executive Officer. Mr. Ganatra is a specialist in the field of intelligent
switching technology and transport network systems. From 1987 to 1997, Mr.
Ganatra held various positions with ACC Corp., including serving as its
President and Chief Operating Officer. Prior to joining ACC Corp., Mr. Ganatra
held various positions during a 19-year career with Rochester Telephone Corp.
(now Frontier Corp.), culminating with the position of Director of Network
Engineering.
AARON D. COWELL, JR. joined US LEC in June 1998 as Executive Vice
President and General Counsel. He was named President in January 2000. Prior to
joining US LEC, Mr. Cowell was a partner with Moore & Van Allen, PLLC, a large
southeastern law firm. Mr. Cowell focussed on business and transactional law,
specializing in mergers and acquisitions. He also represented
telecommunications-related businesses throughout his career in private practice.
At Moore & Van Allen, he represented US LEC since its initial incorporation in
1996. He has been
<PAGE>
involved in numerous operating areas of US LEC's business and legal affairs,
including its IPO in April 1998. Mr. Cowell is a graduate of Harvard Law School.
MICHAEL K. ROBINSON has been US LEC's Executive Vice President of
Finance and Chief Financial Officer since July 1998. Prior to joining US LEC,
Mr. Robinson held positions with the Telecom sector of Alcatel, an international
telecommunications equipment company headquartered in Paris, France. From 1996
to the July 1998, Mr. Robinson was Executive Vice President and Chief Financial
Officer of Alcatel Data Networks, developers and manufacturers of wide area
network data switching equipment for carrier and enterprise solutions, based in
Ashburn, Virginia. He was responsible for financial controls, treasury,
contracts management, information systems, and facilities. In addition to his
duties at Alcatel Data Networks, Mr. Robinson was responsible for the worldwide
financial operations of the Enterprise and Data Networking division for Alcatel.
From 1989 to 1995, Mr. Robinson was Vice President and Chief Financial Officer
with Alcatel Network Systems in Raleigh, North Carolina, and then in Richardson,
Texas. The company develops, manufactures, and markets transmission equipment
for telecommunications systems. Prior to joining Alcatel, Mr. Robinson held
various management positions with Windward International and Siecor Corp. He
brings over 14 years of telecommunications experience to US LEC. Mr. Robinson is
a graduate of the MBA program at Wake Forest.
ROBERT D. INGRAM joined US LEC in September 1999 as its Executive Vice
President - Engineering and Chief Technology Officer. Mr. Ingram has almost 30
years of experience in the telecommunications industry. Immediately prior to
joining US LEC, Mr. Ingram served in the capacity of Vice President - Planning,
Engineering and Construction for Citizens Communications in Dallas, Texas, a
telecommunications provider operating approximately one million access lines in
13 states. In this role, Mr. Ingram was responsible for the integration of
engineering and construction activities in widely dispersed operating units. He
was instrumental in the implementation of Citizens' data services, in addition
to planning their network architecture and equipment selection for introducing
high-speed digital services, and he has extensive experience with both voice and
data networks. Previously, Mr. Ingram spent 22 years with Rochester Telephone in
similar functions.
REGULATION
The following summary of regulatory developments and legislation does
not purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
existing federal and state legislation and regulations are currently the subject
of judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company, can be predicted at this time. This
section also includes a brief description of regulatory and tariff issues
pertaining to the operation of the Company.
OVERVIEW. The Company's services are subject to varying degrees of
federal, state and local regulation. The Federal Communications Commission (the
"FCC") generally exercises jurisdiction over the facilities of, and services
offered by, telecommunications common carriers that provide interstate or
international communications. The state regulatory commissions (herein "PUCs")
retain jurisdiction over the same facilities and services to the extent they are
used to provide intrastate communications.
FEDERAL LEGISLATION. The Company must comply with the requirements of
common carriage under the Communications Act of 1934, as amended (the
"Communications Act"). The Telecom Act, enacted on February 8, 1996,
substantially revised the Communications Act. The Telecom Act establishes a
regulatory framework for the introduction of local competition throughout the
United States and was intended to reduce unnecessary regulation to the greatest
extent possible. Among other things, the Telecom Act preempts, after notice and
an opportunity for comment, any state or local government from prohibiting any
entity from providing telecommunications service.
The Telecom Act also establishes a dual federal-state regulatory scheme
for eliminating other barriers to competition faced by competitors to the
incumbent local exchange carriers and other new entrants into the local
telephone market. Specifically, the Telecom Act imposes on ILECs certain
interconnection obligations, some of which are implemented by FCC regulations.
The Telecom Act contemplates that states will apply the federal regulations and
oversee the implementation of all aspects of interconnection not subject to FCC
jurisdiction as they oversee interconnection negotiations between ILECs and
their new competitors.
The FCC has significant responsibility in the manner in which the
Telecom Act will be implemented especially in the areas of pricing, universal
service, access charges and price caps. The details of the rules adopted by
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the FCC will have a significant effect in determining the extent to which
barriers to competition in local services are removed, as well as the time frame
within which such barriers are eliminated.
The PUCs also have significant responsibility in implementing the
Telecom Act. Specifically, the states have authority to establish
interconnection pricing, including unbundled loop charges, reciprocal
compensation and wholesale pricing consistent with the FCC regulations. The
states are also charged under the Telecom Act with overseeing the arbitration
process for resolving interconnection negotiation disputes between CLECs and the
ILECs and must approve interconnection agreements, and resolve contract
compliance disputes arising from interconnection agreements. See "Business --
Forward Looking Statements and Risk Factors -- Uncertainties Related to
Reciprocal Compensation" for a discussion of the actions before PUCs related to
its interconnection agreement with BellSouth.
The Company has historically earned a significant portion of its
initial revenue in some markets from the ILEC in the form of reciprocal
compensation payments due to the Company. Several ILECs in the Company's
territory (principally BellSouth) have challenged the applicability of the
reciprocal compensation related to enhanced service providers and ISP customers
receiving more calls than they make. See "Business -- Forward Looking Statements
and Risk Factors -- Uncertainties Related to Reciprocal Compensation". (See Note
6 to the Company's Consolidated Financial Statements).
The obligations imposed on ILECs by the Telecom Act to promote
competition, such as local number portability, dialing parity, reciprocal
compensation arrangements and non-discriminatory access to telephone poles,
ducts, conduits and rights-of-way also apply to CLECs, including the Company. As
a result of the Telecom Act's applicability to other telecommunications
carriers, it may provide the Company with the ability to reduce its own
interconnection costs by interconnecting directly with non-ILECs, but may also
cause the Company to incur additional administrative and regulatory expenses in
responding to interconnection requests. At the same time, the Telecom Act also
makes competitive entry into other service or geographic markets more attractive
to Regional Bell Operating Companies ("RBOC"), other ILECs, long distance
carriers and other companies and likely will increase the level of competition
the Company faces. See "Business - Competition".
In addition, the Telecom Act provided that ILECs that are subsidiaries
of RBOCs could not offer in-region, long distance services across LATAs until
they had demonstrated that (i) they have entered into an approved
interconnection agreement with a facilities-based CLEC or that no such CLEC has
requested interconnection as of a statutorily determined deadline, (ii) they
have satisfied a 14-element checklist designed to ensure that the ILEC is
offering access and interconnection to all local exchange carriers on
competitive terms and (iii) the FCC has determined that in-region, inter-LATA
approval is consistent with the public interest, convenience and necessity.
Recently, the FCC approved Bell Atlantic's right to provide interLATA service in
New York, which is the only interLATA application by an RBOC that has been
approved to date. See "Business -- Forward Looking Statements and Risk
Factors--Regulation".
FEDERAL REGULATION AND RELATED PROCEEDINGS. The Telecom Act and the
FCC's efforts to initiate reform have resulted in numerous legal challenges. As
a result, the regulatory framework in which the Company operates is subject to a
great deal of uncertainty. Any changes that result from this uncertainty could
have a material adverse effect on the Company. The FCC has adopted orders
eliminating tariff filing requirements for non-dominant carriers providing
interstate access and domestic interstate long distance services. However, on
February 13, 1997, the United States Court of Appeals for the District of
Columbia (the "D.C. Court of Appeals") granted motions for stay of the FCC order
detariffing domestic interstate long distance service pending judicial review of
that order. The result of this stay is that carriers must continue to file
tariffs for interstate long distance services. Tariff filing requirements remain
in place for international traffic. US LEC has filed federal interstate long
distance, interstate access and international tariffs.
The FCC also has proposed reducing the level of regulation that applies
to the ILECs, and increasing their ability to respond quickly to competition
from the Company and others. For example, in accordance with the Telecom Act,
the FCC has applied "streamlined" tariff regulation to the ILECs, which greatly
accelerates the time prior to which changes to tariffed service rates may take
effect, and has eliminated the requirement that ILECs obtain FCC authorization
before constructing new domestic facilities. These actions will allow ILECs to
change service rates more quickly in response to competition. Similarly, the FCC
has afforded significant new pricing flexibility to ILECs subject to price cap
regulation. On August 5, 1999, the FCC adopted an order granting price cap ILECs
additional pricing flexibility. The order provides certain immediate regulatory
relief regarding price cap ILECs and sets forth a framework of "triggers" to
provide those companies with greater flexibility to set rates for interstate
access services. The order also initiated a rulemaking to determine whether the
FCC should regulate the access charges of CLECs, such as the Company. To the
extent such increased pricing flexibility is utilized for ILECs or
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such additional regulation is implemented, the Company's ability to compete with
ILECs for certain service could be adversely affected.
The FCC has taken several actions related to the assignment of
telephone numbers, first in July 1995 mandating the responsibility for
administering and assigning local telephone numbers be transferred from the
RBOCs and a few other ILECs to a neutral entity, and second in July 1996
adopting a regulatory structure under which a wide range of number portability
issues would be resolved. In March 1997, the FCC affirmed its number portability
rules, but it extended slightly certain deadlines for the implementation of true
number portability. The FCC has established cost recovery rules for long-term
number portability.
On August 8, 1996, the FCC issued an order containing rules providing
guidance to the ILECs, CLECs, long distance companies and PUCs regarding several
provisions of the Telecom Act. The rules include, among other things, FCC
guidance on: (i) discounts for end-to-end resale of ILEC retail local exchange
services (which the FCC suggested should be in the range of 17%-25%); (ii)
availability of unbundled local loops and other unbundled ILEC network elements;
(iii) the use of Total Element Long Run Incremental Costs in the pricing of
these unbundled network elements; (iv) average default proxy prices for
unbundled local loops in each state; (v) mutual compensation proxy rates for
termination of ILEC/CLEC local calls; and (vi) the ability of CLECs and other
service providers to opt into portions of previously-approved interconnection
agreements negotiated by the ILECs with other parties on a most favored nation
(or a "pick and choose") basis. See "Regulation -- Eighth Circuit Court of
Appeals Decision and Supreme Court Reversal" for a discussion of the Eighth
Circuit Court of Appeals decision related to this order.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service program which subsidized certain eligible
services. For example, the FCC established new subsidies for services provided
to qualifying schools and libraries with an annual cap of $2.25 billion and for
services provided to rural health care providers with an annual cap of $400
million. The FCC also expanded the federal subsidies to low-income consumers and
consumers in high-cost areas. Providers of interstate telecommunications
service, such as the Company, as well as certain other entities, must pay for
these programs. The Company's share of the schools, libraries and rural health
care funds is based on its share of the total industry telecommunications
service and certain defined telecommunications end user revenues. The Company's
share of all other federal subsidy funds is based on its share of the total
interstate telecommunications service and certain defined telecommunications end
user revenues. Although the Company has made minimal contributions to the fund,
the amount of the Company's required contribution changes each quarter. As a
result, the Company cannot predict the effect these regulations will have on the
Company in the future. In the May 8 order, the FCC also announced that it will
revise its rules for subsidizing service provided to consumers in high cost
areas. The United States Court of Appeals for the Fifth Circuit upheld those
rules.
In a combined Report and Order and Notice of Proposed Rulemaking
released on December 24, 1996, the FCC made changes and proposed further changes
in the interstate access charge structure. In the Report and Order, the FCC
removed restrictions on an ILEC's ability to lower access prices and relaxed the
regulation of new switched access services in those markets where there are
other providers of access services. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on the Company's ability to compete in providing interstate access
services. On May 16, 1997, the FCC released an order revising its access charge
rate structure. The new rules substantially increase the costs that ILECs
subject to the FCC's price cap rules ("price cap LECs") recover through monthly,
non-traffic sensitive access charges and substantially decrease the costs that
price cap ILECs recover through traffic sensitive access charges. In the May 16
order, the FCC also announced its plan to bring interstate access rate levels
more in line with cost. The plan will include rules to be established that grant
price cap LECs increased pricing flexibility upon demonstrations of increased
competition (or potential competition) in relevant markets. The manner in which
the FCC implements this approach to lowering access charge levels could have a
material effect on the Company's ability to compete in providing interstate
access services. Several parties have appealed the May 16 order. Those appeals
were consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit which upheld the Commission's rules.
As part of its overall plan to lower interstate access rates, the FCC
also released an order on May 21, 1997, in which the FCC revised its price cap
rules. In the May 21 order, the FCC increased the so-called X-Factor (the
percentage by which price cap LECs must lower their interstate access charges
every year, net of inflation and exogenous cost increases) and made it uniform
for all price cap LECs. The results of these rule changes will be both a
one-time overall reduction in price cap LEC interstate access charges and an
increase in the rate at which those charges will be reduced in the future.
Several parties have appealed the May 21 order. Those appeals were
<PAGE>
consolidated and transferred to the United States Court of Appeals for the Tenth
Circuit. They have been subsequently transferred to the D.C. Court of Appeals
where they are currently pending.
On February 26, 1999, the FCC issued a declaratory ruling and notice of
proposed rulemaking concerning ISP traffic. The FCC concluded in its ruling that
ISP traffic is jurisdictionally interstate in nature. The FCC has requested
comment as to what reciprocal compensation rules should govern this traffic upon
expiration of existing interconnection agreements. The FCC also determined that
no federal rule existed that governed reciprocal compensation for ISP traffic at
the time existing interconnection agreements were negotiated and concluded that
it should permit states to determine whether reciprocal compensation should be
paid for calls to ISPs under existing interconnection agreements. In light of
the FCC order, state commissions which previously addressed this issue and
required reciprocal compensation to be paid for ISP traffic may reconsider and
may modify their prior rulings. To date, four PUCs in states where the Company
has earned reciprocal compensation have affirmed their prior position on this
issue. The FCC order has been appealed by several parties. On March 24, 2000,
the United States Court of Appeals for the D.C. Circuit vacated the FCC's
February 26, 1999 declaratory ruling and remanded it back to the FCC. The D.C.
Circuit Court of Appeals found that the FCC failed to clearly explain and
support why ISP traffic should fall under its jurisdiction as long distance in
nature rather than under the domain of state regulators as local in nature. This
ruling means the FCC will have to reexamine its rules covering reciprocal
compensation for ISP traffic. The Company cannot predict the results of such
reexamination.
The Company also anticipates that the FCC will initiate a number of
additional proceedings, of its own volition and as a result of requests from
CLECs and others, as a result of the Telecom Act.
The FCC also requires carriers to file periodic reports concerning
carriers interstate circuits and deployment of network facilities. 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. 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 or 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.
EIGHTH CIRCUIT COURT OF APPEALS DECISIONS AND THE SUPREME COURT
REVERSAL. Various parties, including ILECs and state PUCs, requested that the
FCC reconsider its own rules and/or filed appeals of the FCC's August 8, 1996
order.
The U.S Court of Appeals for the Eighth Circuit ("8th Circuit") held
that, in general, the FCC does not have jurisdiction over prices for
interconnection, resale, leased unbundled network elements and traffic
termination. The 8th Circuit also overturned the FCC's "pick and choose" rules
as well as certain other FCC rules implementing the Telecom Act's local
competition provisions. In addition, the 8th Circuit decisions substantially
limited the FCC's authority to enforce the local competition provisions of the
Telecom Act. On January 25, 1999, U.S. Supreme Court reversed the 8th Circuit
and upheld the FCC's authority to issue regulations governing pricing of
unbundled network elements provided by the ILECs in interconnection agreements
(including regulations governing reciprocal compensation). In addition, the
Supreme Court affirmed the "pick and choose" rules which allows carriers to
choose individual portions of existing interconnection agreements with other
carriers and to opt-in only to those portions of the interconnection agreement
that they find most attractive. The Supreme Court did not, however, address
other challenges raised about the FCC's rules at the 8th Circuit because the 8th
Circuit did not decide those challenges. These challenges will now have to be
addressed by the 8th Circuit in light of the Supreme Court's decision. In
addition, the Supreme Court disagreed with the standard applied by the FCC for
determining whether an ILEC should be required to provide a competitor with
particular unbundled network elements. On remand, the FCC largely retained its
list of unbundled elements, but eliminated the requirement that ILECs provide
unbundled access to local switching for customers with four or more lines in the
top 50 MSAs, and the requirement to provide unbundled operator service and
directory assistance.
The 8th Circuit decisions and the reversal by the Supreme Court
continue to create uncertainty about the rules governing pricing terms and
conditions of interconnection agreements. This uncertainty makes it difficult to
predict whether the Company will be able to rely on existing interconnection
agreements or have the ability to negotiate acceptable interconnection
agreements in the future.
STATE REGULATION. The Company has all of the certifications necessary
to offer its current services in the states of:
<PAGE>
STATE
-----
North Carolina
Georgia
Virginia
Tennessee
South Carolina
Florida
Alabama
Washington, D.C.
Pennsylvania
Maryland
Delaware
New Jersey
New York
Massachusetts
Kentucky
Mississippi
Ohio
Texas
The Company has applications pending with the following PUCs:
Connecticut
Louisiana
To the extent that an area within a state in which the Company operates
is served by a small (in line counts) or rural ILEC not currently subject to
competition, the Company generally does not have authority to service those
areas at this time. Most states regulate entry into local exchange and other
intrastate service markets, and states' regulation of CLECs vary in their
regulatory intensity. The majority of states mandate that companies seeking to
provide local exchange and other intrastate services apply for and obtain the
requisite authorization from the PUC. This authorization process generally
requires the carrier to demonstrate that it has sufficient financial, technical,
and managerial capabilities and that granting the authorization will serve the
public interest.
As a CLEC, the Company is subject to the regulatory directives of each
state in which the Company is certified. In addition to tariff filing
requirements, most states require that CLECs charge just and reasonable rates
and not discriminate among similarly situated customers. Some states also
require the filing of periodic reports, the payment of various regulatory fees
and surcharges, and compliance with service standards and consumer protection
rules. States also often require prior approvals or notifications for certain
transfers of assets, customers or ownership of a CLEC. States generally retain
the right to sanction a carrier or to revoke certifications if a carrier
violates relevant laws and/or regulations.
In all of the states where US LEC is certified, the Company is required
to file tariffs or price lists setting forth the terms, conditions and/or prices
for services which are classified as intrastate. In some states, the Company's
tariff may list a range of prices or a ceiling price for particular services,
and in others, such prices can be set on an individual customer basis, although
the Company may be required to file tariff addenda of the contract terms. The
Company is not subject to price cap or to rate of return regulation in any state
in which it currently provides services.
As noted above, the states have the primary regulatory role over
intrastate services under the Telecom Act. The Telecom Act allows state
regulatory authorities to continue to impose competitively neutral and
nondiscriminatory requirements designed to promote universal service, protect
the public safety and welfare, maintain the quality of service and safeguard the
rights of consumers. PUCs will implement and enforce most of the Telecom Act's
local competition provisions, including those governing the specific charges for
local network interconnection. In some states, those charges are being
determined by generic cost proceedings and in other states they are being
established through arbitration proceedings. Depending on how such charges are
ultimately determined, such charges could become a material expense to the
Company.
<PAGE>
COMPETITION
As noted above, the regulatory environment in which the Company
operates is changing rapidly. The passage of the Telecom Act combined with other
actions by the FCC and state regulatory authorities continues to promote
competition in the provision of telecommunications services.
ILECS. In each market served by its networks, the Company faces, and
expects to continue to face, significant competition from the ILECs, which
currently dominate their local telecommunications markets as a result of their
historic monopoly position.
The Company competes with the ILECs in its markets for local exchange
services on the basis of product offerings, reliability, state-of-the-art
technology, price, route diversity, ease of ordering and customer service.
However, the ILECs have long-standing relationships with their customers and
provide those customers with various transmission and switching services, a
number of which the Company does not currently offer. In addition, ILECs enjoy a
competitive advantage due to their vast financial resources. The Company has
sought, and will continue to seek, to achieve parity with the ILECs in order to
become able to provide a full range of local telecommunications services. See
"Business -- Regulation" for additional information concerning the regulatory
environment in which the Company operates. Because US LEC leases fiber optic
transmission capacity to link its customers with its networks, and uses
state-of-the-art technology in its switch platforms, the Company has
demonstrated cost and service quality advantages over some currently available
ILEC networks.
OTHER COMPETITORS. The Company also faces, and expects to continue to
face, competition from other potential competitors in certain of the markets in
which the Company offers its services. In addition to the ILECs, CAPs, and other
CLECs, potential competitors capable of offering switched local and long
distance services include long distance carriers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end-users. Many of these potential competitors
enjoy competitive advantages based upon existing relationships with subscribers,
brand name recognition and vast financial resources. A continuing trend toward
business combinations and alliances in the telecommunications industry may
create significant new competitors to the Company.
The Company believes that the Telecom Act, as well as a recent series
of completed and proposed transactions between ILECs and long distance companies
and cable companies, increase the likelihood that barriers to local exchange
competition will be removed. The Telecom Act, as passed, conditioned the
provision of in-region interLATA services by RBOCs upon a demonstration that the
market in which an RBOC seeks to provide such services has been opened to
competition. When ILECs that are RBOC subsidiaries are permitted to provide such
services they will be in a position to offer single source service. ILECs that
are not RBOC subsidiaries may offer single source service presently. The Telecom
Act's limitations on provision of in-region interLATA services have been
challenged by the RBOCs. See "Business - Regulation".
The Company also competes with long distance carriers in the provision
of long distance services. Although the long distance market is dominated by a
few major competitors, hundreds of other companies also compete in the long
distance marketplace.
<PAGE>
FORWARD LOOKING STATEMENTS AND RISK FACTORS
Except for historical statements and discussions, statements contained
in this report constitute "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, the Company's Annual
Report to Stockholders for the year ended December 31, 1999, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and subsequently filed Annual Reports
on Form 10-K may include forward looking statements. Other written or oral
statements which constitute forward looking statements have been made and may in
the future be made by or on behalf of US LEC, including statements regarding
future operating performance, share of new and existing markets, short-term and
long-term revenue, earnings and cash flow amounts, judicial, statutory and
regulatory developments and general industry growth rates and US LEC's
performance in relation thereto. These statements are identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "estimates" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. These forward looking statements are based on a
number of assumptions concerning future events, including the outcome of
judicial and regulatory proceedings, the adoption of balanced and effective
rules and regulations by the FCC and PUCs, and US LEC's ability to successfully
execute its strategy. These forward looking statements are also subject to a
number of uncertainties and risks, many of which are outside of US LEC's
control, that could cause actual results to differ materially from such
statements. These risks include, but are not limited to, the following:
DISPUTED RECIPROCAL COMPENSATION. The Telecom Act requires ILECs to
provide reciprocal compensation to a CLEC for local traffic terminated on such
CLEC's network. Notwithstanding this requirement, a number of ILECs have taken
the position that traffic terminated to ESPs, including information service
providers such as ISPs, is not local traffic. A majority of the Company's
revenue is derived from reciprocal compensation amounts due from ILECs,
principally BellSouth. In August 1997, BellSouth notified the Company and other
CLECs that it considered traffic terminated to ESPs, including ISPs, to be
interstate traffic, and therefore not subject to reciprocal compensation, and
that BellSouth would not pay (or bill) reciprocal compensation under
interconnection agreements for this traffic. BellSouth is disputing the portion
of reciprocal compensation billed by the Company related to the transport and
termination of local traffic from its customers to ESPs, including ISPs and
information service providers, primarily on the basis that such traffic does not
terminate in the same local exchange and, as described below, the portion of the
billings related to traffic on certain networks (collectively referred to as
"Disputed Reciprocal Compensation"). The Company recorded Disputed Reciprocal
Compensation revenue of approximately $0, $42 million and $92 million for 1997,
1998 and 1999, respectively, net of a $0, $12 million and $27 million allowance,
respectively. Management believes that the Company has earned and is legally
entitled to this revenue and payments are due from BellSouth pursuant to the
interconnection agreements that BellSouth has with the Company.
On February 26, 1998, following a petition by the Company, the North
Carolina Utilities Commission (the "NCUC") ordered BellSouth to bill and pay for
all ISP-related traffic (the "NCUC Order"). Following motions filed by
BellSouth, the NCUC stayed enforcement of its order until June 1, 1998. On April
27, 1998, BellSouth filed a petition for judicial review of the NCUC Order and
an action for declaratory judgment and other relief (including a request for an
additional stay) with the United States District Court for the Western District
of North Carolina ("U.S. District Court") pending determination of certain
related issues by the FCC. This action was filed against the Company and the
NCUC. In June 1999, the U.S. District Court dismissed BellSouth's petition
without prejudice and remanded back to the NCUC for further review. Following
the U.S District Court's remand, on June 22, 1999, the NCUC denied BellSouth's
request for a further stay of the NCUC Order. On July 16, 1999, the Company
received an $11 million payment from BellSouth for a portion of the Disputed
Reciprocal Compensation earned from North Carolina operations, and subject to
the NCUC Order.
Other than denying BellSouth's request for a further stay, the only
action taken by the NCUC with respect to the remand from the U.S. District Court
is that the NCUC filed with the U.S. Fourth Circuit Court of Appeals (the "4th
Circuit") a notice of appeal of the U.S. District Court's order that rejected
the NCUC's defenses, including its defense that the 11th Amendment to the United
States Constitution bars BellSouth from making the NCUC a party to our
proceeding in the federal courts. The Company has also appealed and the United
States Justice Department has intervened in the appeal. Hearings on this matter
are scheduled for early April, 2000.
In February 1999, the FCC issued a declaratory ruling (the "FCC
Ruling") which concluded that for jurisdictional purposes most calls delivered
to ISPs should be deemed to continue to Internet web sites, which are often
located in other states. Thus, the FCC ruled that such calls are
jurisdictionally "interstate" in nature. However, the FCC further declared that
where parties have previously agreed in interconnection agreements that
reciprocal compensation must be paid for traffic bound for ISPs, the parties
should be bound by those agreements, as interpreted
<PAGE>
and enforced by state regulatory bodies. The FCC also recognized that some
commissions might reconsider their decisions in light of its ruling. As noted,
the NCUC had ruled on February 26, 1998 in favor of the Company with respect to
payment for traffic bound to ISPs under the Company's first interconnection
agreement with BellSouth. To date, state regulatory bodies in at least
twenty-three states have considered the effect of the FCC Ruling and have
overwhelmingly reaffirmed their earlier decisions requiring payment of
reciprocal compensation for this type of traffic or for the first time
determined that such compensation is due. Included among these states are
Alabama, Florida, Louisiana, South Carolina and Tennessee, all of which are in
BellSouth's operating territory. In this regard, the Alabama Public Service
Commission concluded that the treatment of ISP traffic as local was so prevalent
in the industry at the time BellSouth entered into interconnection agreements
with CLECs that, if it is so intended, BellSouth had an obligation to negate
such local treatment in the agreements by specifically delineating that ISP
traffic was not local traffic subject to the payment of reciprocal compensation.
The Florida Public Service Commission reached a similar conclusion. Georgia and
Tennessee have also reaffirmed decisions that reciprocal compensation is owed
for calls to ISPs. In an arbitration of the terms of a new interconnection
agreement between BellSouth and another CLEC, the NCUC recently determined that
until the FCC issues a definitive ruling pursuant to the notice of proposed
rulemaking which was part of the FCC Ruling, reciprocal compensation should
continue to be paid under the new interconnection agreement. While US LEC was
not a party to this arbitration, management believes this decision to be
favorable in light of the U.S. District Court's remand (discussed above). Two
BellSouth states - South Carolina and Louisiana - have ruled that reciprocal
compensation is not due for traffic to ISPs. These decisions also came after the
FCC's Declaratory Ruling. All of these decisions have been appealed. The South
Carolina and Louisiana decisions represent a view adopted by very few other
states. (The Company does not provide local service in Louisiana or South
Carolina.)
In February 2000, the Company received payment from GTE for reciprocal
compensation related to ISP and voice traffic in North Carolina. This payment
was pursuant to a commercial arbitration award rendered January 4, 2000
resulting from a proceeding before the American Arbitration Association. GTE was
ordered to pay US LEC approximately $650,000 for ISP traffic for the period
ending September 1999. The Company is currently working through dispute
resolution procedures with respect to subsequent periods.
On September 14, 1998, the Company filed a complaint with the NCUC
seeking payment of facilities charges, non-ISP based reciprocal compensation and
intraLATA toll termination charges from BellSouth. Also on September 14, 1998,
BellSouth filed a complaint with the NCUC seeking to be relieved from its
obligations under its interconnection agreement with the Company to pay
reciprocal compensation for traffic related to networks including that operated
by Metacomm, LLC ("Metacomm"), a customer of BellSouth and the Company and, as
of June 1998, a related party of the Company. The two proceedings were
consolidated for purposes of discovery, which concluded June 16, 1999, and
hearings concluded in August 1999 with respect to BellSouth's complaint.
Hearings concerning US LEC's complaint have been continued by the NCUC pending
an order in the BellSouth complaint. The Company anticipates that the NCUC will
issue its ruling on BellSouth's complaint before the end of 2000. The BellSouth
proceeding primarily involves the treatment of traffic over a network
established by Metacomm and whether, under the interconnection agreements
between the Company and BellSouth and the Telecom Act, BellSouth is required to
pay reciprocal compensation to the Company for traffic associated with this
network and whether BellSouth has breached its interconnection agreements with
the Company by failing to pay reciprocal compensation for this traffic.
In the NCUC proceedings filed September 14, 1998, BellSouth claims
principally that the traffic on Metacomm's network does not qualify for
reciprocal compensation because the Metacomm network was designed to generate
reciprocal compensation and that such traffic does not constitute
"telecommunications" subject to the reciprocal compensation payment provisions
of the Telecom Act and the interconnection agreements with BellSouth. In
addition, BellSouth has identified other issues on which it bases its claim that
the traffic on the Metacomm network is not compensable, including (1) that the
Company agreed to share reciprocal compensation with Metacomm, (2) that, as
disclosed in the Company's Form 10-Q for the period ended September 30, 1998,
Richard T. Aab, the largest shareholder of the Company and the Chairman of its
Board of Directors, acquired a controlling interest in Metacomm, (3) reciprocal
compensation has been billed on an "always-on" basis even though there is no
measurement of the amount of data transversing the network that is originated by
customers of Metacomm, (4) that the billed traffic includes traffic during
periods when Metacomm had not yet connected customers to its network or when
customers of Metacomm were not sending data over the network, (5) that the
Metacomm network includes facilities that cross LATA boundaries and, therefore,
data traversing these facilities is not local (and, therefore, is ineligible for
reciprocal compensation), (6) that Metacomm is an unlicensed reseller of US
LEC's services, not an end-user, and (7) that the Metacomm network is a
quasi-dedicated network which should not be eligible for reciprocal
compensation.
<PAGE>
It is the Company's understanding that during the relevant period,
Metacomm was engaged in the business of developing and operating a high-speed,
always-on data network in North Carolina and its network provides users with
continuous access to data, wide area network services, software applications and
other services, including access to the Internet. In the course of the these
proceedings, the Company concluded, based on positions taken and information
provided by Metacomm, that Metacomm related traffic should not be considered to
be solely ISP traffic because its network provides additional services and
functions to users. Notwithstanding this determination, the Company believes
BellSouth will continue to contend the Disputed Reciprocal Compensation related
to the Metacomm network traffic is subject, in the first instance, to the
resolution of the ISP issue. The Company has recorded approximately $0, $50
million and $98 million of gross revenue, before allowances and before late
payment charges, for fiscal 1997, 1998 and 1999, respectively, related to
reciprocal compensation revenue generated as a result of Metacomm network
traffic.
When the Metacomm network was originally developed, the Company agreed
to pay Metacomm commissions equal to a specified percentage of the reciprocal
compensation the Company receives from ILEC's for the network traffic. The
Company recorded approximately $200,000, $20 million and $39 million for 1997,
1998 and 1999, respectively, in reciprocal compensation commission expense
earned by Metacomm, which is included in cost of services in the accompanying
financial statements. As of December 31, 1998 and 1999, the Company had a
liability to Metacomm in the amount of $5.3 million and $22.8 million,
respectively, which is recorded as accrued commissions - related party in the
accompanying financial statements. The Company and Metacomm are parties to
agreements by which commissions earned by Metacomm related to reciprocal
compensation are not payable until the related reciprocal compensation is
collected from the ILEC. However, in fiscal 1997, 1998 and 1999, the Company
paid Metacomm $0, $8.3 million and $12 million prior to collecting the earned
reciprocal compensation from BellSouth. These payments are subject to a
repayment agreement if the related reciprocal compensation is ultimately not
collected from BellSouth
The Company believes that calls to establish, maintain and manage data
network connections and intra-network communications generated by data
processing routers, which are necessary to maintain the functionality and
integrity of the Metacomm network, are within the definition of
"telecommunications" under the Telecom Act and constitute compensable traffic
subject to reciprocal compensation under the interconnection agreements the
Company has with BellSouth. The Company also believes that the issues raised by
BellSouth as additional bases for nonpayment does not excuse BellSouth from its
obligation to pay reciprocal compensation under its interconnection agreement
with the Company. Accordingly, the Company intends to defend vigorously against
BellSouth's claims and to prosecute vigorously its claims against BellSouth in
the above proceedings.
As noted above, on July 16, 1999, the Company received a payment of $11
million from BellSouth representing a portion of the amounts due the Company for
ISP reciprocal compensation in North Carolina. In making the payment, BellSouth
stated that it was for ISP traffic the NCUC had ordered it to pay for in
February 1998, including late fees, and that it was reserving all of its appeal
rights with respect to the payment. BellSouth also stated that this payment did
not include any amounts at issue in its September 14, 1998 NCUC proceeding. This
partial payment did not cover all outstanding amounts the Company claims are due
from BellSouth in North Carolina and other states the Company serves. For
example, while the Company has outstanding amounts due from BellSouth for ISP
traffic in Tennessee, Georgia and Florida, BellSouth has not paid these amounts,
presumably because no orders specific to US LEC have been entered by state
commissions in those states directing BellSouth to pay the Company. However,
state commissions in these states have issued rulings in favor of other
competitive carriers and as discussed above, the state commissions in Florida
and Alabama have made rulings subsequent to the FCC Ruling. To address this
issue, the Company has filed the following additional actions against BellSouth
related to delinquent reciprocal compensation payments, none of which involve
Metacomm or any similar network:
o On July 1, 1999, the Company filed a complaint against BellSouth
before the Georgia Public Service Commission ("GAPSC"). The hearing
with relation to this complaint concluded January 21, 2000. The
Company anticipates receiving the ruling from the hearing officer in
April 2000.
o On July 2, 1999, the Company filed a complaint against BellSouth
before the Florida Public Service Commission ("FLPSC"). This matter
is scheduled for hearing in late April 2000.
o On August 6, 1999, the Company filed a complaint against BellSouth
before the Tennessee Regulatory Authority ("TRA"). This matter has
not yet been scheduled for hearing.
Management believes that the Company will ultimately obtain favorable
results in the state proceedings described above before the NCUC, GAPSC, FLPSC
and the TRA; however, BellSouth may elect to initiate additional
<PAGE>
proceedings (by way of appeal or otherwise) challenging amounts owed to the
Company. In this regard, BellSouth recently has asserted a variety of other
objections to paying portions of the reciprocal compensation billed by the
Company. They include assertions that US LEC has miscalculated late payment fees
due from BellSouth and that US LEC has billed reciprocal compensation using the
wrong rates. The Company believes BellSouth has asserted these issues and will
attempt to raise further issues in order to avoid or delay payment.
If a decision adverse to the Company is issued in any of these
proceedings by any of the state commissions, and in particular the NCUC, or in
any appeal or review of a favorable decision by the U.S. District Court, state
commissions, or the FCC, or if either the FCC or any of the applicable state
commissions were to alter its view of reciprocal compensation, such an event
could have a material adverse effect on the Company's operating results and
financial condition. The Company's gross trade accounts receivable as of
December 31, 1998 and 1999 included approximately $54 million and $190 million,
respectively, of earned but uncollected Disputed Reciprocal Compensation (before
a $12 million and $39 million allowance and before late payment charges) of
which approximately $50 million and $148 million was generated as a result of
traffic related to the Metacomm network.
In June 1999, the Company adopted an existing agreement to extend local
interconnection with BellSouth replacing the previous interconnection agreement,
which expired on June 15, 1999. The adopted interconnection agreement with
BellSouth expired on December 31, 1999 but continues in force until new
interconnection agreements are reached, the new agreements will be effective as
of January 1, 2000. The Company filed petitions for arbitration in all nine
states in BellSouth operating territory seeking to obtain a PSC ordered
interconnection agreement, but the Company anticipates that it will be able to
avoid the arbitration process by adopting interconnection agreements that are
either currently in effect or which will result from arbitrations involving
other CLECs. The Company's ability to obtain favorable terms for interconnection
following December 31, 1999 will depend on a number of factors, including
decisions of the FCC and state regulatory authorities. However, the Company
intends to pursue such agreements vigorously and does not anticipate any
interruption in interconnection service.
The Company does anticipate that any such new interconnection
agreements will provide for reciprocal compensation at rates lower than in the
Company's current interconnection agreement. The Company also anticipates that
the reciprocal compensation related to Metacomm will not continue due to changes
in the terms of the interconnection agreement, changes in Metacomm's business or
the architecture of its network or a combination. In light of this, the Company
did not advance any payment to Metacomm in February 2000. In February, 2000 the
Company received a notice by which Metacomm notified BellSouth that due to
BellSouth's failure to pay reciprocal compensation, Metacomm was no longer able
to sustain its network operations. Metacomm instructed BellSouth to terminate
the facilities it provides to Metacomm. One effect of that termination will be
to reduce US LEC's revenue from the Metacomm network. US LEC estimates that the
reduction in quarterly revenue during 2000 will be approximately $18 million,
the reduction in cost of services related to commissions approximately $9
million, resulting in a decrease in earnings from operations of approximately $9
million.
RISKS ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY. The expansion
and development of US LEC's operations depend on, among other things, the
Company's ability to continue to (i) accurately assess potential new markets,
(ii) identify, hire and retain qualified personnel, (iii) lease access to
suitable fiber optic transmission facilities, (iv) purchase, install and operate
switches and related equipment and (v) obtain any required government
authorizations, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions. In addition, US LEC has experienced rapid growth since its
inception, and management believes that sustained growth will place a strain on
operational, human and financial resources. The Company's ability to manage its
expansion effectively depends on the continued development of plans, systems and
controls for its operational, financial and management needs. Given the
Company's limited operating history, there can be no assurance that the Company
will be able to satisfy these requirements or otherwise manage its growth
effectively. The failure of US LEC to satisfy these requirements could have a
material adverse effect on the Company's financial condition and its ability to
fully implement its expansion plans.
The Company's growth strategy also involves the following risks:
QUALIFIED PERSONNEL. A critical component for US LEC's success is
hiring and retaining additional qualified managerial, sales and technical
personnel. Since its inception, the Company has experienced significant
competition in hiring and retaining personnel possessing necessary skills and
telecommunications experience. Although management believes the Company has been
successful in hiring and retaining qualified personnel, there can be no
assurance that US LEC will be able to do so in the future.
<PAGE>
SWITCHES AND RELATED EQUIPMENT. An essential element of the Company's
current strategy is the provision of switched local service. There can be no
assurance that installation of the switches and associated equipment necessary
to implement the Company's business plan will be completed on a timely basis or
that the Company will not experience technological problems that cannot be
resolved in a satisfactory or timely matter. The failure of the Company to
install and operate successfully switches and other network equipment could have
a material adverse effect on the Company's financial condition and its ability
to enter additional markets.
INTERCONNECTION AGREEMENTS. The Company has agreements for the
interconnection of its networks with the networks of the ILECs covering each
market in which US LEC either has or is currently installing a switching
platform. US LEC may be required to negotiate new interconnection agreements as
it enters new markets in the future. In addition, as its existing
interconnection agreements expire, it will be required to negotiate extension or
replacement agreements. There can be no assurance that the Company will
successfully negotiate such additional agreements for interconnection with the
ILECs or renewals of existing interconnection agreements on terms and conditions
acceptable to the Company. In June 1999, the Company adopted an existing
agreement to extend local interconnection with BellSouth replacing the previous
interconnection agreement, which expired on June 15, 1999. The adopted
interconnection agreement with BellSouth expired on December 31, 1999 but
continues in force until new interconnection agreements are reached. The new
agreements will be effective as of January 1, 2000. The Company filed petitions
for arbitration in all nine states in BellSouth operating territory seeking to
obtain a PUC ordered interconnection agreement, but the Company anticipates that
it will be able to avoid the arbitration process by adopting interconnection
agreements that are either currently in effect or which will result from
arbitrations involving other CLECs. The Company's ability to obtain favorable
terms for interconnection following December 31, 1999 will depend on a number of
factors, including decisions of the FCC and state regulatory authorities. See
"Business -- Regulation". The regulatory uncertainty makes negotiating and
enforcing such agreements more difficult and possibly more protracted, and could
result in the need to renegotiate existing agreements. The failure to negotiate
and obtain required interconnection agreements on terms and conditions
acceptable to the Company could have a material adverse effect on the Company's
ability to rapidly enter a particular market and on its operations in its
existing markets.
ORDERING, PROVISIONING AND BILLING. The Company has developed processes
and procedures and is working with external vendors, including the ILECs, in the
implementation of customer orders for services, the provisioning, installation
and delivery of such services and monthly billing for those services. The
failure to manage effectively processes and systems for these service elements
or the failure of the Company's current vendors or the ILECs to deliver
ordering, provisioning and billing services on a timely and accurate basis could
have a material adverse effect upon the Company's ability to fully execute its
strategy.
PRODUCTS AND SERVICES. The Company currently offers local, long
distance, data, Internet and enhanced services. In order to address the needs of
its target customers, the Company will be required to emphasize and develop
additional products and services. No assurance can be given that the Company
will be able to provide the range of telecommunication services that its target
customers need or desire.
ACQUISITIONS. US LEC may acquire other businesses as a means of
expanding into new markets or developing new services. The Company is unable to
predict whether or when any prospective acquisitions will occur or the
likelihood of a material transaction being completed on favorable terms and
conditions. Such transactions would involve certain risks including, but not
limited to, (i) difficulties assimilating acquired operations and personnel;
(ii) potential disruptions of the Company's ongoing business; (iii) the
diversion of resources and management time; (iv) the possibility that uniform
standards, controls, procedures and policies may not be maintained; (v) risks
associated with entering new markets in which the Company has little or no
experience; and (vi) the potential impairment of relationships with employees or
customers as a result of changes in management. If an acquisition were to be
made, there can be no assurance that the Company would be able to obtain the
financing to consummate any such acquisition on terms satisfactory to it or that
the acquired business would perform as expected.
DEPENDENCE ON KEY PERSONNEL. The Company's business is managed by a
small number of key executive officers, most notably Richard T. Aab, Chairman,
Tansukh V. Ganatra, Vice Chairman and Chief Executive Officer, Aaron D. Cowell,
Jr., President and Michael K. Robinson, Executive Vice President and Chief
Financial Officer. The loss of the services of one or more of these key people,
particularly Mr. Aab or Mr. Ganatra, could materially and adversely affect US
LEC's business and its prospects. None of the Company's executive officers have
employment agreements and the Company does not maintain key man life insurance
on any of its officers. The competition for qualified managers in the
telecommunications industry is intense. Accordingly, there can be no assurance
that US
<PAGE>
LEC will be able to hire and retain necessary personnel in the future to replace
any of its key executive officers, if any of them were to leave US LEC or be
otherwise unable to provide services to US LEC.
RELIANCE ON LEASED CAPACITY. A key element of US LEC's business and
growth strategy is leasing fiber optic transmission capacity instead of
constructing its own transport facilities. In implementing this strategy, the
Company relies upon its ability to lease capacity from CAPs, other CLECs and
ILECs operating in its markets. In order for this strategy to be successful, the
Company must be able to negotiate and renew satisfactory agreements with its
fiber optic network providers, and the providers must process provisioning
requests on a timely basis, maintain their networks in good working order and
provide adequate capacity. Although US LEC enters into agreements with its
network providers that are intended to ensure access to adequate capacity and
timely processing of provisioning requests and although US LEC's interconnection
agreements with ILECs generally provide that the Company's connection and
maintenance orders will receive attention at parity with the ILECs and other
CLECs and that adequate capacity will be provided, there can be no assurance
that the ILECs and other network providers will comply with their contractual
(and, in the case of the ILECs, legally required) network provisioning
obligations, or that the provisioning process will be completed for the
Company's customers on a timely and otherwise satisfactory basis. Furthermore,
there can be no assurance that the rates to be charged to US LEC under future
interconnection agreements or lease agreements with other providers will allow
the Company to offer usage rates low enough to attract a sufficient number of
customers and operate its networks at satisfactory margins.
COMPETITION. The telecommunications industry is highly competitive. In
each of the Company's existing and target markets, the Company competes and will
continue to compete principally with the ILECs serving that area. ILECs are
established providers of local telephone and exchange access services to all or
virtually all telephone subscribers within their respective service areas. ILECs
also have greater financial and personnel resources, brand name recognition and
long-standing relationships with customers and with regulatory authorities at
the federal and state levels and with most long distance carriers.
The Company also faces, and expects to continue to face, competition
from other current and potential market entrants, including long distance
carriers seeking to enter, reenter or expand entry into the local exchange
marketplace, and from other CLECs, CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end-users. In addition, a continuing trend toward
combinations and strategic alliances in the telecommunications industry could
give rise to significant new competitors. Many of these current and potential
competitors have financial, personnel and other resources, including brand name
recognition, substantially greater than those of the Company, as well as other
competitive advantages over the Company.
The Company also competes with long distance carriers in the
provisioning of long distance services. Although the long distance market is
dominated by few major competitors, hundreds of other companies also compete in
the long distance marketplace.
In addition, the regulatory environment in which the Company operates
is undergoing significant change. As this regulatory environment evolves,
changes may occur which could create greater or unique competitive advantages
for all or some of the Company's current or potential competitors, or could make
it easier for additional parties to provide services. See "Business --
Competition".
REGULATION. Although passage of the Telecom Act has resulted in
increased opportunities for companies that are competing with the ILECs, no
assurance can be given that changes in current or future regulations adopted by
the FCC or state regulators or other legislative or judicial initiatives
relating to the telecommunications industry would not have a material adverse
effect on the Company. In addition, although the Telecom Act, as passed,
conditions RBOCs' provisioning of in-region long distance service on a showing
that the local market has been opened to competition, in the event a RBOC has
satisfied these conditions, it could (i) remove the incentive RBOCs presently
have to cooperate with companies like US LEC to foster competition within their
service areas so that they can qualify to offer in-region long distance by
allowing RBOCs to offer such services immediately and (ii) give the RBOCs the
ability to offer "one-stop shopping" for both long distance and local service.
In addition to the specific concern regarding the RBOC's ability to
provide in-region long distance, the regulatory environment facing the Company
is subject to numerous uncertainties. The FCC and PUC orders that were designed
to implement the Telecom Act have been challenged in numerous proceedings. As a
result, the Company must attempt to execute its business strategy without
knowing the rules that will govern its operations and its dealings with other
telecommunications companies. As the regulatory environment changes, it is
possible that the
<PAGE>
Company's strategy and its execution of the strategy may not be the optimal
choice. Any such changes could also result in additional, unanticipated
expenses. There can be no assurances that regulatory change will not have a
material and adverse effect on the Company. See "Business - Regulation".
FUTURE CAPITAL AND OPERATING REQUIREMENTS. Implementation of the
Company's business strategy will require significant capital and operating
expenditures during 2000 and future years. In December 1999, the Company amended
its Senior Secured Credit Facility increasing the amount available under the
facility to $150 million (the "Credit Facility"). In addition, in February 2000,
the Company announced it had executed a letter of intent with affiliates of Bain
Capital, Inc. and Thomas H. Lee Partners, L.P. to invest up to $300 million in
convertible preferred stock of US LEC (the "Preferred Stock Investment"). The
investment will be made in two tranches. The first tranche of $200 million is
expected to close in the second quarter 2000. During the first year after
closing of the first tranche, the investors, at their option, may invest up to
an additional $100 million. See "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources". The Company's principal capital expenditures relate to the purchase
and installation of its switching platform, related infrastructure and
facilities. Management expects to satisfy its capital and operating requirements
primarily with current cash balances, borrowings under the Credit Facility,
proceeds from the recently announced Preferred Stock Investment and cash flow
from operations, although there can be no assurance that the actual expenditures
required to implement the Company's business strategy will not exceed amounts
available from these sources. Also there can be no assurance that the planned
Preferred Stock Investment may close due to such factors as the failure of the
parties to agree on the terms of definitive agreements or the inability of the
parties to satisfy the closing conditions. In addition, the actual amount and
timing of the Company's future expenditures may differ materially from the
Company's estimates as a result of, among other things, the ability of the
Company to meet its planned expansion schedule, the number of its customers and
the services for which they subscribe and regulatory, technological and
competitive developments in the Company's industry. Due to the uncertainty of
these factors, actual revenues and costs may vary from expected amounts,
possibly to a material degree, and such variations are likely to affect the
implementation of the Company's business strategy.
The Company also will continue to evaluate revenue opportunities in
planned and other markets as well as potential acquisitions. The Company expects
to obtain the capital required to pursue additional opportunities from the
Credit Facility and other borrowings, the planned Preferred Stock Investment,
the sale of additional equity or debt securities or cash generated from
operations. There can be no assurance, however, that the planned Preferred Stock
Investment will close, that the Company would be successful in raising
sufficient additional capital on acceptable terms or that the Company's
operations would produce sufficient positive cash flow to pursue such
opportunities should they arise. Failure to raise and generate sufficient funds,
or unanticipated increases in capital requirements may require the Company to
delay or curtail its expansion plans, which could have a material adverse effect
on the Company's growth and its ability to compete in the telecommunications
services industry.
VARIABILITY OF QUARTERLY OPERATING RESULTS. As a result of the
significant expenses associated with the Company's expansion into new markets
and the anticipated decline in reciprocal compensation revenue, the Company's
operating results may vary significantly from period to period.
CONTROL BY SINGLE STOCKHOLDER. As of March 17, 2000, Richard T. Aab
beneficially owns or otherwise controlled 100% of the outstanding shares of
Class B Common Stock representing approximately 94% of the Company's total
voting power. In addition, holders of Class B Common Stock are entitled to vote
as a separate class to elect two members of the Board of Directors and to vote
with the holders of Class A Common Stock for the election of other members of
the Board of Directors. As a result, Mr. Aab will be able to control the board
and all stockholder decisions and, in general, to determine (without the consent
of the Company's other stockholders) the outcome of any corporate transaction or
other matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of the Company's assets.
Mr. Aab also has the power to prevent or cause a change in control of the
Company. See "Item 12: Security Ownership of Certain Beneficial Owners and
Management".
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at its principal
office at 401 North Tryon Street, Suite 1000, Charlotte, North Carolina 28202.
The Company leases all of its administrative and sales offices and its switch
sites. The various leases expire in years ranging from 2000 to 2010. Most of
these leases have renewal options. Additional office space and switch sites will
be leased or otherwise acquired as the Company's operations and networks are
expanded and as new networks are constructed. The Company plans to move it's
corporate headquarters to a new facility located in the Southpark section of
Charlotte in the third quarter of 2000.
ITEM 3. LEGAL PROCEEDINGS
US LEC is not currently a party to any material legal proceedings,
other than the GPSC, TRA, FPSC, NCUC and U.S. District Court proceedings related
to reciprocal compensation and other amounts due from BellSouth and the U.S.
District Court proceeding related to access fees due from Sprint Communications.
See "Business--Regulation" and "Forward Looking Statements and Risk Factors"
above and Note 6 to the Company's consolidated financial statements for a
detailed description of these proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the
quarter ending December 31, 1999.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required to be furnished in response to Item 5 is
incorporated by reference to the inside back cover of the Company's 1999 Annual
Report to Stockholders (the "Annual Report"). This section of the Annual Report
has been included in Exhibit 13 to this report.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required to be furnished in response to Item 6 is
incorporated by reference to the section of the Annual Report that appears under
the heading "Selected Financial Data". This section of the Annual Report has
been included in Exhibit 13 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required to be furnished in response to Item 7 is
incorporated by reference to the section of the Annual Report that appears under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations". This section of the Annual Report has been included in
Exhibit 13 to this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required to be furnished in response to Item 7A is
incorporated by reference to the section of the Annual Report that appears under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations". This section of the Annual Report has been included in
Exhibit 13 to this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to Item 8 is
incorporated by reference to the sections of the Annual Report that appear under
the headings "Consolidated Balance Sheets," "Consolidated Statements of
Operations," "Consolidated Statements of Stockholders' Equity (Deficiency),"
"Consolidated Statements of Cash Flows," "Notes to Consolidated Financial
Statements" and "Independent Auditors' Report." These sections of the Annual
Report have been included in Exhibit 13 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished in response to Item 10 with
respect to directors is incorporated by reference from the section of the proxy
statement for the Company's annual meeting of stockholders to be held May 9,
2000 (the "Proxy Statement") that appears under the heading "Election of
Directors". Information relating to the Company's executive officers is
contained in Part I of this report under the heading "Executive Officers of the
Registrant".
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished in response to Item 11 is
incorporated by reference from the sections of the Proxy Statement that appear
under the headings "Compensation of Directors" and "Compensation of Executive
Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished in response to Item 12 is
incorporated by reference from the section of the Proxy Statement that appear
under the heading "Security Ownership of Certain Beneficial Owners and
Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished in response to Item 13 is
incorporated by reference from the section of the Proxy Statement that appear
under the heading "Certain Relationships and Related Transactions".
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits -
The following documents are filed as part of this Form 10-K.
(1) Financial statements:
A. Consolidated Balance Sheets as of December 31, 1998 and 1999
B. Consolidated Statements of Operations for years ended December
31, 1997, 1998 and 1999
C. Consolidated Statements of Stockholders' Equity (Deficiency) for
years ended December 31, 1997, 1998 and 1999
D. Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999
E. Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1998 and 1999
F. Independent Auditors' Report
(2) Financial Statement Schedules:
A. Schedule I - Independent Auditors' Report
B. Schedule II -Valuation and Qualifying Accounts
(3) List of Exhibits:
<TABLE>
<CAPTION>
No. Exhibit
--- --------
<S> <C> <C>
3.1 Form of Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
3.3 Amendment No. 1 to Bylaws of the Company (1)
4 Form of Class A Common Stock Certificate (1)
10.1 US LEC Corp. 1998 Omnibus Stock Plan (1) (2)
10.2 Promissory Note, dated January 16, 1998, made by the company to Melrich
Associates, LP (1)
10.3 Security Agreement dated January 16, 1998, by and between the Company and
Melrich Associates, L.P. (1)
10.4 Promissory Note, dated January 16, 1998, made by the Company to Tansukh V.
Ganatra (1)
10.5 Security Agreement, dated January 16, 1998, by and between the Company and
Tansukh V. Ganatra (1)
10.6 Guaranty and Suretyship Agreement, dated January 16, 1998, by and among
the Company and Richard T. Aab, Melrich Associates, L.P. and Tansukh V.
Ganatra (1)
10.7 Contribution Agreement, dated February 14, 1998, by and between US LEC
Corp. and Richard T. Aab (1)
10.8 Form of Non-transferable Warrant, dated August 4, 1997, issued Craig K.
Simpson (1) (2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
No. Exhibit
--- -------
<S> <C>
10.9 Amended and Restated Class B Stockholders Agreement, dated as of January
1, 1998 (1)
10.10 Consulting Agreement, dated December 18, 1997, by and between the
Company and RTA Associates, LLC and related termination letter, dated
January 1, 1998 (1)
10.11 Consulting Agreement, dated December 18, 1997 by and between the Company
and Super STAR Associates Limited Partnership and related termination
letter, dated January 1, 1998 (1)
10.12 Second Amended Loan and Security Agreement, dated as of December 20,
1999, among US LEC Corp., certain operating subsidiaries of US LEC
Corp., General Electric Capital Corporation, First Union National Bank
and Wachovia Bank N.A.
13 Specified portions (pages 12 to 46 and inside back cover) of the
Company's Annual Report to Stockholders for the year ended December 31,
1999
21 Subsidiaries of the Registrant
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to Registration Statement from Form
S-1 (File No. 333-46341) filed February 13, 1998.
(2) Indicates a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter
ending December 31, 1999.
<PAGE>
SCHEDULE I
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
US LEC Corp.
Charlotte, North Carolina
We have audited the consolidated financial statements of US LEC Corp. and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, and have issued our report thereon dated
February 29, 2000, which report includes an emphasis of a matter paragraph as to
a significant portion of the Company's accounts receivables and revenues
relating to reciprocal compensation currently in dispute; such financial
statements and report are included in your 1999 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of US LEC Corp. and subsidiaries,
listed in Item 14. This financial statement schedule is the responsibility of
the Corporation's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Charlotte, North Carolina
February 29, 2000
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
US LEC CORP. (IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT BEGINNING CHARGED TO CHARGED TO BALANCE AT END
OF PERIOD COSTS AND OTHER OF PERIOD
DESCRIPTION (DEC. 31, 1998) EXPENSES ACCOUNTS DEDUCTIONS (DEC. 31, 1999)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance against accounts $12,024 $28,050 $0 $0 $40,074
receivables
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1999 By: /s/ Richard T. Aab
------------------
Richard T. Aab
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
----------- ----- -----
<S> <C> <C> <C>
/s/ Richard T. Aab Chairman of the Board March 30, 2000
------------------
Richard T. Aab
/s/ Tansukh V. Ganatra Chief Executive Officer and March 30, 2000
---------------------- Director (Principal Executive Officer)
Tansukh V. Ganatra
/s/ Michael K. Robinson Executive Vice President and March 30, 2000
----------------------- Chief Financial Officer
Michael K. Robinson (Principal Financial and Accounting Officer)
/s/ David M. Flaum Director March 30, 2000
------------------
David M. Flaum
/s/ Steven L. Schoonover Director March 30, 2000
------------------------
Steven L. Schoonover
/s/ John W. Harris Director March 30, 2000
------------------
John W. Harris
</TABLE>
EXHIBIT 10.12
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Dated as of December 20, 1999
among
US LEC CORP.,
as Guarantor and Borrower Representative,
CERTAIN OPERATING SUBSIDIARIES OF US LEC CORP.,
as Borrowers,
THE LENDERS PARTY HERETO,
GENERAL ELECTRIC CAPITAL CORPORATION,
as Administrative Agent,
FIRST UNION SECURITIES, INC.,
as Syndication Agent
and
WACHOVIA BANK, N.A.,
as Documentation Agent
------------------------
GECC CAPITAL MARKETS GROUP, INC.
and
FIRST UNION SECURITIES, INC.,
as Co-Arrangers
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C> <C>
ARTICLE 1: DEFINITIONS...........................................................................1
1.1 Certain Definitions...................................................................1
1.2 Accounting Principles; Subsidiaries..................................................18
1.3 UCC Terms............................................................................19
1.4 General Construction; Captions.......................................................19
1.5 References to Documents and Laws.....................................................19
ARTICLE 2: LOANS................................................................................19
2.1 Facility A...........................................................................19
2.2 Facility B...........................................................................20
2.3 Notes................................................................................20
2.4 Letters of Credit....................................................................20
2.5 Reliance on Notices; Appointment of Borrower Representative..........................20
2.6 Procedures for Borrowing.............................................................21
2.7 Facility B Loan Amortization.........................................................22
2.8 Intentionally Omitted................................................................22
2.9 Maturity.............................................................................22
2.10 Prepayments; Commitment Reductions...................................................22
2.11 Interest and Applicable Margins......................................................23
2.12 Payments.............................................................................25
2.13 Application and Allocation of Payments...............................................25
2.14 Loan Account and Accounting..........................................................26
2.15 Indemnity............................................................................27
2.16 Access...............................................................................28
2.17 Taxes................................................................................28
2.18 Capital Adequacy; Increased Costs; Illegality........................................29
2.19 Use of Proceeds......................................................................30
2.20 Fees.................................................................................30
2.21 Expenses.............................................................................31
ARTICLE 3: ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF ADMINISTRATIVE AGENT...................31
3.1 Assignment and Participations........................................................31
3.2 Appointment of Administrative Agent..................................................33
3.3 Administrative Agent's Reliance, Etc.................................................34
3.4 GE Capital and Affiliates............................................................34
3.5 Lender Credit Decision...............................................................35
3.6 Indemnification......................................................................35
3.7 Successor Administrative Agent.......................................................35
3.8 Set Off and Sharing of Payments......................................................36
3.9 Advances; Payments; Non-Funding Lenders; Information; Actions in Concert.............36
3.10 Syndication and Documentation Agents.................................................38
ARTICLE 4: COLLATERAL AND SECURITY AGREEMENT....................................................38
4.1 Grant of Security Interest...........................................................38
4.2 Regulatory Authorizations............................................................40
4.3 Priority of Security Interests.......................................................40
4.4 Pledge Agreements....................................................................40
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
4.5 Further Documentation; Pledge of Instruments.........................................40
4.6 Accounts, Etc........................................................................41
4.7 Further Identification of Collateral.................................................41
4.8 Remedies.............................................................................41
4.9 Standard of Care.....................................................................41
4.10 Advances to Protect Collateral.......................................................41
4.11 License to Use.......................................................................42
4.12 Benefit of Lenders...................................................................42
4.13 Release of Collateral................................................................42
ARTICLE 5: REPRESENTATIONS AND WARRANTIES.......................................................42
5.1 Organization and Qualification.......................................................42
5.2 Authority and Authorization..........................................................42
5.3 Execution and Binding Effect.........................................................42
5.4 Governmental Authorizations..........................................................43
5.5 Regulatory Authorizations............................................................43
5.6 Agreements and Other Documents.......................................................43
5.7 Absence of Conflicts.................................................................43
5.8 No Restrictions......................................................................43
5.9 Government Contracts.................................................................44
5.10 Financial Statements; Business Plan..................................................44
5.11 Financial Accounting Practices.......................................................44
5.12 Deposit and Disbursement Accounts....................................................44
5.13 Insurance............................................................................44
5.14 Accurate and Complete Disclosure.....................................................45
5.15 No Event of Default; Compliance with Material Agreements.............................45
5.16 Labor Matters........................................................................45
5.17 Litigation...........................................................................45
5.18 Rights to Property...................................................................45
5.19 Year 2000 Problem....................................................................46
5.20 Taxes................................................................................46
5.21 No Material Adverse Change...........................................................46
5.22 Solvency.............................................................................46
5.23 No Regulatory Event..................................................................46
5.24 Trade Relations......................................................................46
5.25 No Brokerage Fees....................................................................46
5.26 Margin Stock; Regulation U...........................................................47
5.27 Investment Company; Public Utility Holding Company...................................47
5.28 Personal Holding Company; Subchapter S...............................................47
5.29 Securities Act, Etc..................................................................47
5.30 ERISA................................................................................47
5.31 Intellectual Property................................................................47
5.32 Environmental Warranties.............................................................47
5.33 Security Interests...................................................................47
5.34 Place of Business....................................................................48
5.35 Location of Collateral...............................................................48
5.36 Validity of Contracts and Accounts...................................................48
5.37 No Defaults Under Contracts or Accounts..............................................48
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5.38 Subsidiaries.........................................................................48
5.39 Assumed Names........................................................................48
5.40 Pledge Agreements; Registration of Pledge............................................49
5.41 Transactions with Affiliates.........................................................49
ARTICLE 6: CONDITIONS TO EFFECTIVENESS..........................................................49
6.1 Closing Certificates.................................................................49
6.2 Opinions of Counsel..................................................................49
6.3 Closing Documents....................................................................50
6.4 No Material Adverse Change...........................................................50
6.5 No Existing Default or Event of Default..............................................50
6.6 Payment of Expenses..................................................................51
6.7 Facility B Loans.....................................................................51
ARTICLE 7: CONDITIONS OF LENDING................................................................51
7.1 Conditions to Each Borrowing Date....................................................51
7.2 Affirmation of Representations and Warranties........................................52
7.3 Deadline for Funding Conditions......................................................52
ARTICLE 8: AFFIRMATIVE COVENANTS................................................................52
8.1 Reporting and Information Requirements...............................................52
8.2 Other Notices........................................................................53
8.3 Notice of Pension-Related Events.....................................................54
8.4 Inspection Rights....................................................................54
8.5 Preservation of Corporate Existence and Qualification................................54
8.6 Continuation of Business.............................................................54
8.7 Insurance............................................................................55
8.8 Payment of Taxes, Charges, Claims and Current Liabilities............................56
8.9 Financial Accounting Practices.......................................................57
8.10 Compliance with Laws.................................................................57
8.11 Use of Proceeds......................................................................57
8.12 Government Authorizations; Regulatory Authorizations, Etc............................57
8.13 Contracts and Franchises.............................................................57
8.14 Site Leases and Consents.............................................................58
8.15 Financial Covenants..................................................................58
8.16 Patent, Trademark and Copyright Collateral...........................................58
8.17 Sites................................................................................59
8.18 Certain Notices......................................................................59
8.19 Management Team......................................................................59
8.20 Enforcement of Contracts.............................................................59
8.21 Legal Fee Reserve....................................................................59
8.22 Subordinated Loans...................................................................59
8.23 Liens on After-Acquired Property.....................................................59
8.24 Year 2000 Compliance.................................................................60
8.25 Post-Closing Items...................................................................60
8.26 Further Assurances...................................................................60
8.27 Excess Cash..........................................................................60
ARTICLE 9: NEGATIVE COVENANTS...................................................................60
9.1 Indebtedness.........................................................................61
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9.2 Restrictions on Liens and Sale of Collateral.........................................61
9.3 Limitation on Contingent Obligations.................................................61
9.4 Prohibition of Mergers, Acquisitions, Name, Office or Business Changes, Etc..........61
9.5 Limitation on Equity Payments........................................................62
9.6 Prohibition on Sale or Issuance of Stock.............................................62
9.7 Limitation on Investments, Advances and Loans........................................62
9.8 Capital Expenditures.................................................................63
9.9 Limitation on Leases.................................................................63
9.10 Transactions with Affiliates.........................................................63
9.11 Extension of Accounts................................................................63
9.12 Assumed Names........................................................................63
9.13 Subsidiaries.........................................................................63
ARTICLE 10: EVENTS OF DEFAULT AND REMEDIES.......................................................64
10.1 Events of Default....................................................................64
10.2 Remedies.............................................................................66
10.3 Waivers by Loan Parties..............................................................67
10.4 Exercise of Rights...................................................................67
10.5 Rights of Secured Party..............................................................68
10.6 Additional Remedies..................................................................68
10.7 Application of Proceeds..............................................................69
10.8 Discontinuance of Proceedings........................................................69
10.9 Power of Attorney....................................................................69
10.10 Regulatory Matters...................................................................70
ARTICLE 11: JOINT AND SEVERAL OBLIGATIONS; GUARANTY..............................................71
11.1 Guaranty.............................................................................71
11.2 Waivers by Loan Parties..............................................................72
11.3 Benefit of Guaranty..................................................................72
11.4 Subordination of Subrogation, Etc....................................................73
11.5 Election of Remedies.................................................................73
11.6 Limitation...........................................................................73
11.7 Contribution with Respect to Guaranty Obligations....................................74
11.8 Liability Cumulative.................................................................74
ARTICLE 12: GENERAL CONDITIONS/MISCELLANEOUS.....................................................75
12.1 Amendments, Modifications and Waivers................................................75
12.2 Advances Not Implied Waivers.........................................................75
12.3 Business Day.........................................................................75
12.4 Records..............................................................................76
12.5 Notices..............................................................................76
12.6 FCC and PUC Approval.................................................................77
12.7 Lenders Sole Beneficiary.............................................................77
12.8 Lender's Review of Information.......................................................77
12.9 No Joint Venture.....................................................................77
12.10 Severability.........................................................................77
12.11 Rights Cumulative....................................................................77
12.12 Duration; Survival...................................................................77
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12.13 Governing Law........................................................................78
12.14 Counterparts.........................................................................78
12.15 Successors and Assigns...............................................................78
12.16 Disclosures and Confidentiality......................................................78
12.17 Jurisdiction and Venue...............................................................80
12.18 Jury Waiver..........................................................................80
12.19 Limitation on Liability..............................................................80
12.20 Schedules, Exhibits and Annexes......................................................80
12.21 Agreement to Govern..................................................................81
12.22 Entire Agreement.....................................................................81
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ANNEXES TO LOAN AND SECURITY AGREEMENT
Annex I Letters of Credit
Annex II Initial Commitments; Addresses of Lenders
Annex III Closing Checklist
SCHEDULES TO LOAN AND SECURITY AGREEMENT
Schedule 1 Borrower Information and Certain Defined Terms
Schedule 2.7 Facility B Loan Amortization Schedule
Schedule 2.11 Applicable Margins
Schedule 2.20 Commitment Fees
Schedule 3.9 Wire Instructions
Schedule 5.4 Required Consents
Schedule 5.5 Regulatory Authorizations
Schedule 5.6 Agreements and Other Documents
Schedule 5.8 Restrictions on Indebtedness
Schedule 5.9 Government Contracts
Schedule 5.10 Financial Statements; Business Plan
Schedule 5.12 Deposit and Disbursement Accounts
Schedule 5.13 Existing Insurance
Schedule 5.16 Labor Matters
Schedule 5.17 Litigation
Schedule 5.18 Site and Site Leases; Real Property; Equipment Location
Schedule 5.31 Intellectual Property
Schedule 5.33 Security Interests--Recordings and Filings
Schedule 5.34 Place of Business
Schedule 5.35 Location of Collateral
Schedule 5.39 Assumed Names
Schedule 5.41 Transactions with Affiliates
Schedule 7.1 Post-Closing Items
Schedule 8.7 Required Insurance
Schedule 8.15 Financial Covenants
Schedule 9.1 Permitted Debt
Schedule 9.2 Liens
EXHIBITS TO LOAN AND SECURITY AGREEMENT
Exhibit A-1 Form of Facility A Note
Exhibit A-2 Form of Facility B Note
Exhibit B Form of Borrowing Certificate
Exhibit C Form of Notice of Conversion/Continuation
Exhibit D Form of Opinion of Counsel to Loan Parties
Exhibit E Form of Opinion of Regulatory Counsel to Loan Parties
Exhibit F Form of Landlord Waiver and Consent
Exhibit G Form of Assignment Agreement
Exhibit H Form of Administrative Questionnaire
Exhibit I Form of Additional Borrower Assumption
Exhibit J Form of Pledge Agreement
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LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
("Agreement") is dated as of December 20, 1999, by and among the entity or
entities which are described on Schedule 1 or may become a party hereto pursuant
to an Additional Borrower Assumption as herein provided (individually a
"Borrower" and collectively, "Borrowers"); US LEC CORP., a Delaware corporation
("Holdings"), as Guarantor and Borrower Representative; GENERAL ELECTRIC CAPITAL
CORPORATION (in its individual capacity, "GE Capital"), as Lender and as
administrative agent for Lenders (in that latter capacity, "Administrative
Agent"); FIRST UNION NATIONAL BANK ("FUNB"), as Lender; FIRST UNION SECURITIES,
INC. (in its individual capacity, "FUSI"), as syndication agent (in that latter
capacity, "Syndication Agent"); WACHOVIA BANK, N.A., as Lender and as
documentation agent for the Lenders (in that latter capacity, "Documentation
Agent"); and the other Lenders party hereto from time to time.
B A C K G R O U N D:
1. Borrowers, Holdings, GE Capital, FUNB and First Union Capital
Markets Corp. are parties to the Amended and Restated Loan and Security
Agreement, dated as of June 30, 1999 (the "Existing Loan Agreement").
2. The parties to the Existing Loan Agreement desire to amend and
restate the Existing Loan Agreement in its entirety as of the Effective Date in
the manner and on the terms and conditions set forth herein.
3. Immediately prior to the Effective Date, GE Capital and FUNB, as
Lenders under the Existing Loan Agreement, have effected assignments of the
Loans outstanding under the Existing Loan Agreement to Lenders party hereto with
the effect that as of the date hereof, such Lenders shall hold such existing
Loans in proportion to their Commitments as set forth on Annex II.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and intending to be legally bound hereby, the parties
hereto agree as follows:
ARTICLE 1: DEFINITIONS
1.1 Certain Definitions. Certain terms are defined on Schedule 1. In addition to
other words and terms defined in the preamble hereof or elsewhere in this
Agreement, or on the Schedules, the following words and terms shall have the
following meanings unless the context otherwise clearly requires:
"Accounts": as defined in Section 4.1(a).
"Additional Borrower": as defined in Section 6.3(c).
"Additional Borrower Assumption": as defined in Section 9.13.
"Advance": any Facility A Advance or Facility B Advance, as the context
may require.
"Affected Lender": as defined in Section 2.18(d).
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"Affiliate": with respect to any Person, (a) each Person that, directly
or indirectly, owns or controls, whether beneficially, or as a trustee, guardian
or other fiduciary, five percent (5%) or more of the Stock having ordinary
voting power in the election of directors of such Person, (b) each Person that
controls, is controlled by or is under common control with such Person, (c) each
of such Person's officers, directors, joint venturers and partners and (d) in
the case of individuals, the immediate family members, spouses and lineal
descendants of individuals who are Affiliates of any Borrower. For the purposes
of this definition, "control" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management or
policies, whether through the ownership of voting securities, by contract or
otherwise; provided, however, that the term "Affiliate" shall specifically
exclude, in the case of any Loan Party, Administrative Agent and each Lender.
"Agent": Administrative Agent, Syndication Agent or Documentation
Agent.
"Applicable Base Margin": the per annum interest rate margin from time
to time in effect and payable in addition to the Base Rate applicable to the
Base Rate Loans, as determined by reference to Schedule 2.11.
"Applicable L/C Margin": the per annum fee, from time to time in
effect, payable with respect to outstanding Letter of Credit Obligations as
determined by reference to Schedule 2.11.
"Applicable LIBOR Margin": the per annum interest rate from time to
time in effect and payable in addition to the LIBOR Rate applicable to LIBOR
Loans, as determined by reference to Schedule 2.11.
"Applicable Margins": the Applicable L/C Margin, the Applicable Base
Margin, and the Applicable LIBOR Margin, collectively.
"Asset Disposition": means any sale or other disposition, or series of
sales or other dispositions (including by merger or consolidation, and whether
by operation of law or otherwise), made on or after the date hereof by any Loan
Party or any of its Subsidiaries to any Person of (i) all or substantially all
of the outstanding Stock of any of its Subsidiaries, (ii) all or substantially
all of its assets or the assets of any division of any Borrower or any of its
Subsidiaries or (iii) any other asset or assets which, when taken together with
all sales or other dispositions of assets not covered by the foregoing clauses
(i) and (ii), yield proceeds or involve assets having a fair market value in
excess of $100,000 in any twelve-month period.
"Assignment Agreement": as defined in Section 3.1(a).
"Base Rate": for any day, a floating rate equal to the higher of (i)
the rate publicly quoted from time to time by The Wall Street Journal as the
"base rate on corporate loans at large U.S. money center commercial banks" (or,
if The Wall Street Journal ceases quoting a base rate of the type described, the
highest per annum rate of interest published by the Board of Governors of the
Federal Reserve System in Federal Reserve statistical release H.15 (519)
entitled "Selected Interest Rates" as the Bank prime loan rate or its
equivalent), and (ii) the Federal Funds Rate plus fifty (50) basis points per
annum. Each change in any interest rate provided for in this Agreement based
upon the Base Rate shall take effect at the time of such change in the Base
Rate.
"Base Rate Loan": a Loan or portion thereof bearing interest by
reference to the Base Rate.
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"Borrower Representative": US LEC Corp. in its capacity as
representative and agent of Borrowers.
"Borrowers": as defined in Schedule 1 and any other subsidiary of
Holdings that becomes a Borrower as herein provided.
"Borrowing Certificate": a certificate substantially in the form of
Exhibit B.
"Borrowing Date": any Business Day on which an Advance is made or a
Letter of Credit Obligation is incurred.
"Business Day": a day other than a Saturday, Sunday or other day on
which commercial banks in New York, New York or Charlotte, North Carolina are
authorized or required by law to close.
"Business Plan": Loan Parties' business plan, including pro forma
projections, as described in Schedule 5.10, as updated upon the request of
Administrative Agent at the direction of Requisite Lenders or as required
herein; provided, however, that each such update shall be acceptable to
Requisite Lenders, which acceptance shall not be unreasonably withheld.
"Capital Expenditures": for any period, (a) the additions to property,
plant and equipment and other capital expenditures (including all systems and
development expenditures related to the Networks) of Loan Parties that are (or
would be) set forth in a consolidated statement of cash flows of Loan Parties
for such period prepared in accordance with GAAP; provided, however, that no
consideration paid for or expenditure related to the acquisition of any license
and no capitalized interest shall be treated as a Capital Expenditure nor shall
expenditures of proceeds of insurance settlements, condemnation awards and other
like settlements in respect of lost, destroyed, damaged or condemned property,
plant or equipment, to the extent that such expenditures are made to repair or
replace such property or to acquire other property, plant and equipment useful
in the business within twelve (12) months of receipt of such proceeds, be deemed
Capital Expenditures and (b) Capital Lease Obligations incurred by Loan Parties
during such period.
"Capital Lease": with respect to any Person, any lease of any property
(whether real, personal or mixed) by such Person as lessee that, in accordance
with GAAP, would be required to be classified and accounted for as a capital
lease on a balance sheet of such Person.
"Capital Lease Obligation": with respect to any Capital Lease of any
Person, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee in respect
of such Capital Lease.
"Cash": at any time, the cash, cash equivalents or marketable
investment grade securities held by any Loan Party free of any claims or
encumbrances other than those created by the Loan Documents.
"Cash Flow": during any fiscal period of Loan Parties, the sum of (i)
net income (or loss) (which may be a positive or negative number) for such
period, plus (ii) all non-cash items deducted in determining such net income (or
loss), minus (iii) all non-cash items added in determining such net income (or
loss) during such period.
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<PAGE>
"Cash Interest Coverage Ratio": (a) until the Loan Parties report
positive EBITDA for each of four (4) consecutive Fiscal Quarters considered as a
single accounting period, (i) the product of EBITDA for the two (2) most recent
Fiscal Quarters ending on or prior to such date multiplied by two (2) divided by
(ii) Net Interest Expense (excluding any portion thereof not paid in cash) for
the most recent four (4) consecutive Fiscal Quarters ending on or prior to such
date and (b) thereafter, (i) EBITDA for any period of four (4) consecutive
Fiscal Quarters divided by (ii) Net Interest Expense (excluding any portion
thereof not paid in cash) for such period.
"Change of Board": an occurrence whereupon, at any time, fewer than
one-half of the directors comprising the board of directors of Holdings shall
include members of a group consisting of any of the current chief executive
officer, the president, any current or future Class B directors, any existing
Board members and replacement or additional directors nominated or supported by
one-half or more of the members of the foregoing group.
"Change of Control": an occurrence whereupon both of the following
exist: (i) the failure of the Permitted Holders, in the aggregate, to own or
control, directly or indirectly, stock of Holdings representing either 25% or
more of the voting capital stock of Holdings or more than any other Person or
group, within the meaning of Regulation 13D under the Securities Exchange Act of
1934 and (ii) a Change of Board shall occur.
"Charges": all federal, state, county, city, municipal, local, foreign
or other governmental taxes (including taxes owed to the PBGC at the time due
and payable), levies, assessments, charges, liens, claims or encumbrances upon
or relating to (a) the Collateral, (b) the Obligations, (c) the employees,
payroll, income or gross receipts of any Loan Party, (d) any Loan Party's
ownership or use of any properties or other assets, or (e) any other aspect of
any Loan Party's business.
"Closing Checklist": the schedule, including all appendices, exhibits
or schedules thereto, listing certain documents and information to be delivered
in connection with this Agreement, the other Loan Documents and the transactions
contemplated thereunder, substantially in the form attached hereto as Annex III.
"Co-Arrangers": GECMG and FUSI.
"Code": the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral": as defined in Section 4.1.
"Commitment Fees": as defined in Section 2.20(a).
"Commitments": the Facility A Commitment and the Facility B Commitment,
collectively. The initial Commitments of Lenders are set forth on Annex II.
"Commitment Termination Date": the Facility A Commitment Termination
Date or the Facility B Commitment Termination Date, as the context may require.
"Communications Law": any and all of (i) the Telecommunications Act of
1996, the Communications Act of 1934, any similar or successor federal statute
to either and the rules and regulations of the FCC thereunder; and (ii) any
state law governing the provision of telecommunications services and the rules
and regulations of the PUC, all as the same may be in effect from time to time.
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"Contingent Obligation": as to any Person, any obligation of such
Person guaranteeing, directly or indirectly, any Indebtedness, leases, dividends
or other obligations ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, whether or not contingent, (a) to
purchase any such primary obligation or any property constituting direct or
indirect security therefor, (b) to advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation or (d) otherwise to assure or hold harmless the owner of such primary
obligation against loss in respect thereof.
"Contracts": as defined in Section 4.1(b).
"Current Assets": with respect to any Person, all current assets of
such Person as of any date of determination calculated in accordance with GAAP,
but excluding Indebtedness due from Affiliates.
"Current Liabilities": with respect to any Person, all liabilities
which should, in accordance with GAAP, be classified as current liabilities, and
in any event shall include all Indebtedness payable on demand or within one year
from any date of determination without any option on the part of the obligor to
extend or renew beyond such year, all accruals for federal or other taxes based
on or measured by income and payable within such year, and the current portion
of long-term debt required to be paid within one year, but excluding, in the
case of Borrowers, the aggregate outstanding principal balances of the Loans.
"Default": any of the conditions or occurrences specified in Section
10.1, whether or not any requirement for the giving of notice, the lapse of
time, or both, or any other condition has been satisfied.
"Default Rate": as defined in Section 2.11(d).
"Disqualified Stock": means any Stock of Holdings which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
exchangeable for Indebtedness, or is redeemable at the option of the holder
thereof, in whole or in part, on or prior to the first anniversary of the
Facility B Loan Maturity Date.
"EBITDA": for any period, the sum of consolidated net income (excluding
extraordinary gains and losses and any income and related expenses derived from
sources which are disputing amounts payable to any Loan Party with respect to
reciprocal compensation related to internet service providers, enhanced service
providers and related facility charges), depreciation, amortization, Net
Interest Expense and tax expense for Loan Parties.
"Effective Date": the date on which the conditions set forth in Article
6 are satisfied or waived with consent of all Lenders.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute.
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"Environmental Laws": all applicable federal, state, local and foreign
laws, statutes, ordinances, codes, rules, standards and regulations, now or
hereafter in effect, and in each case as amended or supplemented from time to
time, and any applicable judicial or administrative interpretation thereof,
including any applicable judicial or administrative order, consent decree, order
or judgment, imposing liability or standards of conduct for or relating to the
regulation and protection of human health, safety, the environment and natural
resources (including ambient air, surface water, groundwater, wetlands, land
surface or subsurface strata, wildlife, aquatic species and vegetation).
Environmental Laws include the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (42 U.S.C. ss.ss. 9601 et seq.)
("CERCLA"); the Hazardous Materials Transportation Authorization Act of 1994 (49
U.S.C. ss.ss. 5101 et seq.); the Federal Insecticide, Fungicide, and Rodenticide
Act (7 U.S.C. ss.ss. 136 et seq.); the Solid Waste Disposal Act (42 U.S.C.
ss.ss. 6901 et seq.); the Toxic Substance Control Act (15 U.S.C. ss.ss. 2601 et
seq.); the Clean Air Act (42 U.S.C. ss.ss. 7401 et seq.); the Federal Water
Pollution Control Act (33 U.S.C. ss.ss. 1251 et seq.); the Occupational Safety
and Health Act (29 U.S.C. ss.ss. 651 et seq.); and the Safe Drinking Water Act
(42 U.S.C. ss.ss. 300(f) et seq.); each as from time to time amended, and any
and all regulations promulgated thereunder, and all analogous state, local and
foreign counterparts or equivalents and any transfer of ownership notification
or approval statutes.
"Environmental Liabilities": with respect to any Person, all
liabilities, obligations, responsibilities, response, remedial and removal
costs, investigation and feasibility study costs, capital costs, operation and
maintenance costs, losses, damages, punitive damages, property damages, natural
resource damages, consequential damages, treble damages, costs and expenses
(including all fees, disbursements and expenses of counsel, experts and
consultants), fines, penalties, sanctions and interest incurred as a result of
or related to any claim, suit, action, investigation, proceeding or demand by
any Person, whether based in contract, tort, implied or express warranty, strict
liability, criminal or civil statute or common law, including any arising under
or related to any Environmental Laws, Environmental Permits, or in connection
with any Release or threatened Release or presence of a Hazardous Material
whether on, at, in, under, from or about or in the vicinity of any real or
personal property.
"Environmental Permits": all permits, licenses, authorizations,
certificates, approvals or registrations required by any Governmental Authority
under any Environmental Laws.
"Equipment": as defined in Section 4.1(c).
"Equity Payment": any distribution of earnings or capital, or any
redemption or other payment in respect of stock, membership interests,
partnership interests or other equity interests, including options and warrants,
either directly or indirectly, whether in cash or property or in obligations of
any Loan Party.
"Event of Default": any of the events specified in Section 10.1;
provided, however, that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, under Section 10.1 or otherwise, has been
satisfied.
"Excess Cash": the aggregate amount of Cash in excess of $5,000,000
held by the Loan Parties.
"Excess Cash Flow": without duplication, with respect to any Fiscal
Year of Loan Parties, consolidated net income plus (a) depreciation,
amortization and Net Interest Expense to the extent deducted in determining
consolidated net income, plus decreases or minus increases (as the case may be)
(b) in Working Capital, minus (c) Net Interest Expense paid or accrued
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(excluding any original issue discount, interest paid in kind or amortized debt
discount, to the extent included in determining Net Interest Expense) and
scheduled principal payments paid or payable in respect of Indebtedness
permitted hereunder to be incurred, plus or minus (as the case may be), (d)
extraordinary gains or losses which are cash items not included in the
calculation of net income, minus (e) Capital Expenditures for such Fiscal Year
permitted hereunder, plus (f) taxes deducted in determining consolidated net
income to the extent not paid for in cash. For purposes of this definition,
"Working Capital" means Current Assets (exclusive of Cash) less Current
Liabilities.
"Existing Loan": as defined in Section 2.2(b).
"Existing Loan Agreement": as defined in the recitals to this
Agreement.
"Facility A Advance": any advance made pursuant to Section 2.1(a).
"Facility A Commitment": (a) as to any Lender, the aggregate commitment
of such Lender to make its Pro Rata Share of Facility A Advances and/or incur
Letter of Credit Obligations hereunder or in the most recent Assignment
Agreement executed by such Lender and (b) as to all Lenders, the aggregate
commitment of all Lenders to make Facility A Advances and/or incur Letter of
Credit Obligations, which aggregate commitment shall be Twenty-Five Million
Dollars ($25,000,000) on the date hereof, as such amount may be adjusted, if at
all, from time to time in accordance with this Agreement.
"Facility A Commitment Termination Date": the earliest of (a) the sixth
anniversary of the Effective Date, (b) the date of termination of Lenders'
obligations to make Advances and/or incur Letter of Credit Obligations or permit
existing Loans to remain outstanding pursuant to Section 10.2(b), and (c) the
date of indefeasible prepayment in full by Borrowers of the Facility A Loans and
the cancellation and return (or stand-by guarantee) of all Letters of Credit or
the cash collateralization of all Letter of Credit Obligations pursuant to Annex
I and the permanent reduction of the Facility A Commitment to zero dollars ($0).
"Facility A Loan": at any time, the sum of (i) the aggregate amount of
Facility A Advances outstanding to Borrowers plus (ii) the aggregate outstanding
balance of all Letter of Credit Obligations incurred on behalf of Borrowers.
Unless the context otherwise requires, references to the outstanding principal
balance of the Facility A Loan shall include the outstanding balance of Letter
of Credit Obligations.
"Facility A Note": as defined in Section 2.3(a).
"Facility B Advance": any advance made pursuant to Section 2.2(a).
"Facility B Commitment": (a) as to any Lender, the aggregate commitment
of such Lender to make its Pro Rata Share of the Facility B Advances hereunder
or in the most recent Assignment Agreement executed by such Lender and (b) as to
all Lenders, the aggregate commitment of all Lenders to make the Facility B
Advances, which aggregate commitment shall be One Hundred Twenty Five Million
Dollars ($125,000,000) on the date hereof, as such amount may be adjusted, if at
all, from time to time in accordance with this Agreement.
"Facility B Commitment Termination Date": the earliest of (a) June 30,
2001, (b) the date of termination of Lenders' obligations to make the Facility B
Advances or permit the Facility
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B Loan to remain outstanding pursuant to Section 10.2(b) and (c) the date of
permanent cancellation or reduction of the Facility B Commitment to zero dollars
($0).
"Facility B Loan": at any time, the aggregate amount of Facility B
Advances outstanding to Borrowers.
"Facility B Loan Maturity Date": the earlier of (a) the seventh
anniversary of the date hereof and (b) the date of termination of Lenders'
obligations to permit the Facility B Loan to remain outstanding pursuant to
Section 10.2(b).
"Facility B Note": as defined in Section 2.3(b).
"FCC": the Federal Communications Commission of the United States of
America, and any successor, in whole or in part, to its jurisdiction.
"Federal Funds Rate": shall mean, for any day, a floating rate equal to
the weighted average of the rates on overnight Federal funds transactions among
members of the Federal Reserve System, as determined by Administrative Agent.
"Fee Letter": as defined in Section 2.20(b).
"Fees": any and all fees payable to Administrative Agent or any Lender
pursuant to this Agreement or any of the other Loan Documents.
"Financial Statements": the consolidated income statements, statements
of cash flows and balance sheets of Loan Parties delivered in accordance with
this Agreement.
"Fiscal Quarter": any of the quarterly accounting periods of Loan
Parties ending on March 31, June 30, September 30 and December 31 of each year.
"Fiscal Year": any of the annual accounting periods of Loan Parties
ending on December 31 of each year.
"Fixed Charges": the sum, for any period, of (i) Total Debt Service,
plus (ii) Capital Expenditures, plus (iii) cash taxes.
"Fixed Charges Coverage Ratio": as of any date, (a) until the Loan
Parties report positive EBITDA for each of four (4) consecutive Fiscal Quarters
considered as a single accounting period, (i) the sum of (A) the product of
EBITDA for the two (2) most recent Fiscal Quarters ending on or prior to such
date multiplied by two (2) plus (B) beginning with the Fiscal Quarter ending on
March 31, 2002, up to $15,000,000 of Excess Cash as of the last day of the most
recent such Fiscal Quarter divided by (ii) Fixed Charges for the most recent
four (4) consecutive Fiscal Quarters ending on or prior to such date and (b)
thereafter, (i) the sum of (A) EBITDA for any period of four (4) consecutive
Fiscal Quarters plus (B) the amount of Cash of the Loan Parties on the last day
of the most recent such Fiscal Quarter in excess of $5,000,000 up to $15,000,000
divided by (ii) Fixed Charges for such period.
"GAAP": subject to Section 1.2, generally accepted accounting
principles in the United States of America (as such principles may change from
time to time) applied on a consistent basis (except for changes in application
in which the Loan Parties' independent certified public accountants concur),
applied both to classification of items and amounts.
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"General Intangibles": as defined in Section 4.1(d).
"Governmental Actions": actions by any Governmental Authority.
"Governmental Authority": the federal government, any state or
political subdivision thereof, any city or municipal entity, and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Guaranties": collectively, the Holdings Guaranty and any other
guaranty executed by any Guarantor in favor of Secured Parties in respect of the
Obligations.
"Guarantors": Holdings and any existing or future Subsidiary of
Holdings which is not a Borrower and which executes a guaranty or other similar
agreement in favor of Secured Parties in respect of the Obligations.
"Hazardous Material": any substance, material or waste which is
regulated by, or forms the basis of liability now or hereafter under, any
Environmental Laws, including any material or substance which is (a) defined as
a "solid waste," "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous waste," "restricted hazardous waste," "pollutant,"
"contaminant," "hazardous constituent," "special waste," "toxic substance" or
other similar term or phrase under any Environmental Laws or (b) petroleum or
any fraction or by-product thereof, asbestos, polychlorinated biphenyls ("PCBs")
or any radioactive substance.
"Holdings": as defined in the recitals to this Agreement.
"Holdings Guaranty": the Guaranty of Holdings, pursuant to Article 11.
"Holdings Pledge Agreement": the Pledge Agreement, dated December 30,
1998, as amended, executed by Holdings pursuant to which all of the Stock of all
Borrowers described on Schedule I on the date hereof is pledged to
Administrative Agent on behalf of Secured Parties.
"Indebtedness": as to any Person, at a particular time, (a)
indebtedness for borrowed money or for the deferred purchase price of property
or services in respect of which such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which such
Person otherwise assures a creditor against loss, (b) obligations under leases
which shall have been or should be, in accordance with GAAP, recorded as Capital
Leases in respect of which obligations such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which
obligations such Person assures a creditor against loss, (c) obligations of such
Person to purchase or repurchase accounts receivable, chattel paper or other
payment rights sold or assigned by such Person, (d) indebtedness or obligations
of such Person under or with respect to letters of credit, notes, bonds or other
debt instruments (other than letters of credit that are cash collateralized) and
(e) all obligations of such Person under any interest rate swap, cap or collar
agreement or other similar agreement or arrangement designed to alter the risks
of that Person arising from fluctuations in interest rates, in each case whether
contingent or matured.
"Interest Expense": for any period, the aggregate amount of interest,
hedging costs and fees (excluding closing fees) paid or payable during such
period by the Loan Parties in respect of Total Debt.
"Interest Income": for any period, the aggregate amount of interest
received during such period by the Loan Parties in respect of Cash.
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<PAGE>
"Interest Payment Date": (a) as to any Base Rate Loan, the last
Business Day of each Fiscal Quarter to occur while such Loan is outstanding, (b)
as to any LIBOR Loan, the last day of the applicable LIBOR Period; provided,
however, that in the case of any LIBOR Period greater than three (3) months in
duration, interest shall be payable at three-month intervals and on the last day
of such LIBOR Period; and provided, further, that, in addition to the foregoing,
each of (x) the date upon which all of the Commitments have been terminated and
the Loans have been paid in full and (y) the Commitment Termination Date shall
be deemed to be an "Interest Payment Date" with respect to any interest which is
then accrued under this Agreement.
"Inventory": as defined in Section 4.1(e).
"Landlord Consent": a consent substantially in the form of Exhibit F or
in other form acceptable to Requisite Lenders executed by the owner/landlord,
sublessor and/or licensor (including carriers) of any real property where any of
the Collateral is or is to be located.
"Law": any law (including common law), constitution, statute,
regulation, rule, ordinance, order, injunction, writ, decree or award of any
governmental body or court of competent jurisdiction or of any arbitrator
(including but not limited to ERISA, the Code, the UCC, any applicable tax law,
product safety law, occupational safety or health law, Communications Law,
Environmental Law and/or securities laws).
"L/C Sublimit": as defined in Annex I.
"Lenders": GE Capital, FUNB and, if any such Lender shall decide to
assign all or any portion of the Obligations, such term shall include such
assignee and any subsequent assignee of any assignee.
"Letter of Credit Obligations": all outstanding obligations incurred by
Administrative Agent or Lenders at the request of Borrower Representative,
whether direct or indirect, contingent or otherwise, due or not due, in
connection with the issuance of a reimbursement agreement or guaranty by
Administrative Agent or purchase by Lenders of a participation as set forth in
Annex I with respect to any Letter of Credit. The amount of such Letter of
Credit Obligations shall equal the maximum amount which may be payable by
Administrative Agent or Lenders thereupon or pursuant thereto.
"Letters of Credit": commercial or standby letters of credit issued for
the account of any Borrower by any L/C Issuer for which Administrative Agent and
Lenders have incurred Letter of Credit Obligations.
"LIBOR Business Day": a Business Day on which banks in the city of
London are generally open for interbank or foreign exchange transactions.
"LIBOR Loan": a Loan or any portion thereof bearing interest by
reference to the LIBOR Rate.
"LIBOR Period": with respect to any LIBOR Loan, each period commencing
on a LIBOR Business Day selected by Borrower Representative pursuant to this
Agreement and ending one week or one, two, three or six months thereafter, as
selected by Borrower Representative's irrevocable notice to Administrative Agent
as set forth in Section 2.11(e); provided, however, that the foregoing provision
relating to LIBOR Periods is subject to the following:
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(a) if any LIBOR Period would otherwise end on a day that is
not a LIBOR Business Day, such LIBOR Period shall be extended to the next
succeeding LIBOR Business Day unless the result of such extension would be to
carry such LIBOR Period into another calendar month in which event such LIBOR
Period shall end on the immediately preceding LIBOR Business Day;
(b) any LIBOR Period pertaining to a LIBOR Loan that begins on
the last LIBOR Business Day of a calendar month (or on a day for which there is
no numerically corresponding day in the calendar month at the end of such LIBOR
Period) shall end on the last LIBOR Business Day of a calendar month;
(c) Borrower Representative shall select LIBOR Periods so as
not to require a payment or prepayment of any LIBOR Loan during a LIBOR Period
for such Loan;
(d) Borrower Representative shall select LIBOR Periods so that
there shall be no more than six (6) separate LIBOR Loans in existence at any one
time; and
(e) Borrower Representative may not more frequently than once
each calendar month select, or continue a LIBOR Loan for, a LIBOR Period of one
week and may not continue any LIBOR Loan having a LIBOR Period of one week for
another LIBOR Period of one week.
"LIBOR Rate": for each LIBOR Period, a rate of interest determined by
Administrative Agent equal to:
(a) the offered rate for deposits in United States Dollars for
the applicable LIBOR Period which appears on Telerate Page 3750 as of
11:00 a.m., London time, on the second full LIBOR Business Day next
preceding the first day of each LIBOR Period (unless such date is not a
Business Day, in which event the next succeeding Business Day will be
used); divided by
(b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two (2) LIBOR Business Days
prior to the beginning of such LIBOR Period (including basic,
supplemental, marginal and emergency reserves under any regulations of
the Board of Governors of the Federal Reserve System or other
governmental authority having jurisdiction with respect thereto, as now
and from time to time in effect) for Eurocurrency funding (currently
referred to as "Eurocurrency liabilities" in Regulation D of such
Board) which are required to be maintained by a member bank of the
Federal Reserve System.
If such interest rates shall cease to be available from Telerate News
Service, the LIBOR Rate shall be determined from such financial reporting
service or other information as shall be mutually acceptable to Administrative
Agent and Borrower Representative.
"Lien": any mortgage, pledge, hypothecation, lien (statutory or other),
judgment lien, security interest, security agreement, charge or other
encumbrance, or other security arrangement of any nature whatsoever, including,
without limitation, any installment contract, conditional sale or other title
retention arrangement, any sale of accounts receivable or chattel paper, and any
assignment, deposit arrangement or lease intended as, or having the effect of,
security and the filing of any financing statement under the UCC or comparable
law of any jurisdiction.
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"Loan Documents": this Agreement, the Notes, the Security Documents,
the Guaranties, the Fee Letter, all other filings and all other agreements,
instruments, documents and certificates identified in the Closing Checklist
executed and delivered to, or in favor of, Administrative Agent and/or Lenders
and including all other pledges, powers of attorney, consents, assignments,
contracts, notices, filings and all other written matter whether heretofore, now
or hereafter executed by or on behalf of any Loan Party, or any employee of any
Loan Party, and delivered to Administrative Agent or any Lender in connection
with this Agreement or the transactions contemplated hereby. Any reference in
this Agreement or any other Loan Document to a Loan Document shall include all
appendices, exhibits or schedules thereto, and all amendments, restatements,
supplements or other modifications thereto, and shall refer to such Agreement as
the same may be in effect at any and all times such reference becomes operative.
"Loan Parties": the Borrowers, Holdings and each other Guarantor.
"Loans": the Facility A Loan and the Facility B Loan.
"Loss of Key Management": an occurrence whereupon, at any time, either
one of the Permitted Holders shall cease to be an officer or director of
Holdings and Holdings fails to designate within thirty (30) days therefrom a
replacement as an officer or director in his stead or provide a plan to
designate such replacement which is reasonably acceptable to Requisite Lenders.
"Markets": as defined in Schedule 1.
"Material Adverse Effect" or "Material Adverse Change": a material
adverse effect on or material adverse change in (i) a material portion of the
Collateral, (ii) the business, financial or other condition, prospects or
projections of Holdings and its Subsidiaries taken as a whole from that
reflected in the Business Plan, (iii) the ability of any Loan Party to perform
its obligations under this Agreement, the Notes, the other Loan Documents or the
System Agreements or (iv) Administrative Agent's or Lenders' ability to enforce
the rights and remedies granted under this Agreement or the other Loan
Documents, in all cases whether attributable to a single circumstance or event
or an aggregation of circumstances or events.
"Maximum Lawful Rate": as defined in Section 2.11(f).
"Net Interest Expense": for any period, Interest Expense less Interest
Income.
"Network": a transmission and communications system operated by a Loan
Party, including all Equipment related thereto.
"Non-Funding Lender": as defined in Section 3.9(a)(ii).
"Notes": the Facility A Notes and the Facility B Notes, collectively.
"Notice of Conversion/Continuation": as defined in Section 2.11(e).
"Obligations": all loans, advances, debts, liabilities and obligations
for the performance of covenants, tasks or duties or for payment of monetary
amounts (whether or not such performance is then required or contingent, or such
amounts are liquidated or determinable) owing by any Loan Party to
Administrative Agent or any Lender, and all covenants and duties regarding such
amounts, of any kind or nature, present or future, whether or not evidenced by
any
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<PAGE>
note, agreement or other instrument, arising under this Agreement, any of the
other Loan Documents or any interest rate swap agreement. This term includes all
principal, interest (including all interest which accrues after the commencement
of any case or proceeding in bankruptcy after the insolvency of, or for the
reorganization of, any Loan Party, whether or not allowed in such proceeding),
Letter of Credit Obligations, Fees, expenses, attorneys' fees and any other sum
chargeable to any Loan Party under this Agreement or any of the other Loan
Documents.
"Organizational Documents": with respect to a corporation, the articles
of incorporation and by-laws of such corporation; with respect to a partnership,
the certificate of partnership (or limited partnership, as applicable) and
partnership agreement, together with the analogous documents for any corporate
or partnership general partner; and in any case, any other document governing
the formation and conduct of business by such entity.
"Other Lender": as defined in Section 3.9(d).
"PBGC": the Pension Benefit Guaranty Corporation established under
Title IV of ERISA or any other governmental agency, department or
instrumentality succeeding to its functions.
"Permits": all consents, licenses, notices, approvals, authorizations,
filings, orders, registrations, and permits required by any Governmental
Authority for the construction and operation of a Network (excluding Regulatory
Authorizations), issued or obtained as and when required in accordance with all
Requirements of Law.
"Permitted Acquisition": a Telecommunications Acquisition which
satisfies the following conditions:
(a) no Default or Event of Default exists, both immediately
before and after giving effect to such acquisition;
(b) not later than fifteen (15) days prior to the completion
of such acquisition, Holdings shall have provided Lenders with information and
financial analysis (including purchase price and historical and projected
revenue, cash flow and cost reductions) regarding such acquisition,
demonstrating to the reasonable satisfaction of the Lenders, after giving pro
forma effect to such acquisition, (i) compliance with Schedule 8.15 and (ii)
during Stage II, a Total Leverage Ratio of at least 0.50 less than the Total
Leverage Ratio set forth in Schedule 8.15 for the most recently ended Fiscal
Quarter;
(c) the total amount expended by the Loan Parties for any
single acquisition or series of related acquisitions, if payable in Cash or
Disqualified Stock and completed during a period when the Senior Leverage Ratio
is greater than or equal to 4.0x, shall not exceed $5,000,000 or, until the
Termination Date, $10,000,000 in the aggregate with all other acquisitions; and
(d) the total amount expended by the Loan Parties for any
single acquisition or series of related acquisitions, if payable in Cash or
Disqualified Stock and completed during a period when the Senior Leverage Ratio
is less than 4.0x, shall not exceed $10,000,000.
"Permitted Debt": (i) the Obligations, (ii) existing Indebtedness
(including existing letters of credit not to exceed $1,500,000 and their
subsequent renewal) specified on Schedule 9.1
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and any refinancings thereof on terms that in the aggregate are not less
favorable to Loan Parties, (iii) Indebtedness incurred for the purposes
specified on Schedule 9.1 up to an aggregate of $1,750,000 and any refinancings
thereof on terms that in the aggregate are not less favorable to Loan Parties,
(iv) Permitted Subordinated Debt, (v) inter-company Indebtedness between Loan
Parties and (vi) interest rate protection agreements in connection with
Indebtedness permitted hereunder.
"Permitted Encumbrances": the Liens permitted under Section 9.2.
"Permitted Holders": the present chief executive officer of Holdings
and the present chairman of the board of directors of Holdings.
"Permitted Subordinated Debt": Indebtedness in an amount not greater
than $150,000,000 that (i) does not require any payment of principal until
twelve (12) months after the Facility B Loan Maturity Date, (ii) is issued on
market terms prevailing at the time and (iii) is subordinated on terms
reasonably acceptable to Requisite Lenders to the Indebtedness created hereunder
or pursuant to any other Loan Document.
"Person": any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, public benefit corporation, other entity or
government (whether federal, state, county, city, municipal, local, foreign, or
otherwise, including any instrumentality, division, agency, body or department
thereof).
"Plan": any employee pension benefit plan to which Section 4021 of
ERISA applies and (i) which is maintained for employees of any Loan Party or
(ii) to which any Loan Party made, or was required to make, contributions at any
time within the preceding five (5) years.
"Pledge Agreement(s)": the Holdings Pledge Agreement and any other
pledge agreement, substantially in the form of Exhibit J, executed by any Loan
Party pledging any stock or membership or ownership interests to Administrative
Agent on behalf of Secured Parties.
"Proceeds": as defined in Section 4.1(f).
"Projections": the Loan Parties' forecasted consolidated (a) balance
sheets; (b) profit and loss statements (which also were provided on a
consolidating basis); and (c) cash flow statements, all prepared on a Subsidiary
by Subsidiary basis, together with appropriate supporting details and a
statement of underlying assumptions.
"Pro Rata Share": (a) with respect to all matters relating to any
Lender, the percentage obtained by dividing (i) the Commitment of such Lender by
(ii) the aggregate Commitments of all Lenders and (b) with respect to all Loans
on and after the Commitment Termination Date, the percentage obtained by
dividing (i) the aggregate outstanding principal balance of the Loans held by
that Lender by (ii) the outstanding principal balance of the Loans held by all
Lenders.
"PUC": the public utilities commission for the state or any other
jurisdiction in which all or any portion of a Network is located, or any
successor agency, and any successor, in whole or in part, to its functions or
jurisdictions, and any other Persons specified on Schedule 1.
"Quarterly Revenues": for any Fiscal Quarter, revenues for such quarter
(other than revenues derived from sources which are disputing amounts payable to
any Loan Party with
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respect to reciprocal compensation related to internet service providers,
enhanced service providers and related facility charges) that are received from
any third party entity which is not an Affiliate of any Loan Party or the
principal shareholders of such Loan Party.
"Regulatory Authorizations": all approvals, authorizations, licenses,
filings, notices, registrations, consents, permits, exemptions, registrations,
qualifications, designations, declarations, or other actions or undertakings now
or hereafter made by, to or in respect of any telecommunications Governmental
Authority, including any certificates of public convenience and all grants,
approvals, licenses, filings and registrations from or to the FCC or PUC or
under any Communications Law necessary in order to enable any Loan Party to
provide telecommunications service of the type provided or proposed to be
provided by such Loan Party and any authorizations specified on Schedule 1.
"Regulatory Event": any of the following events: (i) any Lender becomes
subject to regulation as a "carrier," a "telephone company," a "common carrier,"
a "public utility" or otherwise under any applicable law or governmental
regulation, federal, state or local, solely as a result of the transactions
contemplated by this Agreement and the other Loan Documents, or (ii) any Loan
Party becomes subject to regulation by any Governmental Authority in any way
that is materially different from the regulation existing at the date hereof and
that could reasonably be expected to have a Material Adverse Effect, or (iii)
the FCC or any PUC issues an order revoking, denying or refusing to renew, or
recommending the revocation, denial or non-renewal of, any Regulatory
Authorization that could reasonably be expected to have a Material Adverse
Effect.
"Release": any release, threatened release, spill, emission, leaking,
pumping, pouring, emitting, emptying, escape, injection, deposit, disposal,
discharge, dispersal, dumping, leaching or migration of Hazardous Material in
the indoor or outdoor environment, including the movement of Hazardous Material
through or in the air, soil, surface water, ground water or property.
"Replacement Lender": as defined in Section 2.18(d).
"Reportable Event": (i) a reportable event described in Section 4043 of
ERISA and regulations thereunder, (ii) a withdrawal by a substantial employer
from a Plan to which more than one employer contributes, as referred to in
Section 4063(b) of ERISA, or (iii) a cessation of operations at a facility
causing more than twenty percent (20%) of Plan participants to be separated from
employment, as referred to in Section 4062(f) of ERISA.
"Required Consents": the Governmental Authority approvals or consents
of other Persons required with respect to each Loan Party's execution, delivery
and performance of this Agreement and the other Loan Documents, as defined in
Schedule 5.4.
"Requirement of Law": as to any Person, the Organizational Documents of
such Person, and any law, treaty, rule or regulation, or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its properties or transactions or to
which such Person or any of its property or transactions is subject, including
all applicable common law and equitable principles, all provisions of all
applicable state and federal constitutions, statutes, rules, regulations and
orders of governmental bodies, all Permits or Regulatory Authorizations issued
to Borrower, all Communications Laws and all Environmental Laws.
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"Requisite Lenders": (a) Lenders having at least fifty-one percent
(51%) of the Commitments of all Lenders or (b) if the Commitments have been
terminated, at least fifty-one percent (51%) of the aggregate outstanding amount
of all Loans.
"Responsible Officer": of a Person, the chief executive officer, the
president, the general counsel, the chief financial officer or the director of
treasury operations of such Person.
"Secured Parties": Administrative Agent and Lenders.
"Security Documents": this Agreement, the Pledge Agreements, the
Landlord Consents, all financing statements, and any other documents granting,
evidencing, or perfecting any security interest or Lien with respect to or
securing any of the Obligations.
"Senior Debt": all Indebtedness, guarantees and liabilities secured by
liens on property of Loan Parties, other than Permitted Subordinated Debt.
"Senior Debt to Total Cash Equity": Senior Debt, at any date, divided
by Total Cash Equity at the same date.
"Senior Leverage Ratio": for any period, Senior Debt as of any date
divided by the product of (i) EBITDA for the two (2) most recent Fiscal Quarters
ending on or prior to such date multiplied by (ii) two (2).
"Site Leases": collectively, all leases, subleases, tower leases,
co-location agreements, license agreements, easements, use agreements,
privileges, access agreements, right-of-way agreements and all other agreements
relating to the use by any Loan Party of any Site.
"Site(s)": any site where Equipment with a cost of more than $100,000
is located.
"Software" and "Software Licenses": any software now or hereafter owned
by, or licensed to, any Loan Party or with respect to which such Loan Party has
or may have license or use rights.
"Solvent": with respect to any Person on a particular date, that on
such date (a) the fair value of the property of such Person is greater than the
total amount of liabilities, including contingent liabilities, of such Person;
(b) the present fair salable value of the assets of such Person is not less than
the amount that will be required to pay the probable liability of such Person on
its debts as they become absolute and matured; (c) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature; and (d) such
Person is not engaged in a business or transaction, and is not about to engage
in a business or transaction, for which such Person's property would constitute
an unreasonably small capital. The amount of contingent liabilities (such as
litigation, guarantees and pension plan liabilities) at any time shall be
computed as the amount which, in light of all the facts and circumstances
existing at the time, represents the amount which can be reasonably be expected
to become an actual or matured liability.
"Stage 1": the period of time from the Effective Date until the
Termination Date unless, on or prior to March 31, 2001, Borrower Representative
submits Financial Statements and compliance certificates pursuant to Section 8.1
reflecting (i) positive EBITDA for each of the previous two (2) consecutive
Fiscal Quarters and (ii) Total Leverage Ratio in respect of such Fiscal Quarters
not greater than 10.0x, as calculated on the last day of the second such Fiscal
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Quarter, in which event the period shall be from the Effective Date until (a)
for purposes of Section 8.15, the end of the later of the two Fiscal Quarters
referred to above and (b) for purposes of Schedule 2.11, the date of such
delivery.
"Stage 2": the period immediately following the end of Stage 1.
"Stock": all shares, options, warrants, general or limited partnership
or membership interests or other equivalents (regardless of how designated) of
or in a corporation, partnership, limited liability company or equivalent
entity, whether voting or nonvoting, including common stock, preferred stock or
any other "equity security" (as such term is defined in Rule 3a11-1 of the
General Rules and Regulations promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended).
"Subsidiary": with respect to any Person, (a) any corporation of which
an aggregate of more than fifty percent (50%) of the outstanding Stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether, at the time, Stock of any other class or
classes of such corporation shall have or might have voting power by reason of
the happening of any contingency) is at the time, directly or indirectly, owned
legally or beneficially by such Person and/or one or more Subsidiaries of such
Person, or with respect to which any such Person has the right to vote or
designate the vote of fifty percent (50%) or more of such Stock, whether by
proxy, agreement, operation of law or otherwise, and (b) any partnership or
limited liability company in which such Person and/or one or more Subsidiaries
of such Person shall have an interest (whether in the form of voting or
participation in profits or capital contribution) of more than fifty percent
(50%) or of which any such Person is a general partner or may exercise the
powers of a general partner.
"System Agreements": any and all agreements and documents executed by
or delivered by or to any Loan Party at any time in connection with any Network
or its acquisition, construction or operation, including all management and
maintenance agreements, agreements for storage or warehousing of Collateral,
Site Leases and interconnection agreements.
"Taxes": taxes, levies, imposts, deductions, Charges or withholdings,
and all liabilities with respect thereto, excluding taxes imposed on or measured
by the net income of Administrative Agent or a Lender by the jurisdiction under
which Administrative Agent or any Lender is organized or from which it makes the
Advances or any political subdivision of either thereof.
"Telecommunications Acquisition": the acquisition of a
Telecommunications Business effected by (i) a merger with a Loan Party in which
the Loan Party is the surviving entity, (ii) an acquisition of assets by a Loan
Party, (iii) an acquisition of Stock by Holdings or (iv) a merger of a newly
created wholly-owned first tier Subsidiary of Holdings into another Person,
which, upon the merger, becomes a wholly-owned Subsidiary of Holdings and either
a Borrower or a Guarantor.
"Telecommunications Business": the business of primarily (i)
transmitting, or providing services relating to the transmission of voice, fax,
video or data through owned or leased transmission facilities or the provision
of Internet related or other enhanced services ("Telecommunications Services"),
(ii) creating, developing or marketing communications related network equipment,
software and other devices for use in a Telecommunications Services, (iii)
owning, developing or operating assets related to Telecommunications Services,
(iv) owning, developing or operating back-office or support systems related to
Telecommunications Services
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or (v) evaluating, participating or pursuing any other activity or opportunity
that is primarily related to those identified in clause (i), (ii), (iii) or (iv)
above.
"Termination Date": the date on which the Loans have been indefeasibly
repaid in full and all other amounts then due and payable under this Agreement
or any of the other Loan Documents have been indefeasibly paid in full and
Letter of Credit Obligations have been cash collateralized, canceled or backed
by stand-by letters of credit in accordance with Annex I, and no Borrower shall
have any further right to borrow any monies under this Agreement.
"Total Cash Equity": all cash proceeds received by Holdings from the
sale or issuance of its Stock, net of all brokers', underwriter's and advisors'
fees and all other costs and expenses, including legal and printing expenses,
incurred in connection with such transaction.
"Total Debt": all Indebtedness of any Loan Party, all guarantees by any
Loan Party of Indebtedness of any Person other than a Loan Party and all
liabilities of any Person other than a Loan Party secured by any Lien on
property of any Loan Party.
"Total Debt to Total Cash Equity": Total Debt, at any date, divided by
Total Cash Equity as of the same date.
"Total Debt Service": the sum, for any period, of: (i) mandatory
principal payments on Total Debt and (ii) Net Interest Expense (excluding any
portion thereof not paid in cash).
"Total Leverage Ratio": for any period, Total Debt as of any date
divided by the product of (i) EBITDA for the two (2) most recent Fiscal Quarters
ending on or prior to such date multiplied by (ii) two (2).
"UCC": the Uniform Commercial Code as the same may from time to time be
in effect in the State of New York or the Uniform Commercial Code of another
jurisdiction, to the extent it may be required to apply to any item or items of
Collateral.
1.2 Accounting Principles; Subsidiaries. Except as otherwise provided
in this Agreement, all computations and determinations as to accounting or
financial matters and all financial statements to be delivered pursuant to this
Agreement shall be made and prepared in accordance with GAAP (including
principles of consolidation where appropriate), consistently applied, and all
accounting or financial terms shall have the meanings ascribed to such terms by
GAAP. If at any time a Loan Party has any Subsidiaries, all accounting and
financial terms herein shall be deemed to include references to consolidated and
consolidating principles, and covenants, representations and agreements with
respect to a Loan Party and its properties and activities shall be deemed to
refer to such Loan Party and its consolidated Subsidiaries collectively. For
purposes of Section 8.15, GAAP shall be determined on the basis of such
principles in effect on the date of the most recent annual audited Financial
Statements provided hereunder (or if prior to delivery of the first such annual
audited Financial Statements hereunder, then on a basis consistent with the
annual audited Financial Statements referenced in Section 5.10); provided,
however, that if due to a change in application of GAAP or the rules promulgated
with respect thereto, (i) Borrower Representative shall object to determination
of compliance with the financial covenants in Section 8.15 on such basis or (ii)
Administrative Agent or Requisite Lenders shall object to determination of
compliance therewith on such basis within thirty (30) days after delivery of
such Financial Statements, then such calculations shall be made on a basis
consistent with the most recent Financial Statements delivered as to which no
such objection shall have been made.
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1.3 UCC Terms. Except as otherwise provided or amplified (but not
limited) herein, terms used in this Agreement that are defined in the UCC shall
have the same meanings herein.
1.4 General Construction; Captions. All definitions and other terms
used in this Agreement shall be equally applicable to the singular and plural
forms thereof, and all references to any gender shall include all other genders.
The words "hereof," "hereto," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular Article, Section, subsection or clause in this Agreement.
References herein to an Exhibit, Schedule, Article, Section, subsection or
clause refer to the appropriate Exhibit, Schedule, Article, Section, subsection
or clause in this Agreement unless otherwise specified. The word "including"
shall have the meaning represented by the phrase "including, without
limitation." The captions and table of contents in this Agreement and the other
Loan Documents are for convenience only, and in no way limit or amplify the
provisions hereof.
1.5 References to Documents and Laws. All defined terms and references
in this Agreement or the other Loan Documents with respect to any agreements,
notes, instruments, certificates or other documents shall be deemed to refer to
such documents and to any amendments, modifications, renewals, extensions,
replacements, restatements, substitutions and supplements of and to such
documents. All references to Laws shall include any amendments thereof and any
successor statutes and regulations.
ARTICLE 2: LOANS
2.1 Facility A. Subject to the terms and conditions hereof, each Lender
agrees to make available from time to time until the Facility A Commitment
Termination Date its Pro Rata Share of all Facility A Advances. The Pro Rata
Share of any Lender of the Facility A Loan shall not at any time exceed such
Lender's Facility A Commitment. The obligations of each Lender hereunder shall
be several and not joint. Until the Facility A Commitment Termination Date,
Borrowers may from time to time borrow, repay and reborrow under this Section
2.1.
2.2 Facility B.
(a) Subject to the terms and conditions hereof, each Lender
agrees to make available from time to time until the Facility B Commitment
Termination Date its Pro Rata Share of all Facility B Advances. The Pro Rata
Share of any Lender of the Facility B Loan shall not at any time exceed such
Lender's Facility B Commitment. The obligations of each Lender hereunder shall
be several and not joint. Until the Facility B Commitment Termination Date,
Borrowers may from time to time borrow, repay and reborrow under this Section
2.2. After the Facility B Commitment Termination Date, amounts repaid or prepaid
may not be reborrowed under this Section 2.2.
(b) To the extent any Loans under the Existing Loan Agreement
(the "Existing Loans") are outstanding on the Effective Date, such Existing
Loans shall be deemed a Facility B Advance made on the Effective Date by each
Lender in accordance with its Facility B Commitment on the Effective Date.
2.3 Notes.
(a) Borrowers shall execute and deliver to each Lender a note
to evidence the Facility A Commitment of that Lender. Each note shall be in the
principal amount of the Facility
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A Commitment of the applicable Lender, dated the Effective Date, and
substantially in the form of Exhibit A-1 (each a "Facility A Note" and,
collectively, the "Facility A Notes"). Each Facility A Note shall represent the
obligation of each Borrower to pay the amount of each Lender's Facility A
Commitment or, if less, the applicable Lender's Pro Rata Share of the aggregate
unpaid principal amount of all Facility A Advances to such Borrower together
with interest thereon as prescribed in Section 2.11.
(b) Borrowers shall execute and deliver to each Lender a note
to evidence the Facility B Commitment of that Lender. Each note shall be in the
principal amount of the Facility B Commitment of the applicable Lender, dated
the Effective Date, and substantially in the form of Exhibit A-2 (each a
"Facility B Note" and, collectively, the "Facility B Notes"). Each Facility B
Note shall represent the obligation of each Borrower to pay the amount of each
Lender's Facility B Commitment or, if less, the applicable Lender's Pro Rata
Share of the aggregate unpaid principal amount of all Facility B Advances to
such Borrower together with interest thereon as prescribed in Section 2.11.
2.4 Letters of Credit. Subject to and in accordance with the terms and
conditions contained herein and in Annex I, Borrower Representative shall have
the right to request, and Lenders agree to incur, or purchase participations in,
Letter of Credit Obligations for the account of Borrowers.
2.5 Reliance on Notices; Appointment of Borrower Representative.
Administrative Agent and each Lender shall be entitled to rely upon, and shall
be fully protected in relying upon, any Borrowing Certificate, Notice of
Conversion/Continuation or similar notice believed by Administrative Agent or
such Lender to be genuine. Administrative Agent and each Lender may assume that
each Person executing and delivering such a notice was duly authorized, unless
the responsible individual acting thereon for Administrative Agent or such
Lender has actual knowledge to the contrary. Each Borrower hereby designates
Holdings as its representative and agent on its behalf for the purposes of
issuing Borrowing Certificates and Notices of Conversion/Continuation, giving
instructions with respect to the disbursement of the proceeds of the Loans,
selecting interest rate options, requesting Letters of Credit, giving and
receiving all other notices and consents hereunder or under any of the other
Loan Documents and taking all other actions (including in respect of compliance
with covenants) on behalf of any Borrower or Borrowers under the Loan Documents
(Holdings, in that capacity, being "Borrower Representative"). Holdings hereby
accepts such appointment. Administrative Agent and each Lender may regard any
notice or other communication pursuant to any Loan Document from Borrower
Representative as a notice or communication from all Borrowers, and may give any
notice or communication required or permitted to be given to any Borrower or
Borrowers hereunder to Borrower Representative on behalf of such Borrower or
Borrowers. Each Borrower agrees that each notice, election, representation and
warranty, covenant, agreement and undertaking made on its behalf by Borrower
Representative shall be deemed for all purposes to have been made by such
Borrower and shall be binding upon and enforceable against such Borrower to the
same extent as if the same had been made directly by such Borrower.
2.6 Procedures for Borrowing.
(a) Borrowing Certificates. To request a Facility A Advance or
a Facility B Advance hereunder, Borrower Representative shall send to
Administrative Agent a completed Borrowing Certificate at least three (3)
Business Days prior to the requested Borrowing Date for LIBOR Loans and one (1)
Business Day prior to the requested Borrowing Date for Base Rate Loans. Each
Borrowing Certificate shall specify therein (i) the requested Borrowing Date,
(ii) the
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aggregate amount of such Advance, (iii) the amount thereof, if any, requested to
be LIBOR Loans and (iv) the initial LIBOR Period or Periods for any such LIBOR
Loans. The Loans shall be made as Base Rate Loans unless (subject to Section
2.18) the Borrowing Certificate specifies that all or a portion thereof shall be
LIBOR Loans. All LIBOR Loans shall comply with Section 2.11(e).
Each Borrowing Certificate shall be irrevocable and binding on
Borrowers. In the case of any requested Advance which the related Borrowing
Certificate specifies is to be comprised of LIBOR Loans, Borrowers shall,
jointly and severally, indemnify each Lender against any loss, cost or expense
incurred by such Lender as a result of any failure to fulfill on or before the
date specified in such Borrowing Certificate for such requested Advance the
applicable conditions set forth in Article 7, including any loss (including loss
of anticipated profits), cost or expense incurred by reason of the liquidation
or reemployment of deposits or other funds acquired by such Lender to fund any
LIBOR Loan to be made by such Lender as part of such requested Advance when such
LIBOR Loan, as a result of such failure, is not made on such date.
(b) Lender's Obligation. The failure of any Lender to make the
Advance to be made by it as part of any Loan shall not relieve any other Lender
of its obligation, if any, hereunder to make its Advance on such Borrowing Date,
but no Lender shall be responsible for the failure of any other Lender to make
the Advance to be made by such other Lender on the Borrowing Date.
(c) Advances. Each Advance (other than the last Advance) shall
be in an aggregate principal amount of not less than $1,000,000 and integral
multiples of $100,000 in excess thereof. No amount may be borrowed hereunder on
or after the Commitment Termination Date applicable to the proposed Advance.
2.7 Facility B Loan Amortization. The Facility B Loan shall be
amortized according to Schedule 2.7.
2.8 Intentionally Omitted.
2.9 Maturity.
(a) The entire unpaid balance of the aggregate Facility A Loan
and all other non-contingent Obligations shall be immediately due and payable in
full in immediately available funds on the Facility A Commitment Termination
Date, if not sooner paid in full pursuant to Section 2.10.
(b) The entire unpaid balance of the aggregate Facility B Loan
and all other non-contingent Obligations shall be immediately due and payable in
full in immediately available funds on the Facility B Loan Maturity Date, if not
sooner paid in full pursuant to Section 2.10.
2.10 Prepayments; Commitment Reductions.
(a) Voluntary Prepayments.
(i) Borrowers may, at their option, at any time and
from time to time, in whole or in part, voluntarily prepay all or part of any
Loan upon three (3) Business Days' prior written notice to Administrative Agent,
specifying the date and amount of prepayment, in a minimum amount of $1,000,000,
plus all accrued but unpaid interest thereon and any LIBOR
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funding breakage costs in accordance with Section 2.15(b). Such notice shall be
irrevocable and the principal amount specified in such notice shall be due and
payable on the date specified together with accrued interest on the amount
prepaid.
(ii) Borrowers may, at their option, at any time,
permanently reduce from time to time or terminate the Facility A Commitment or
the Facility B Commitment; provided, however, that neither the Facility A
Commitment nor the Facility B Commitment shall be reduced to an amount less than
the outstanding principal amount of the Facility A Loan or the Facility B Loan,
respectively, in a minimum amount of $1,000,000.
(b) Mandatory Prepayments.
(i) Asset Dispositions. In the event of receipt by
any Loan Party of proceeds of any Asset Disposition (including insurance
recoveries and condemnation proceeds) that are not used within one hundred
eighty (180) days of receipt to acquire property, plant or equipment or a
Regulatory Authorization, Borrowers shall prepay the Loans within such one
hundred eighty (180) day period in an amount equal to all such proceeds, net of
(A) commissions and other reasonable and customary transaction costs, fees and
expenses properly attributable to such transaction and payable by such Loan
Party in connection therewith (in each case, paid to non-Affiliates), (B)
transfer taxes and (C) an appropriate reserve for income taxes in accordance
with GAAP in connection therewith. Any such prepayment shall be applied in
accordance with clause (c) of this Section 2.10.
(ii) Sale or Issuance of Stock. No later than the
Business Day following the receipt by Holdings of any proceeds from a sale or
issuance of Stock by Holdings, Borrowers shall prepay the Loans in an amount
equal to all such proceeds, except for (A) 100% of proceeds from the exercise of
options granted pursuant to equity-based compensation arrangements, the issuance
of stock pursuant to employee stock purchase plans and the exercise of warrants,
(B) proceeds of up to $150,000,000 from a private placement of Stock by Holdings
consummated on or prior to the first anniversary of the Effective Date and (C)
proceeds of up to $500,000,000 from a public offering of Stock by Holdings
consummated on or prior to June 20, 2001, net of underwriting discounts and
commissions and other reasonable costs paid to non-Affiliates in connection
therewith. Any such prepayment shall be applied in accordance with clause (c) of
this Section 2.10.
(iii) Excess Cash Flow. Borrowers shall prepay the
Loans, in an amount equal to fifty percent (50%) of Excess Cash Flow for each
such Fiscal Year commencing with the Fiscal Year ended December 31, 2002, which
payment shall be made on the earlier of the date which is ten (10) days after
(A) the date on which Holdings' annual audited Financial Statements for the
immediately preceding Fiscal Year are delivered pursuant to Section 8.1 or (B)
the date on which such annual audited Financial Statements were required to be
delivered pursuant to Section 8.1.
(c) Application of Mandatory Prepayments. Any prepayments made
by Borrowers pursuant to clause (b) of this Section 2.10 above shall be applied
as follows: first, to Fees and reimbursable expenses of Administrative Agent
then due and payable pursuant to any of the Loan Documents; second, to interest
then due and payable on the Facility B Loan; third, to prepay the scheduled
installments of the Facility B Loan in inverse order of maturity until such Loan
shall have been prepaid in full and, for any such prepayments before the
Facility B Commitment Termination Date, the Facility B Commitment shall be
reduced pro tanto; fourth, to interest then due and payable on the Facility A
Advances; fifth, to the principal balance of the
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Facility A Advances outstanding until the same shall have been paid in full;
sixth to any Letter of Credit Obligations of Borrowers to provide cash
collateral therefor in the manner set forth in Annex I, until all such Letter of
Credit Obligations have been fully cash collateralized in the manner set forth
in Annex I.
2.11 Interest and Applicable Margins.
(a) Borrowers shall pay interest to Administrative Agent, for
the ratable benefit of Lenders in accordance with the various Loans being made
by each Lender, in arrears on each applicable Interest Payment Date, at the
following rates: (i) the Base Rate plus the Applicable Base Margin per annum or
(ii) at the election of Borrower Representative and, if permitted herein, the
applicable LIBOR Rate plus the Applicable LIBOR Margin per annum, based on the
aggregate amount of Loans outstanding from time to time.
The Applicable Base Margin and Applicable LIBOR Margin will be
3.00% and 4.00% per annum, respectively, as of the date hereof. The Applicable
Margins will be adjusted (up or down within the limits set forth in Schedule
2.11) prospectively on a quarterly basis as determined by Loan Parties'
consolidated financial performance, commencing with the first day of the first
calendar month that occurs more than five (5) days after the first day of Stage
2; provided, however, that in the case of LIBOR Loans such adjustments may not
be made before the end of a LIBOR Period. Adjustments in Applicable Margins will
be determined by reference to Schedule 2.11.
All adjustments in the Applicable Margins in Stage 2 will be
implemented quarterly, on a prospective basis, for the period commencing at
least five (5) days after the date of delivery pursuant to Section 8.1 of the
quarterly unaudited or annual audited (as applicable) Financial Statements of
Loan Parties evidencing the need for an adjustment. Concurrently with the
delivery of those Financial Statements, Borrower Representative shall deliver to
Administrative Agent a certificate, signed by its chief financial officer or
vice president, treasury operations, setting forth in reasonable detail the
basis for the continuance of, or any change in, the Applicable Margins. Failure
to timely deliver such Financial Statements shall, in addition to any other
remedy provided for in this Agreement, result in an increase in the Applicable
Margins to the highest level set forth in Schedule 2.11 until the first day of
the first calendar month following the delivery of those Financial Statements
demonstrating that such an increase is not required. If an Event of Default
shall have occurred or be continuing at the time any reduction in the Applicable
Margins is to be implemented, that reduction shall be deferred until the first
day of the first calendar month following the date on which such Event of
Default is waived or cured.
(b) If any payment on any Loan becomes due and payable on a
day other than a Business Day, the maturity thereof will be extended to the next
succeeding Business Day (except as set forth in the definition of LIBOR Period)
and, with respect to payments of principal, interest thereon shall be payable at
the then applicable rate during such extension.
(c) All computations of Fees calculated on a per annum basis
and of interest shall be made by Administrative Agent on the basis of a three
hundred sixty (360) day year, in each case for the actual number of days
occurring in the period for which such interest and Fees are payable. The Base
Rate shall be determined each day based upon the Base Rate as in effect each
day. Each determination by Administrative Agent of an interest rate and Fees
hereunder shall be conclusive, absent manifest error.
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(d) As long as an Event of Default shall have occurred and be
continuing under Section 10.1(a), (j) or (k) or as long as any other Event of
Default shall have occurred and be continuing, at the election of Requisite
Lenders confirmed by written notice to Borrower Representative, the interest
rates applicable to the Loans and the Letter of Credit Fees shall be increased
by two percent (2%) per annum above the rates of interest or the rate of such
Fees otherwise applicable hereunder ("Default Rate"), and all outstanding
Obligations shall bear interest at the Default Rate applicable to such
Obligations. Interest and Letter of Credit Fees at the Default Rate shall accrue
from the initial date of such Event of Default until that Event of Default is
cured or waived and shall be payable upon demand.
(e) As long as no Default or Event of Default shall have
occurred and be continuing, Borrower Representative shall have the option to (i)
request that any Advances be made as a LIBOR Loan, (ii) convert at any time all
or any part of outstanding Loans from Base Rate Loans to LIBOR Loans, (iii)
convert any LIBOR Loan to a Base Rate Loan, subject to payment of LIBOR funding
breakage costs in accordance with Section 2.15(b) if such conversion is made
prior to the expiration of the LIBOR Period applicable thereto, or (iv) continue
all or any portion of any Loan as a LIBOR Loan upon the expiration of the
applicable LIBOR Period and the succeeding LIBOR Period of that continued Loan
shall commence on the last day of the LIBOR Period of the Loan to be continued.
Any Loan to be made or continued as, or converted into, a LIBOR Loan must be in
a minimum amount of $1,000,000 and integral multiples of $100,000 in excess of
such amount. Any such election must be made by 11:00 a.m. (New York time) on the
third (3rd) Business Day prior to (1) the date of any proposed Advance which is
to bear interest at the LIBOR Rate, (2) the end of each LIBOR Period with
respect to any LIBOR Loans to be continued as such or (3) the date on which
Borrower Representative wishes to convert any Base Rate Loan to a LIBOR Loan for
a LIBOR Period designated by Borrower Representative in such election. If no
election is received with respect to a LIBOR Loan by 11:00 a.m. (New York time)
on the third (3rd) Business Day prior to the end of the LIBOR Period with
respect thereto (or if an Event of Default shall have occurred and be
continuing), that LIBOR Loan shall be converted to a Base Rate Loan at the end
of its LIBOR Period. Borrower Representative must make such election by notice
to Administrative Agent in writing, by telecopy or overnight courier. In the
case of any conversion or continuation, such election must be made pursuant to a
written notice (a "Notice of Conversion/Continuation") in the form of Exhibit C.
(f) Notwithstanding anything to the contrary set forth in this
Section 2.11, if a court of competent jurisdiction determines in a final order
that the rate of interest payable hereunder exceeds the highest rate of interest
permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum
Lawful Rate would be so exceeded, the rate of interest payable hereunder shall
be equal to the Maximum Lawful Rate; provided, however, that if at any time
thereafter the rate of interest payable hereunder is less than the Maximum
Lawful Rate, Borrowers shall continue to pay interest hereunder at the Maximum
Lawful Rate until such time as the total interest received by Administrative
Agent, on behalf of Lenders, is equal to the total interest which would have
been received had the interest rate payable hereunder been (but for the
operation of this paragraph) the interest rate payable since the date hereof as
otherwise provided in this Agreement. Thereafter, interest hereunder shall be
paid at the rate(s) of interest and in the manner provided in Sections 2.11(a)
through (e) above unless and until the rate of interest again exceeds the
Maximum Lawful Rate, and at that time this paragraph shall again apply. In no
event shall the total interest received by any Lender pursuant to the terms
hereof exceed the amount which such Lender could lawfully have received had the
interest due hereunder been calculated for the full term hereof at the Maximum
Lawful Rate. If the Maximum Lawful Rate is calculated pursuant to this
paragraph, such interest shall be calculated at a daily rate equal to the
Maximum Lawful Rate divided by the number of days in the year in which such
calculation is made. If,
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notwithstanding the provisions of this Section 2.11(f), a court of competent
jurisdiction shall finally determine that a Lender has received interest
hereunder in excess of the Maximum Lawful Rate, Administrative Agent shall, to
the extent permitted by applicable law, promptly apply such excess in the order
specified in Section 2.13 and thereafter shall refund any excess to Borrowers or
as a court of competent jurisdiction may otherwise order.
2.12 Payments. All payments and prepayments to be made in respect of
principal, interest or other amounts due from Borrowers hereunder or under any
other Loan Document shall be payable on or before 1:00 p.m., New York time, on
the day when due, without presentment, demand, protest or notice of any kind,
all of which are hereby expressly waived, and an action therefor shall
immediately accrue. Such payments shall be made to Administrative Agent at
Administrative Agent's office at 10 Riverview Drive, Danbury, Connecticut 06810,
Attn: TFS/US LEC Portfolio Manager or such other location specified in writing
by Administrative Agent, in immediately available funds, without set off,
recoupment, counterclaims or any other deduction of any nature. Payments
received after 1:00 p.m., New York time, on any Business Day shall be deemed to
have been received on the following Business Day.
2.13 Application and Allocation of Payments.
(a) As long as no Default or Event of Default shall have
occurred and be continuing, (i) payments matching specific scheduled payments
then due shall be applied to those scheduled payments; (ii) voluntary
prepayments shall be applied as determined by Borrower Representative or as
provided in Section 8.27; and (iii) mandatory prepayments shall be applied as
set forth in Section 2.10(c). All payments and prepayments applied to a
particular Loan shall be applied ratably to the portion thereof held by each
Lender as determined by its Pro Rata Share. As to each other payment, and as to
all payments made when an Event of Default shall have occurred and be continuing
or following the Commitment Termination Date, each Borrower hereby irrevocably
waives the right to direct the application of any and all payments received from
or on behalf of such Borrower, and each Borrower hereby irrevocably agrees that
Administrative Agent shall have the continuing exclusive right to apply any and
all such payments against the Obligations of Borrowers as Administrative Agent
may deem advisable notwithstanding any previous entry by Administrative Agent in
the Loan Account or any other books and records. In the absence of a specific
determination by all Lenders and Administrative Agent with respect thereto,
payments shall be applied to amounts then due and payable in the following
order: (1) to Fees and Administrative Agent's and Lenders' expenses reimbursable
hereunder; (2) to interest on the Loans, ratably in proportion to the interest
accrued as to each Loan; (3) to principal payments on the Loans and to provide
cash collateral for Letter of Credit Obligations in the manner described in
Annex I, ratably to the aggregate, combined principal balance of the Loans and
outstanding Letter of Credit Obligations; and (4) to all other Obligations
including expenses of Lenders to the extent reimbursable under Section 2.21.
(b) Administrative Agent is authorized to, and at its sole
election may, charge to the Facility A Loan balance on behalf of each Borrower
and cause to be paid all Fees, expenses, Charges, costs (including insurance
premiums in accordance with Section 8.7(a)) and interest and principal, other
than principal of the Facility A Loan, owing by Borrowers under this Agreement
or any of the other Loan Documents if and to the extent Borrowers fail to
promptly pay any such amounts as and when due, even if such charges would cause
the balance of the aggregate Facility A Loan to exceed the Facility A
Commitment. At Administrative Agent's option and to the extent permitted by law,
any charges so made shall constitute part of the Facility A Loan hereunder.
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2.14 Loan Account and Accounting. Administrative Agent shall maintain a
loan account (the "Loan Account") on its books to record: all Advances, all
payments made by Borrowers, and all other debits and credits as provided in this
Agreement with respect to the Loans or any other Obligations. All entries in the
Loan Account shall be made in accordance with Administrative Agent's customary
accounting practices as in effect from time to time. The balance in the Loan
Account, as recorded on Administrative Agent's most recent printout or other
written statement, shall, absent manifest error, be presumptive evidence of the
amounts due and owing to Administrative Agent and Lenders by Borrowers;
provided, however, that any failure to so record or any error in so recording
shall not limit or otherwise affect any Borrower's duty to pay the Obligations.
Administrative Agent shall render to Borrower Representative a monthly
accounting of transactions with respect to the Loans setting forth the balance
of the Loan Account. Unless Borrower Representative notifies Administrative
Agent in writing of any objection to any such accounting (specifically
describing the basis for such objection), within thirty (30) days after the date
thereof, each and every such accounting shall (absent manifest error) be deemed
final, binding and conclusive upon Borrowers in all respects as to all matters
reflected therein. Only those items expressly objected to in such notice shall
be deemed to be disputed by Borrowers. Notwithstanding any provision herein
contained to the contrary, any Lender may elect (which election may be revoked)
to dispense with the issuance of Notes to that Lender and may rely on the Loan
Account as evidence of the amount of Obligations from time to time owing to it.
2.15 Indemnity.
(a) Each Loan Party that is a signatory hereto shall jointly
and severally indemnify and hold harmless each of Administrative Agent,
Syndication Agent, Documentation Agent, Lenders and their respective Affiliates,
and each such Person's respective officers, directors, employees, attorneys,
agents and representatives (each, an "Indemnified Person"), from and against any
and all suits, actions, proceedings, claims, damages, losses, liabilities and
expenses (including reasonable attorneys' fees and disbursements and other costs
of investigation or defense, including those incurred upon any appeal) which may
be instituted or asserted against or incurred by any such Indemnified Person as
the result of credit having been extended, suspended or terminated under this
Agreement and the other Loan Documents and the administration of such credit,
and in connection with or arising out of the transactions contemplated hereunder
and thereunder and any actions or failures to act in connection therewith,
including any and all Environmental Liabilities and legal costs and expenses
arising out of or incurred in connection with disputes between or among any
parties to any of the Loan Documents (collectively, "Indemnified Liabilities");
provided, however, that no such Loan Party shall be liable for any
indemnification to an Indemnified Person to the extent that any such suit,
action, proceeding, claim, damage, loss, liability or expense results from that
Indemnified Person's gross negligence or willful misconduct or material and
knowing breach of its obligations and this Agreement. NO INDEMNIFIED PERSON
SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY LOAN DOCUMENT, ANY
SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY LOAN DOCUMENT OR AS A
RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
(b) To induce Lenders to provide the LIBOR Rate option on the
terms provided herein, if (i) any LIBOR Loans are repaid in whole or in part
prior to the last day of any
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applicable LIBOR Period (whether that repayment is made pursuant to any
provision of this Agreement or any other Loan Document or is the result of
acceleration, by operation of law or otherwise); (ii) any Borrower shall default
in payment when due of the principal amount of or interest on any LIBOR Loan;
(iii) any Borrower shall default in making any borrowing of, conversion into or
continuation of LIBOR Loans after Borrower Representative has given notice
requesting the same in accordance herewith; or (iv) any Borrower shall fail to
make any prepayment of a LIBOR Loan after Borrower Representative has given a
notice thereof in accordance herewith, Borrowers shall jointly and severally
indemnify and hold harmless each Lender from and against all losses, costs and
expenses resulting from or arising from any of the foregoing. Such
indemnification shall include any loss (including loss of margin) or expense
arising from the reemployment of funds obtained by it or from fees payable to
terminate deposits from which such funds were obtained. For the purpose of
calculating amounts payable to a Lender under this subsection, each Lender shall
be deemed to have actually funded its relevant LIBOR Loan through the purchase
of a deposit which bears interest at the LIBOR Rate in an amount equal to the
amount of that LIBOR Loan and having a maturity comparable to the relevant LIBOR
Period; provided, however, that each Lender may fund each of its LIBOR Loans in
any manner it sees fit, and the foregoing assumption shall be utilized only for
the calculation of amounts payable under this subsection. This covenant shall
survive the termination of this Agreement and the payment of the Notes and all
other amounts payable hereunder. As promptly as practicable under the
circumstances, each Lender shall provide Borrower Representative with its
written calculation of all amounts payable pursuant to this Section 2.15, and
such calculation shall be presumed correct (absent manifest error) and shall be
binding on the parties hereto unless Borrower Representative shall object in
writing within thirty (30) Business Days of receipt thereof, specifying the
basis for such objection in detail.
2.16 Access. Each Loan Party which is a party hereto shall, during
normal business hours, from time to time upon one (1) Business Day's prior
notice as frequently as Administrative Agent determines to be appropriate: (a)
provide any Agent and any of its officers, employees and agents (and, during the
continuance of an Event of Default, any Lender and any of its officers,
employees and agents) access to the properties, facilities, advisors and
employees (including officers) of such Loan Party and to the Collateral, (b)
permit any Agent, each initial Lender and any of their officers, employees and
agents, to inspect, audit and make extracts from such Loan Party's books and
records and (c) permit Administrative Agent, each initial Lender and their
officers, employees and agents, to inspect, review, evaluate and make test
verifications and counts of the Accounts, Equipment, Inventory and other
Collateral of such Loan Party. If a Default or Event of Default shall have
occurred and be continuing or if access is necessary to preserve or protect the
Collateral as determined by Administrative Agent, each such Loan Party shall
provide such access to Administrative Agent and to each Lender at all times and
without advance notice. Furthermore, as long as any Event of Default shall have
occurred and be continuing, each such Loan Party shall provide Administrative
Agent and each Lender with access to their suppliers and customers. Each Loan
Party shall make available to Administrative Agent, each initial Lender and
their respective counsel, as quickly as is possible under the circumstances,
originals or copies of all books and records which Administrative Agent may
request. Each Loan Party shall deliver any document or instrument necessary for
Administrative Agent or each initial Lender, as it may from time to time
request, to obtain records from any service bureau or other Person which
maintains records for such Loan Party, and shall maintain duplicate records or
supporting documentation on media, including computer tapes and discs owned by
such Loan Party. Any Lender or its representatives (other than any Person in the
telecommunications business), upon request by such Lender to Administrative
Agent, may accompany Administrative Agent on any such visit.
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2.17 Taxes.
(a) Any and all payments by Borrowers hereunder (including any
payments made pursuant to Article 11 or under any other Loan Document) shall be
made, in accordance with this Section 2.17, free and clear of and without
deduction for any and all present or future Taxes. If any Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder (including any sum payable pursuant to Article 11 or under any other
Loan Document), (i) the sum payable shall be increased as much as shall be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.17) Administrative
Agent or Lenders, as applicable, receive an amount equal to the sum they would
have received had no such deductions been made, (ii) such Borrower shall make
such deductions, and (iii) such Borrower shall pay the full amount deducted to
the relevant taxing or other authority in accordance with applicable law. Within
thirty (30) days after the date of any payment of Taxes, Borrower Representative
shall furnish to Administrative Agent the original or a certified copy of a
receipt evidencing payment thereof.
(b) Each Loan Party that is a signatory hereto shall jointly
and severally indemnify and, within ten (10) days of demand therefor, pay
Administrative Agent and each Lender for the full amount of Taxes (including any
Taxes imposed by any jurisdiction on amounts payable under this Section 2.17)
paid by Administrative Agent or such Lender, as appropriate, and any liability
(including penalties, interest and expenses) arising therefrom or with respect
thereto, whether or not such Taxes were correctly or legally asserted.
2.18 Capital Adequacy; Increased Costs; Illegality.
(a) If any Lender shall have determined that any law, treaty,
governmental (or quasi-governmental) rule, regulation, guideline or order
regarding capital adequacy, reserve requirements or similar requirements or
compliance by any Lender with any request or directive regarding capital
adequacy, reserve requirements or similar requirements (whether or not having
the force of law), in each case, adopted after the date hereof, from any central
bank or other Governmental Authority increases or would have the effect of
increasing the amount of capital, reserves or other funds required to be
maintained by such Lender and thereby reducing the rate of return on such
Lender's capital as a consequence of its obligations hereunder, then Borrowers
shall from time to time upon demand by such Lender made within ninety (90) days
of the occurrence thereof (with a copy of such demand to Administrative Agent)
pay to Administrative Agent, for the account of such Lender, additional amounts
sufficient to compensate such Lender for such reduction. A certificate as to the
amount of that reduction and showing the basis of the computation thereof
submitted by such Lender to Borrower Representative and to Administrative Agent
shall, absent manifest error, be final, conclusive and binding for all purposes.
(b) If, due to either (i) the introduction of or any change in
any law or regulation (or any change in the interpretation thereof) or (ii) the
compliance with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law), in each case
adopted after the date hereof, there shall be any increase in the cost to any
Lender of agreeing to make or making, funding or maintaining any Loan, then
Borrowers shall from time to time, upon demand by such Lender (with a copy of
such demand to Administrative Agent), pay to Administrative Agent for the
account of such Lender additional amounts sufficient to compensate such Lender
for such increased cost. A certificate as to the amount of such increased cost,
submitted to Borrower Representative and to Administrative Agent by such Lender,
shall be conclusive and binding on Borrowers for all purposes, absent manifest
error. Each Lender agrees that, as promptly as practicable after it becomes
aware of any circumstances referred to above
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which would result in any such increased cost, but in any event within ninety
(90) days thereof, the affected Lender shall, to the extent not inconsistent
with such Lender's internal policies of general application, use reasonable
commercial efforts to minimize costs and expenses incurred by it and payable to
it by Borrowers pursuant to this Section 2.18(b).
(c) Notwithstanding anything to the contrary contained herein,
if the introduction of or any change in any law or regulation (or any change in
the interpretation thereof) shall make it unlawful, or any central bank or other
Governmental Authority shall assert that it is unlawful, for any Lender to agree
to make or to make or to continue to fund or maintain any LIBOR Loan, then,
unless that Lender is able to make or to continue to fund or to maintain such
LIBOR Loan at another branch or office of that Lender without, in that Lender's
opinion, adversely affecting it or its Loans or the income obtained therefrom,
on notice thereof and demand therefor by such Lender to Borrower Representative
through Administrative Agent, (i) the obligation of such Lender to agree to make
or to make or to continue to fund or maintain LIBOR Loans shall terminate and
(ii) Borrowers shall forthwith prepay in full all outstanding LIBOR Loans owing
by such Borrower to such Lender, together with interest accrued thereon, unless
Borrower Representative on behalf of Borrowers, within five (5) Business Days
after the delivery of such notice and demand, converts all such Loans into a
Loan bearing interest based on the Base Rate.
(d) Replacement of Lender in Respect of Increased Costs.
Within fifteen (15) days after receipt by Borrower Representative of written
notice and demand from any Lender (an "Affected Lender") for payment of
additional amounts or increased costs as provided in Section 2.17, 2.18(a) or
2.18(b), Borrower Representative may, at its option, notify Administrative Agent
and such Affected Lender of its intention to replace the Affected Lender. As
long as no Default or Event of Default shall have occurred and be continuing,
Borrower Representative, with the consent of Administrative Agent, may obtain,
at Borrowers' expense, a replacement Lender ("Replacement Lender") for the
Affected Lender, which Replacement Lender must be satisfactory to Administrative
Agent. If Borrowers obtain a Replacement Lender within ninety (90) days
following notice of their intention to do so, the Affected Lender must sell and
assign its Loans and Commitments to such Replacement Lender for an amount equal
to the principal balance of all Loans held by the Affected Lender and all
accrued interest and Fees with respect thereto through the date of such sale;
provided, however, that Borrowers shall have reimbursed such Affected Lender for
the additional amounts or increased costs that it is entitled to receive under
this Agreement through the date of such sale and assignment.
Notwithstanding the foregoing, Borrowers shall not have the
right to obtain a Replacement Lender if the Affected Lender rescinds its demand
for increased costs or additional amounts within fifteen (15) days following its
receipt of Borrowers' notice of intention to replace such Affected Lender.
Furthermore, if Borrowers give a notice of intention to replace and do not so
replace such Affected Lender within ninety (90) days thereafter, Borrowers'
rights under this Section 2.18(d) shall terminate and Borrowers shall promptly
pay all increased costs or additional amounts demanded by such Affected Lender
pursuant to Sections 2.17(a), 2.18(a) and 2.18(b).
2.19 Use of Proceeds.
(a) Borrowers shall utilize the proceeds of the Facility B
Loan solely for the financing of the acquisition, construction or improvement of
telecommunication asset or assets which are an integral part of a Network in a
Market or any assets (not including any leasehold improvements except those
leasehold improvements expended during the initial buildout of each switch site
and related off-site sales office) which are at all times located at a Site or
sales office
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<PAGE>
in a Market or, to the extent other funds were used by the Loan Parties to
acquire such assets, for general corporate purposes.
(b) Borrowers shall utilize the proceeds of the Facility A
Loan for Permitted Acquisitions, working capital or general corporate purposes,
including capital expenditures and transaction costs.
2.20 Fees.
(a) Borrower shall pay to Administrative Agent, for the
ratable benefit of Lenders, the fees described on Schedule 2.20 in connection
with this Agreement (the "Commitment Fees").
(b) Borrowers shall pay to each of the Co-Arrangers additional
Fees, the amount and dates of payment of which are embodied in a separate
agreement among Holdings, GE Capital, GECMG, FUNB and FUSI (the "Fee Letter").
2.21 Expenses. Borrowers shall (a) pay or reimburse Administrative
Agent for all of its reasonable costs, fees, charges and expenses incurred or
arising in connection with the negotiation, review, preparation and execution of
this Agreement, the Loan Documents, any commitment or proposal letter, or any
amendment, supplement, waiver, modification to, or restructuring of this
Agreement, the Obligations or the other Loan Documents, including reasonable
legal fees and disbursements, expenses, document charges and other charges and
expenses of Administrative Agent, (b) pay or reimburse Administrative Agent for
all of its reasonable costs, fees, charges and expenses incurred in connection
with the administration and syndication of the Loans (including printing,
distribution and bank meetings) and Administrative Agent and each Lender for all
of its reasonable costs, fees, charges and expenses incurred in connection with
the enforcement, protection or preservation of any rights under or in connection
with this Agreement or any other Loan Documents, including reasonable legal fees
and disbursements, audit fees and charges, and all out-of-pocket expenses, (c)
pay, indemnify and hold Lenders harmless from any and all recording and filing
fees and taxes and any and all liabilities with respect to, or resulting from
any delay by any Loan Party in paying, stamp, excise and other taxes (excluding
income and franchise taxes and Taxes of similar nature), if any, which may be
payable or determined to be payable in connection with the execution and
delivery or recordation or filing of, or consummation of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement and the other Loan Documents.
All of the amounts described in this Section are referred to collectively as the
"Lenders' Expenses," shall be payable upon demand, and shall accrue interest at
the interest rate in effect when such demand is made from five (5) days after
the date of demand until paid in full. All Lenders' Expenses, and interest
thereon, shall be part of the Obligations and shall be secured by the
Collateral. The agreements in this Section 2.21 shall survive repayment of the
Obligations. All Lenders' Expenses that are outstanding on any Borrowing Date
shall be paid before or with such advance. If Borrower Representative has not
paid to Lenders the amount of all Lenders' Expenses billed to Borrowers at least
five (5) Business Days before such Borrowing Date, Lenders shall be authorized
to retain from any Advance on such Borrowing Date the amount of such Lenders'
Expenses that remain unpaid. Borrowers' obligation to pay Lenders' Expenses
shall not be limited by any limitation on the amount of the Commitment that may
be designated as available for such purposes, and any amounts so designated
shall be used to pay Lenders' Expenses accrued at the time of any Advance before
any of Borrowers' legal fees or similar expenses.
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ARTICLE 3: ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF ADMINISTRATIVE AGENT
3.1 Assignment and Participations.
(a) The Loan Parties signatory hereto consent to any Lender's
assignment of, and/or sale of participations in, at any time or times, the Loan
Documents, Loans, Letter of Credit Obligations and any Commitment or of any
portion thereof or interest therein, including any Lender's rights, title,
interests, remedies, powers or duties thereunder, whether evidenced by a writing
or not. Any assignment by a Lender shall (i) require the consent of
Administrative Agent and Borrower Representative (which, in the case of Borrower
Representative, shall not be unreasonably withheld or delayed); provided,
however, that no consent of Borrower Representative shall be required if an
Event of Default shall have occurred and be continuing; (ii) require the
execution of an assignment agreement (an "Assignment Agreement") and the
delivery by the assignee of a completed Administrative Questionnaire,
substantially in the form attached hereto as Exhibit G and Exhibit H,
respectively, and otherwise in form and substance satisfactory to, and
acknowledged by, Administrative Agent; (iii) be conditioned on such assignee
Lender representing to the assigning Lender and Administrative Agent that it is
making the purchase for its own account, for investment purposes and not with a
view to the distribution thereof; (iv) if a partial assignment, be in an amount
at least equal to $5,000,000, be of the same Pro Rata Share of Facility A
Commitment and Facility B Commitment and, after giving effect to any such
partial assignment, the assigning Lender shall have retained Commitments and
Loans in an amount at least equal to $5,000,000; and (v) include a payment to
Administrative Agent of an assignment fee of $3,500 by the assigning Lender. The
failure of Borrower Representative to consent to an assignment to a Person that
is or is an Affiliate of a Person that is engaged in the telecommunications
industry and is a competitor of or supplier to any Loan Party shall not be
deemed unreasonable. In the case of an assignment by a Lender under this Section
3.1, the assignee shall have, to the extent of such assignment, the same rights,
benefits and obligations as it would if it were a Lender hereunder. The
assigning Lender shall be relieved of its obligations hereunder with respect to
its Commitments or assigned portion thereof from and after the date of such
assignment. Each Borrower hereby acknowledges and agrees that any assignment
will give rise to a direct obligation of Borrowers to the assignee and that the
assignee shall be considered to be a "Lender." In all instances, each Lender's
liability to make Loans hereunder shall be several and not joint and shall be
limited to such Lender's Pro Rata Share of the applicable Commitment. In the
event any Lender assigns or otherwise transfers all or any part of the
Obligations, any such Lender shall so notify Borrower Representative and
Borrowers shall, upon the request of Administrative Agent or such Lender,
execute a new Note in exchange for each Note, if any, or portion thereof being
assigned. Notwithstanding the foregoing provisions of this Section 3.1(a), any
Lender may at any time pledge the Obligations held by it and such Lender's
rights under this Agreement and the other Loan Documents to a Federal Reserve
Bank, and any Lender that is an investment fund may assign the Obligations held
by it and such Lender's rights under this Agreement and the other Loan Documents
to another investment fund managed by the same investment advisor; provided,
however, that no such pledge to a Federal Reserve Bank shall release such Lender
from such Lender's obligations hereunder or under any other Loan Document.
(b) Any participation by a Lender of all or any part of its
Commitments shall be made with the understanding that all amounts payable by
Borrowers hereunder shall be determined as if that Lender had not sold such
participation, and that the holder of any such participation shall not be
entitled to require such Lender to take or omit to take any action hereunder
except actions directly affecting (i) any reduction in the principal amount of,
or interest
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<PAGE>
rate or Fees payable with respect to, any Loan in which such holder
participates, (ii) any extension of the scheduled amortization of the principal
amount of any Loan in which such holder participates or the final maturity date
thereof, and (iii) any release of all or substantially all of the Collateral
(other than in accordance with the terms of this Agreement, the Collateral
Documents or the other Loan Documents). Solely for purposes of Sections 2.15,
2.17, 2.18 and 3.8, each Borrower acknowledges and agrees that a participation
shall give rise to a direct obligation of Borrowers to the participant and the
participant shall be considered to be a "Lender." Except as set forth in the
preceding sentence no Borrower or Loan Party shall have any obligation or duty
to any participant. Neither Administrative Agent nor any Lender (other than
Lender selling a participation) shall have any duty to any participant and may
continue to deal solely with Lender selling a participation as if no such sale
had occurred.
(c) Except as expressly provided in this Section 3.1, no
Lender shall, as between any Loan Party and that Lender, or Administrative Agent
and that Lender, be relieved of any of its obligations hereunder as a result of
any sale, assignment, transfer or negotiation of, or granting of participation
in, all or any part of the Loans, the Notes or other Obligations owed to such
Lender.
(d) Each Loan Party executing this Agreement shall assist any
Lender permitted to sell assignments or participations under this Section 3.1 as
reasonably required to enable the assigning or selling Lender to effect any such
assignment or participation, including the execution and delivery of any and all
agreements, notes and other documents and instruments as shall be requested and,
if requested by Administrative Agent, the preparation of informational materials
for, and the participation of management in meetings with, potential assignees
or participants. Each Loan Party executing this Agreement shall certify the
correctness, completeness and accuracy of all descriptions of such Loan Parties
and its affairs contained in any selling materials provided by it and all other
information provided by it and included in such materials, except that any
Projections delivered by such Loan Party shall only be certified by such Loan
Party as having been prepared by it in compliance with the representations
contained in Section 5.10.
(e) A Lender may furnish any information concerning Loan
Parties in the possession of such Lender from time to time to assignees and
participants (including prospective assignees and participants). Each Lender
shall obtain from assignees or participants confidentiality covenants
substantially equivalent to those contained in Section 12.16.
(f) So long as no Event of Default shall have occurred and be
continuing, no Lender shall assign or sell participations in any portion of its
Loans or Commitments to a potential Lender or participant if, as of the date of
the proposed assignment or sale, the assignee Lender or participant would be
subject to capital adequacy or similar requirements under Section 2.18(a),
increased costs under Section 2.18(b), an inability to fund LIBOR Loans under
Section 2.18(c), or withholding taxes in accordance with Section 2.17(a).
3.2 Appointment of Administrative Agent. GE Capital is hereby appointed
to act on behalf of all Lenders as Administrative Agent under this Agreement and
the other Loan Documents. The provisions of this Section 3.2 are solely for the
benefit of Administrative Agent and Lenders and no Loan Party nor any other
Person shall have any rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this Agreement
and the other Loan Documents, Administrative Agent shall act solely as an agent
of Lenders and does not assume and shall not be deemed to have assumed any
obligation toward or relationship of agency or trust with or for any Loan Party
or any other Person. Administrative Agent shall have no duties or
responsibilities except for those expressly set forth in this
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Agreement and the other Loan Documents. The duties of Administrative Agent shall
be mechanical and administrative in nature and Administrative Agent shall not
have, or be deemed to have, by reason of this Agreement, any other Loan Document
or otherwise a fiduciary relationship in respect of any Lender. Neither
Administrative Agent nor any of its Affiliates nor any of their respective
officers, directors, employees, agents or representatives shall be liable to any
Lender for any action taken or omitted to be taken by it hereunder or under any
other Loan Document, or in connection herewith or therewith, except for damages
caused by its or their own gross negligence or willful misconduct.
If Administrative Agent shall request instructions from Requisite
Lenders or all affected Lenders with respect to any act or action (including
failure to act) in connection with this Agreement or any other Loan Document,
then Administrative Agent shall be entitled to refrain from such act or taking
such action unless and until Administrative Agent shall have received
instructions from Requisite Lenders or all affected Lenders, as the case may be,
and Administrative Agent shall not incur liability to any Person by reason of so
refraining. Administrative Agent shall be fully justified in failing or refusing
to take any action hereunder or under any other Loan Document (a) if such action
would, in the opinion of Administrative Agent, be contrary to law or the terms
of this Agreement or any other Loan Document, (b) if such action would, in the
opinion of Administrative Agent, expose Administrative Agent to Environmental
Liabilities or (c) if Administrative Agent shall not first be indemnified to its
satisfaction against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action. Without limiting
the foregoing, no Lender shall have any right of action whatsoever against
Administrative Agent as a result of Administrative Agent acting or refraining
from acting hereunder or under any other Loan Document in accordance with the
instructions of Requisite Lenders or all affected Lenders, as applicable.
3.3 Administrative Agent's Reliance, Etc. Neither Administrative Agent
nor any of its Affiliates nor any of their respective directors, officers,
agents or employees shall be liable for any action taken or omitted to be taken
by it or them under or in connection with this Agreement or the other Loan
Documents, except for damages caused by its or their own gross negligence or
willful misconduct. Without limitation of the generality of the foregoing,
Administrative Agent: (a) may treat the payee of any Note as the holder thereof
until Administrative Agent receives written notice of the assignment or transfer
thereof signed by such payee and in form satisfactory to Administrative Agent;
(b) may consult with legal counsel, independent public accountants and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (c) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, warranties or
representations made in or in connection with this Agreement or the other Loan
Documents; (d) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of this
Agreement or the other Loan Documents on the part of any Loan Party or to
inspect the Collateral (including the books and records) of any Loan Party; (e)
shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
the other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; and (f) shall incur no liability under or in respect of this
Agreement or the other Loan Documents by acting upon any notice, consent,
certificate or other instrument or writing (which may be by telecopy, telegram,
cable or telex) believed by it to be genuine and signed or sent by the proper
party or parties.
3.4 GE Capital and Affiliates. With respect to its Commitments
hereunder, GE Capital shall have the same rights and powers under this Agreement
and the other Loan
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Documents as any other Lender and may exercise the same as though it were not
Administrative Agent; and the term "Lender" or "Lenders" shall, unless otherwise
expressly indicated, include GE Capital in its individual capacity. GE Capital
and its Affiliates may lend money to, invest in, and generally engage in any
kind of business with, any Loan Party, any of their Affiliates and any Person
who may do business with or own securities of any Loan Party or any such
Affiliate, all as if GE Capital were not Administrative Agent and without any
duty to account therefor to Lenders. GE Capital and its Affiliates may accept
fees and other consideration from any Loan Party for services in connection with
this Agreement or otherwise without having to account for the same to Lenders.
Each Lender acknowledges the potential conflict of interest between GE Capital
as a Lender and GE Capital as Administrative Agent.
3.5 Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon Administrative Agent or any other Lender
and based on the Financial Statements referred to in Section 5.10 and such other
documents and information as it has deemed appropriate, made its own credit and
financial analysis of the Loan Parties and its own decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and without
reliance upon Administrative Agent or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement. Each Lender acknowledges the potential conflict of interest of each
other Lender as a result of Lenders holding disproportionate interests in the
Loans, and expressly consents to, and waives any claim based upon, such conflict
of interest.
3.6 Indemnification. Lenders agree to indemnify Administrative Agent
(to the extent Administrative Agent is not reimbursed by Loan Parties and
without limiting the obligations of Loan Parties hereunder), ratably according
to their respective Pro Rata Shares, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by, or asserted against Administrative Agent in any way relating to
or arising out of this Agreement or any other Loan Document or any action taken
or omitted by Administrative Agent in connection therewith; provided, however,
that no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from Administrative Agent's gross negligence or willful
misconduct. Without limiting the foregoing, each Lender agrees to reimburse
Administrative Agent promptly upon demand for its ratable share of any
out-of-pocket expenses (including counsel fees) incurred by Administrative Agent
in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement and each other Loan Document, to the
extent that Administrative Agent is not reimbursed for such expenses by Loan
Parties.
3.7 Successor Administrative Agent. Administrative Agent may resign at
any time by giving not less than thirty (30) days' prior written notice thereof
to Lenders and Borrower Representative. Upon any such resignation, the Requisite
Lenders shall have the right to appoint a successor Administrative Agent. If no
successor Administrative Agent shall have been so appointed by the Requisite
Lenders and shall have accepted such appointment within thirty (30) days after
the resigning Administrative Agent's giving notice of resignation, then the
resigning Administrative Agent may, on behalf of Lenders, appoint a successor
Administrative Agent, which shall be a Lender, if a Lender is willing to accept
such appointment, or otherwise shall be a commercial bank or financial
institution or a subsidiary of a commercial bank or financial institution if
such commercial bank or financial institution is organized under the laws of the
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United States of America or of any State thereof and has a combined capital and
surplus of at least $300,000,000. If no successor Administrative Agent has been
appointed pursuant to the foregoing by the 30th day after the date such notice
of resignation was given by the resigning Administrative Agent, such resignation
shall become effective and the Requisite Lenders shall thereafter perform all
the duties of Administrative Agent hereunder until such time, if any, as the
Requisite Lenders appoint a successor Administrative Agent as provided above.
Any successor Administrative Agent appointed by the Requisite Lenders hereunder
shall be subject to the approval of Borrower Representative, such approval not
to be unreasonably withheld or delayed; provided, however, that such approval
shall not be required if a Default or Event of Default shall have occurred and
be continuing. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall succeed to and become vested with all the rights, powers, privileges
and duties of the resigning Administrative Agent. Upon the earlier of the
acceptance of any appointment as Administrative Agent hereunder by a successor
Administrative Agent or the effective date of the resigning Administrative
Agent's resignation, the resigning Administrative Agent shall be discharged from
its duties and obligations under this Agreement and the other Loan Documents,
except that any indemnity rights or other rights in favor of such resigning
Administrative Agent shall continue. After any resigning Administrative Agent's
resignation hereunder, the provisions of this Section 3.7 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.
3.8 Set Off and Sharing of Payments. In addition to any rights now or
hereafter granted under applicable law and not by way of limitation of any such
rights, upon the occurrence and during the continuance of any Event of Default,
each Lender and each holder of any Note and each of their respective Affiliates
is hereby authorized at any time or from time to time, without notice to any
Loan Party or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and to apply any and all balances held by
it at any of its offices for the account of any Borrower or Guarantor
(regardless of whether such balances are then due to such Borrower or Guarantor)
and any other properties or assets at any time held or owing by that Lender,
that holder or that Affiliate to or for the credit or for the account of any
Borrower or Guarantor against and on account of any of the Obligations which are
not paid when due. Any Lender or holder of any Note or any Affiliate of either
exercising a right to set off or otherwise receiving any payment on account of
the Obligations in excess of its Pro Rata Share of the Obligations shall
purchase for cash (and the other Lenders or holders shall sell) such
participations in each such other Lender's or holder's Pro Rata Share of the
Obligations as would be necessary to cause such Lender or holder to share the
amount so set off or otherwise received with each other Lender or holder in
accordance with their respective Pro Rata Shares. Each Loan Party agrees, to the
fullest extent permitted by law, that (a) any Lender or holder may exercise its
right to set off with respect to amounts in excess of its Pro Rata Share of the
Obligations and may sell participations in such amount so set off to other
Lenders and holders and (b) any Lender or holder so purchasing a participation
in the Loans made or other Obligations held by other Lenders or holders may
exercise all rights of set off, bankers' lien, counterclaim or similar rights
with respect to such participation as fully as if such Lender or holder were a
direct holder of the Loans and the other Obligations in the amount of such
participation. Notwithstanding the foregoing, if all or any portion of the set
off amount or payment otherwise received is thereafter recovered from Lender,
holder or Affiliate that has exercised the right of set off, the purchase of
participations by that Lender shall be rescinded and the purchase price restored
without interest.
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3.9 Advances; Payments; Non-Funding Lenders; Information; Actions in
Concert.
(a) Advances; Payments.
(i) Administrative Agent shall notify Lenders,
promptly after receipt of a Borrowing Certificate and in any event prior to 3:00
p.m. (New York time) on the date such Borrowing Certificate is received, by
telecopy, telephone or other similar form of transmission. Each Lender shall
make the amount of such Lender's Pro Rata Share of such Advance available to
Administrative Agent in same day funds by wire transfer to Administrative
Agent's account as set forth in Schedule 3.9 not later than 3:00 p.m. (New York
time) on the requested funding date in the case of a Base Rate Loan and not
later than 11:00 a.m. (New York time) on the requested funding date in the case
of a LIBOR Loan. After receipt of such wire transfers (or, in Administrative
Agent's sole discretion, before receipt of such wire transfers), subject to the
terms hereof, Administrative Agent shall make the requested Advance to Borrower
Representative to the account of Borrower Representative specified on Schedule
3.9. All payments by each Lender shall be made without set off, counterclaim or
deduction of any kind.
(ii) All Payments due hereunder and under the Notes
shall be made to Administrative Agent by wire transfer to the account specified
on Schedule 3.9 no later than 1:00 p.m. (New York time) on the date due.
Payments received after such time shall be deemed to have been made on the next
Business Day. On each Business Day that Administrative Agent receives a payment
with respect to the Loans, Administrative Agent will advise each Lender by
telephone or telecopy of the amount of such Lender's Pro Rata Share of
principal, interest and Fees paid for the benefit of Lenders with respect to
each applicable Loan. Provided that such Lender has funded all payments or
Advances required to be made by it and has purchased all participations required
to be purchased by it under this Agreement and the other Loan Documents as of
such date, Administrative Agent will pay to each Lender such Lender's Pro Rata
Share of such payment. Such payments shall be made by wire transfer to such
Lender's account (as specified by such Lender in Schedule 3.9 or the applicable
Assignment Agreement) not later than 2:00 p.m. (New York time) on the next
Business Day following receipt. To the extent that any Lender (a "Non-Funding
Lender") has failed to fund all such payments and Advances or failed to fund the
purchase of all such participations, Administrative Agent shall be entitled to
set off the funding short-fall against that Non-Funding Lender's Pro Rata Share
of all payments received from Borrowers.
(b) Availability of Lender's Pro Rata Share. Administrative
Agent may assume that each Lender will make its Pro Rata Share of each Advance
available to Administrative Agent on each funding date. If such Pro Rata Share
is not, in fact, paid to Administrative Agent by such Lender when due,
Administrative Agent will be entitled to recover such amount on demand from such
Lender without set off, counterclaim or deduction of any kind. If any Lender
fails to pay the amount of its Pro Rata Share forthwith upon Administrative
Agent's demand, Administrative Agent shall promptly notify Borrower
Representative and Borrowers shall immediately repay such amount to
Administrative Agent. Nothing in this Section 3.9(b) or elsewhere in this
Agreement or the other Loan Documents shall be deemed to require Administrative
Agent to advance funds on behalf of any Lender or to relieve any Lender from its
obligation to fulfill its Commitments hereunder or to prejudice any rights that
any Loan Party may have against any Lender as a result of any default by such
Lender hereunder. To the extent that Administrative Agent advances funds to
Borrowers on behalf of any Lender and is not reimbursed therefor on the same
Business Day as such Advance is made, Administrative Agent shall be entitled to
retain for its account all interest accrued on such Advance until reimbursed by
the applicable Lender.
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(c) Return of Payments.
(i) If Administrative Agent pays an amount to a
Lender under this Agreement in the belief or expectation that a related payment
has been or will be received by Administrative Agent from Borrowers and such
related payment is not received by Administrative Agent, then Administrative
Agent will be entitled to recover such amount from such Lender on demand without
set off, counterclaim or deduction of any kind.
(ii) If Administrative Agent determines at any time
that any amount received by Administrative Agent under this Agreement must be
returned to any Borrower or paid to any other Person pursuant to any insolvency
law or otherwise, then, notwithstanding any other term or condition of this
Agreement or any other Loan Document, Administrative Agent will not be required
to distribute any portion thereof to any Lender. In addition, each Lender will
repay to Administrative Agent on demand any portion of such amount that
Administrative Agent has distributed to such Lender, together with interest at
such rate, if any, as Administrative Agent is required to pay to Borrowers or
such other Person, without set off, counterclaim or deduction of any kind.
(d) Non-Funding Lenders. The failure of any Non-Funding Lender
to make any Advance or any payment required by it hereunder shall not relieve
any other Lender (each such other Lender, an "Other Lender") of its obligations
to make such Advance, but neither any Other Lender nor Administrative Agent
shall be responsible for the failure of any Non-Funding Lender to make an
Advance or to purchase a participation required hereunder. Notwithstanding
anything set forth herein to the contrary, a Non-Funding Lender shall not have
any voting or consent rights under or with respect to any Loan Document or
constitute a "Lender" (or be included in the calculation of "Requisite Lenders"
hereunder) for any voting or consent rights under or with respect to any Loan
Document.
(e) Dissemination of Information. Administrative Agent will
use reasonable efforts to provide Lenders with any notice of an Event of Default
received by Administrative Agent from, or delivered by Administrative Agent to,
any Loan Party, with notice of any Event of Default of which Administrative
Agent has actually become aware and with notice of any action taken by
Administrative Agent following any Event of Default; provided, however, that
Administrative Agent shall not be liable to any Lender for any failure to do so,
except to the extent that such failure is attributable to Administrative Agent's
gross negligence or willful misconduct. Lenders acknowledge that each Loan Party
is required to provide Financial Statements and Collateral Reports to Lenders
hereunder and agrees that Administrative Agent shall have no duty to provide the
same to Lenders.
(f) Actions in Concert. Anything in this Agreement to the
contrary notwithstanding, each Lender hereby agrees with each other Lender that
no Lender shall take any action to protect or enforce its rights arising out of
this Agreement or the Notes (other than exercising any rights of set off)
without first obtaining the prior written consent of Requisite Lenders, it being
the intent of Lenders that any such action to protect or enforce rights under
this Agreement and the Notes shall be taken in concert and at the direction or
with the consent of Administrative Agent.
3.10 Syndication and Documentation Agents. The Syndication Agent and
the Documentation Agent shall have no duties, responsibilities or obligations
under this Agreement.
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ARTICLE 4: COLLATERAL AND SECURITY AGREEMENT
4.1 Grant of Security Interest. To secure the prompt and complete
payment, performance and observance of all of the Obligations (specifically
including each Loan Party's Obligations arising under the provisions of Article
10), each Loan Party hereby grants, assigns, conveys, mortgages, pledges,
hypothecates and transfers to Administrative Agent, for itself and the benefit
of Lenders, a continuing Lien upon all of such Loan Party's right, title and
interest in and to the following kinds and types of property, whether now owned
or hereafter acquired or arising, wherever located, together with all
substitutions therefor and all accessions, replacements and renewals thereof,
and in all proceeds and products thereof (collectively, the "Collateral"):
(a) all existing and future accounts, accounts receivable and
rights to payment and (i) all accounts receivable created by or arising from all
sales or leases of goods or rendition of services by such Loan Party to its
customers or subscribers; (ii) all unpaid seller's rights (including rescission,
replevin, reclamation and stopping in transit) relating to the foregoing or
arising therefrom; (iii) all rights to any goods represented by any of the
foregoing, including returned or repossessed goods; (iv) all reserves and credit
balances arising from any of the foregoing; (v) all guarantees or collateral for
any of the foregoing; and (vi) all insurance policies or rights relating to any
of the foregoing (collectively, "Accounts");
(b) all existing and future instruments, chattel paper,
documents of title, securities, contracts, agreements, licenses, easements,
grants and rights now or hereafter entered into or acquired by such Loan Party,
as modified, replaced or supplemented from time to time, including (i) all
capacity usage agreements and other agreements with carriers, customers or
subscribers which constitute five percent (5%) or more of such Loan Party's
revenues, (ii) all purchase agreements and supply agreements and related
warranty rights, (iii) all operating agreements, (iv) all interconnection
agreements, (v) all other System Agreements and (vi) all insurance policies
(collectively, "Contracts");
(c) all equipment, furniture and fixtures, switches, towers,
electronics, transmitting equipment, software, cabling, hardware, devices and
components now or hereafter owned by such Loan Party, and any and all additions,
substitutions and replacements to or of any of the foregoing, together with all
attachments, components, parts, improvements, upgrades and accessions installed
thereon or affixed thereto (collectively, "Equipment");
(d) all general intangibles and intangible property, including
rights under Contracts, rights to payment of any kind, insurance proceeds and
amounts due under insurance policies, deposit accounts, patent rights,
trademarks, service marks, copyrights, trade names, customer lists, goodwill,
registrations, licenses, license rights, rights in intellectual property,
software, software licenses, computer programming (including source codes,
object codes and all other embodiments of computer programming or information),
tax refunds and benefits, corporate and other business records, refunds and
indemnification rights, all amounts owed at any time to such Loan Party (to the
extent permitted by applicable law in effect at any time and subject to Section
4.2), all rights that such Loan Party may have at any time in any Regulatory
Authorization, including any rights to payment upon any transfer of any
Regulatory Authorization, or any other transfer or transaction intended to
result in a transfer of such a Regulatory Authorization, or the obtaining of FCC
or PUC authority for another Person to operate a telecommunications system in
the area instead of such Loan Party, all rights to receive payment or property
upon any assignment, transfer, sale or surrender of any other Collateral and all
other intangible personal property of such Loan Party of every kind and nature
(collectively, "General Intangibles");
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(e) all merchandise, inventory and goods now or hereafter
owned by such Loan Party, together with all goods and materials used or usable
in manufacturing, processing, packaging or shipping such merchandise, inventory
and goods in all states of production, from raw materials through
work-in-progress to finished goods (collectively, "Inventory"); and
(f) all proceeds and products of any of the foregoing,
including (i) any and all proceeds of any insurance, indemnity, warranty or
guaranty payable to such Loan Party from time to time with respect to any of the
Collateral, (ii) any and all payments (in any form whatsoever) made or due and
payable to such Loan Party from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of any
other Collateral by any Governmental Authority (or any Person acting under color
of governmental authority), (iii) any and all other amounts from time to time
paid or payable under or in connection with any other Collateral and (iv) any
and all cash proceeds and non-cash proceeds in the form of Equipment, Inventory,
Contracts, Accounts, General Intangibles, chattel paper, documents, instruments,
securities or other proceeds (collectively, "Proceeds").
4.2 Regulatory Authorizations. Administrative Agent and each Lender
acknowledge and recognize that each Loan Party's assignment of or grant of a
security interest in its Regulatory Authorizations may be subject to
restrictions imposed by the FCC or PUC on such Loan Party's ability to assign
its interest in or transfer control of any Regulatory Authorizations. Likewise,
Administrative Agent and each Lender acknowledge and recognize that each Loan
Party's assignment of or grant of a security interest in any state or local
franchises or licenses may be subject to similar government restrictions. Each
Loan Party acknowledges, however, that the value of the Regulatory
Authorizations is a critical part of the Collateral package, and agrees to use
its best efforts to effect the transfer of such Regulatory Authorizations to
Administrative Agent, on behalf of Lenders, or its designee upon the occurrence
of an Event of Default.
4.3 Priority of Security Interests. The security interests granted in
Section 4.1 by each Loan Party to Administrative Agent on behalf of Secured
Parties are and shall be continuing and indefeasible first-priority security
interests in the Collateral which may be perfected by filing under the UCC,
subject to no Liens except for Liens permitted under Section 9.2.
4.4 Pledge Agreements. Each Loan Party hereby represents and warrants
that valid, first-priority security interests have been granted by Holdings to
Administrative Agent, on behalf of Secured Parties, pursuant to the Holdings
Pledge Agreement, in 100% of the Stock of each Borrower, together with an
irrevocable proxy to vote such Stock if an Event of Default should occur, and
that all existing stock certificates, warrants and other instruments evidencing
ownership, together with executed blank stock powers, have been delivered to
Administrative Agent on behalf of Secured Parties. Each Loan Party shall also
grant to Administrative Agent on behalf of Secured Parties valid, first-priority
security interests in 100% of the Stock of all other present or future
Subsidiaries of such Loan Party having assets in excess of $100,000 and an
irrevocable proxy to vote such Stock if an Event of Default should occur.
4.5 Further Documentation; Pledge of Instruments. At any time and from
time to time, upon the written request of Administrative Agent or Requisite
Lenders, and at the sole expense of the Loan Parties, each Loan Party shall
promptly execute, deliver and record any documents, instruments, agreements and
amendments, and take all such further action, as Administrative Agent or
Requisite Lenders may reasonably deem desirable in obtaining the full benefits
of this Agreement and of the rights and powers herein granted, including the
filing of any financing statements or amendments under the UCC. Each Loan Party
also hereby authorizes Administrative Agent to file any such financing statement
or amendment thereto, without the
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signature of such Loan Party, or with a copy or telecopy of such Loan Party's
signature, to the extent permitted by applicable law, or to execute any
financing statement or amendment thereof on behalf of such Loan Party as such
Loan Party's attorney-in-fact. If any amount payable under or in connection with
any of the Collateral shall be or become evidenced by any promissory note or
other instrument or any certificated securities, such note, instrument or
certificate shall be immediately pledged and delivered to Administrative Agent
on behalf of Secured Parties hereunder, duly endorsed in a manner satisfactory
to Administrative Agent or Requisite Lenders. Each Loan Party shall keep and
maintain, at its own cost and expense, satisfactory and complete records of the
Collateral, including a record of any and all payments received and any and all
credits granted with respect to the Collateral and all other dealings with the
Collateral. Each Loan Party shall mark its books and records pertaining to the
Collateral to evidence this Agreement and the Liens granted hereby. All chattel
paper shall be marked with the following legend: "This writing and the
obligations evidenced or secured hereby are subject to the security interest of
General Electric Capital Corporation, as Administrative Agent, for the benefit
of Administrative Agent and Lenders."
4.6 Accounts, Etc. Each Loan Party shall be entitled to collect any
Accounts and General Intangibles until the occurrence of an Event of Default,
during the continuance of which Administrative Agent or Requisite Lenders may
restrict or terminate such authority. Each Loan Party agrees that, upon the
occurrence of an Event of Default, Administrative Agent on behalf of Secured
Parties shall be entitled to assume any or all of the Contracts, Accounts or
General Intangibles in the place of such Loan Party (without releasing such Loan
Party from liability thereunder).
4.7 Further Identification of Collateral. Each Loan Party shall furnish
to Administrative Agent on behalf of Secured Parties from time to time
statements and schedules further identifying and describing the Collateral and
each location thereof and such other reports in connection with the Collateral
as Administrative Agent or Requisite Lenders may reasonably request, all in
reasonable detail.
4.8 Remedies. Administrative Agent on behalf of Secured Parties shall
have all the rights and remedies of a secured party under the UCC, and shall be
entitled to exercise any and all remedies available under this Article 4 or
Article 10 or otherwise available at law or in equity upon the occurrence of an
Event of Default. Except as otherwise specifically provided herein, each Loan
Party hereby waives presentment, demand, protest or any notice (to the maximum
extent permitted by applicable law) of any kind in connection with this
Agreement or any Collateral.
4.9 Standard of Care. Administrative Agent shall be deemed to have
exercised reasonable care in the custody and preservation of any of the
Collateral in its possession if it takes such action for that purpose as
Borrower Representative requests in writing, but Administrative Agent's failure
to comply with any such request shall not of itself be deemed a failure to
exercise reasonable care, and no failure of Administrative Agent to preserve or
protect any rights with respect to such Collateral against prior parties, or to
do any act with respect to the preservation of such Collateral not so requested
by Borrower Representative, shall be deemed a failure to exercise reasonable
care in the custody or preservation of such Collateral.
4.10 Advances to Protect Collateral. All insurance expense and all
expenses of protecting, storing, warehousing, insuring, handling, maintaining
and shipping the Collateral (including all rent payable by any Loan Party to any
landlord of any premises where any of the Collateral may be located) and any and
all Taxes shall be borne and paid by such Loan Party.
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Administrative Agent on behalf of Secured Parties may (but shall not be
obligated to) make advances to preserve, protect or obtain any of the
Collateral, including advances to cure defaults under any of the Contracts or
advances to pay Taxes, insurance and the like, and all such advances shall
become part of the Obligations owing to Lenders hereunder and shall be payable
to Administrative Agent on demand, with interest thereon from the date of such
advance until paid at the Default Rate applicable to Base Rate Loans in effect
on the date of such advance.
4.11 License to Use. Administrative Agent on behalf of Secured Parties
is hereby granted a non-exclusive license or other right to use without charge
during the continuance of an Event of Default any Loan Party's labels, patents,
copyrights, rights of use of any name, trade secrets, trade names, trademarks
and advertising matter, or any tangible or intangible property or rights of a
similar nature, as they pertain to the Collateral, in advertising for sale and
selling any Collateral, and such Loan Party's rights under all licenses and all
franchise agreements shall inure to the benefit of Administrative Agent on
behalf of Secured Parties.
4.12 Benefit of Lenders. All Liens granted or contemplated hereby shall
be for the benefit of Administrative Agent and Lenders, and all Proceeds or
payments realized from the Collateral in accordance herewith shall be applied to
the Obligations in accordance with the terms provided herein.
4.13 Release of Collateral. Upon any sale of assets permitted herein
and application of the proceeds as required by Section 2.10, the Liens granted
by Loan Parties to Administrative Agent for the benefit of Secured Parties shall
be released and Administrative Agent shall, upon request of Borrower
Representative, execute and deliver to Borrower Representative appropriate
executed UCC-3s confirming such release.
ARTICLE 5: REPRESENTATIONS AND WARRANTIES
Each Loan Party hereby represents and warrants, jointly and severally,
to Administrative Agent and each Lender, with respect to all Loan Parties, as
follows:
5.1 Organization and Qualification. Each Loan Party is duly organized,
validly existing and in good standing under the laws of its state of
organization. Each Loan Party is duly qualified to do business and in good
standing in each jurisdiction in which the failure to receive or retain such
qualification could reasonably be expected to have a Material Adverse Effect. As
to any Loan Party that is a limited liability company, each manager is duly
organized, validly existing, in good standing under the laws of its state of
organization, and duly qualified to do business and in good standing in each
jurisdiction in which the failure to receive or retain such qualification could
reasonably be expected to have a Material Adverse Effect.
5.2 Authority and Authorization. Each Loan Party has all requisite
corporate or limited liability company right, power, authority and legal right
to carry on its business, to own or lease its properties and to execute and
deliver and perform its obligations under this Agreement, to make the borrowings
provided for herein, and to execute and deliver and to perform its obligations
under the Loan Documents. Each Loan Party's execution, delivery and performance
of the Loan Documents have been duly and validly authorized by all necessary
corporate or limited liability company proceedings on the part of each Loan
Party and the manager of any Loan Party that is a limited liability company.
5.3 Execution and Binding Effect. This Agreement, the Notes and all
other Loan Documents have been or will be duly and validly executed and
delivered by each Loan Party, and
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constitute or, when executed and delivered, will constitute, the legal, valid
and binding obligations of such Loan Party enforceable in accordance with their
respective terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, receivership, moratorium or other laws affecting
creditors' rights generally.
5.4 Governmental Authorizations. Except for the consents identified on
Schedule 5.4 (the "Required Consents"), no authorization, consent, approval,
license, exemption or other action by, and no registration, qualification,
designation, declaration or filing with, any Governmental Authority (other than
the filing of financing statements and continuation statements) is or will be
necessary in connection with the execution and delivery of this Agreement, the
Notes or any other Loan Documents by each Loan Party, consummation by each Loan
Party of the transactions herein or therein contemplated, including obtaining
the Loans and granting security for the Obligations, performance of or
compliance by each Loan Party with the terms and conditions hereof or thereof or
the legality, validity and enforceability hereof or thereof.
5.5 Regulatory Authorizations. Loan Parties hold all authorizations,
permits and licenses required by the FCC or the PUC or any Communications Law
for the conduct of their business as now conducted and as proposed in the
Business Plan to be conducted, and all such Regulatory Authorizations are in
full force and effect, are subject to no further administrative or judicial
review and are therefore final. No Lender, by reason of the execution, delivery
and performance (other than the enforcement of remedies) of any of the Loan
Documents, will be subject to the regulation or control of either the FCC or the
PUC. The Regulatory Authorizations are described on Schedule 5.5.
5.6 Agreements and Other Documents. As of the date hereof, each Loan
Party has provided to Lenders, accurate and complete copies (or summaries) of
all of the following agreements or documents to which such Loan Party is subject
and each of which is listed on Schedule 5.6: (a) supply agreements and purchase
agreements not terminable by such Loan Party within sixty (60) days following
written notice issued by such Loan Party and involving transactions in excess of
$1,000,000 per annum; (b) any lease of Equipment having a remaining term of one
year or longer and requiring aggregate rental and other payments in excess of
$500,000 per annum; (c) licenses and permits held by such Loan Party, the
absence of which could be reasonably likely to have a Material Adverse Effect;
(d) instruments or documents evidencing Indebtedness of such Loan Party and any
security interest granted by such Loan Party with respect thereto; and (e)
instruments and agreements evidencing the issuance of any equity securities,
warrants, rights or options to purchase equity securities of a Borrower.
5.7 Absence of Conflicts. The execution and delivery of this Agreement,
the Notes and the other Loan Documents, the consummation of the transactions
herein or therein contemplated and the performance of or compliance with the
terms and conditions hereof or thereof by each Loan Party will not (a) violate
any applicable Law; (b) conflict with or result in a breach of or a default
under the Organizational Documents of such Loan Party or any material agreement
or instrument to which such Loan Party is a party or by which such Loan Party or
its properties are bound; or (c) result in the creation or imposition of any
Lien upon any property (now owned or hereafter acquired) of such Loan Party
except as otherwise contemplated by this Agreement.
5.8 No Restrictions. No Loan Party is a party or subject to any
contract, agreement or restriction in its Organizational Documents that
materially and adversely affects its business or the use or ownership of any of
its properties or operation of its business as contemplated in its
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Business Plan. The Loan Parties' strategy is to deploy owned switching equipment
and to lease transmission capacity from others. No Loan Party is a party or
subject to any contract or agreement which restricts its right or ability to
incur Indebtedness, other than as set forth on Schedule 5.8, none of which
prohibits such Loan Party's execution of or compliance with this Agreement. No
Loan Party has agreed or consented to cause or permit in the future (upon the
happening of a contingency or otherwise) any of the Collateral, whether now
owned or hereafter acquired, to be subject to a Lien that is not a Permitted
Encumbrance.
5.9 Government Contracts. Except as set forth in Schedule 5.9, as of
the date hereof, no Loan Party is a party to any contract or agreement with any
Governmental Authority and no Loan Party's Accounts are subject to the Federal
Assignment of Claims Act, as amended (31 U.S.C.ss. 3727) or any similar state or
local law.
5.10 Financial Statements; Business Plan. Borrower Representative has
furnished to Lenders the most recent annual or quarterly Financial Statements of
Holdings, certified by a Responsible Officer of Holdings, including balance
sheets and related statements of income, retained earnings and cash flow, as
described on Schedule 5.10. Such Financial Statements (including the notes
thereto) present fairly the financial condition of Loan Parties on a
consolidated basis as of the end of such fiscal period and the results of its
operations and the changes in its financial position for the fiscal period then
ended, all in conformity with GAAP applied on a basis consistent with that of
the preceding fiscal period. As of the date hereof, no Loan Party has any
obligation or liability (absolute, contingent, liquidated or unliquidated)
material to Loan Parties taken as a whole, which are required to be disclosed in
financial statements prepared in accordance with GAAP, except for those
reflected in the Financial Statements discussed on Schedule 5.10, and since the
date hereof has incurred no such obligation or liability, except as permitted by
this Agreement. The projections and pro forma financial statements delivered by
Borrower Representative to Administrative Agent, on behalf of Lenders, as part
of the Business Plan, a copy of which has been delivered prior to the date
hereof, were prepared in good faith, based on reasonable assumptions.
5.11 Financial Accounting Practices. Loan Parties have made and kept
books, records and accounts which, in reasonable detail, accurately and fairly
reflect their respective transactions and dispositions of their assets, and Loan
Parties maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (a) transactions are executed in accordance with
management's general or specific authorization, (b) transactions are recorded as
necessary (i) to permit preparation of financial statements in conformity with
GAAP and (ii) to maintain accountability for assets, (c) access to assets is
permitted only in accordance with management's general or specific authorization
and (d) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences.
5.12 Deposit and Disbursement Accounts. Schedule 5.12 lists all banks
and other financial institutions at which any Loan Party maintains deposits
and/or other accounts as of the date hereof, including any disbursement
accounts, and such Schedule correctly identifies the name, address and telephone
number of each depository, the name in which the account is held, a description
of the purpose of the account, and the complete account number.
5.13 Insurance. Schedule 5.13 lists all insurance policies of any
nature maintained, as of the date hereof, for current occurrences by each Loan
Party, as well as a summary of the terms of each such policy.
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5.14 Accurate and Complete Disclosure. No representation or warranty
made by any Loan Party in this Agreement or any other Loan Document and no
statement made by any Loan Party in any financial statement, certificate,
report, exhibit or document furnished by such Loan Party to Administrative Agent
pursuant to or in connection with this Agreement (including any filings with the
Securities and Exchange Commission, the FCC or the PUC) is or was false or
misleading as of the date made in any material respect (including by omission of
material information necessary to make such representation, warranty or
statement not misleading). There are no facts that would reasonably be expected
to evidence or create a Material Adverse Effect which have not been set forth in
the Financial Statements referred to in Section 5.10 or otherwise disclosed in
writing to Administrative Agent and Lenders prior to the Effective Date.
5.15 No Event of Default; Compliance with Material Agreements. No event
has occurred and is continuing and no condition exists which constitutes a
Default or an Event of Default. As of the date hereof, no Loan Party is in
violation of any term of any material agreement or instrument to which it is a
party or by which it or its properties are bound that would reasonably be
expected to have a Material Adverse Effect.
5.16 Labor Matters. As of the date hereof, (a) no strikes or other
material labor disputes against any Loan Party are pending or, to any Loan
Party's knowledge, threatened; (b) hours worked by and payment made to employees
of each Loan Party comply with the Fair Labor Standards Act and each other
federal, state, local or foreign law applicable to such matter; (c) all payments
due from any Loan Party for employee health and welfare insurance have been paid
or accrued as a liability on the books of such Loan Party; (d) except as set
forth in Schedule 5.16, no Loan Party is a party to or bound by any collective
bargaining agreement, management agreement, consulting agreement or any
employment agreement (and true and complete copies of any agreements described
on Schedule 5.16 have been delivered to Administrative Agent and each Lender);
(e) there is no organizing activity involving any Loan Party pending or, to any
Loan Party's knowledge, threatened by any labor union or group of employees; (f)
there are no representation proceedings pending or, to any Loan Party's
knowledge, threatened with the National Labor Relations Board, and no labor
organization or group of employees of any Loan Party has made a pending demand
for recognition; and (g) except as set forth in Schedule 5.16, there are no
complaints or charges against any Loan Party pending or, to the knowledge of the
executive officers of Holdings, threatened to be filed with any Governmental
Authority or arbitrator based on, arising out of, in connection with, or
otherwise relating to the employment or termination of employment by any Loan
Party of any individual which, if adversely determined, could reasonably be
expected to have a Material Adverse Effect.
5.17 Litigation. Except as set forth in Schedule 5.17, there is no
pending action, suit or threatened proceeding by or before any Governmental
Authority against or affecting any Loan Party or any of its properties, rights
or licenses which if adversely decided could reasonably be expected to have a
Material Adverse Effect.
5.18 Rights to Property. Each Loan Party has good and marketable title,
subject only to the Permitted Encumbrances, to the Collateral, to all other
personal and real property purported to be owned by it and to all property
reflected in the most recent balance sheet referred to in Section 5.10 (except
as sold or otherwise disposed of in the ordinary course of business as no longer
used or useful in the conduct of the business). Schedule 5.18 lists as of the
date hereof (i) all Sites and Site Leases, (ii) all other real property owned by
each Loan Party, and (iii) all material Equipment of each Loan Party and its
location or proposed location. Each Loan Party
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has entered into the Site Leases described on Schedule 5.18. Such Site Leases
are in full force and effect and are not subject to termination because of
default or otherwise.
5.19 Year 2000 Problem. Each Loan Party has a plan and organization in
place to minimize any materially adverse effects on its business operations
caused by the failure of any system or equipment which is material to such Loan
Party's operations to be Year 2000 Compliant. "Year 2000 Compliant" means that
the functionality and the performance of any such system or equipment will not
be adversely affected as a result of the date change from the calendar year 1999
to the calendar year 2000, including leap year calculations, and that, to the
extent applicable to such system's or equipment's normal operation
specifications, such system or equipment will accurately accept, store,
retrieve, calculate, compare and otherwise process dates before and after
January 1, 2000. Each Loan Party is conscientiously implementing such plan. Each
Loan Party will, upon request from Administrative Agent, on behalf of Lenders,
or from Requisite Lenders, provide Administrative Agent or, if so requested,
Lenders with periodic updates on its implementation of such plan.
5.20 Taxes. Each Loan Party's federal tax identification number is set
forth on Schedule 1. All tax returns required to be filed by each Loan Party
have been properly prepared, executed and filed, and all Taxes upon such Loan
Party or upon any of its respective properties, incomes, sales or franchises
which are shown to be due and payable thereon have been paid, other than Taxes
or assessments the validity or amount of which such Loan Party is contesting in
good faith. The reserves and provisions for taxes on the books of each Loan
Party are adequate for all open years and for its current fiscal period.
5.21 No Material Adverse Change. Since the date of the Financial
Statements referenced in Section 5.10, there has been no Material Adverse
Change.
5.22 Solvency. Both before and after giving effect to (a) the Advances
and Letter of Credit Obligations to be made or extended on the date hereof or
such other date as the Advances and Letter of Credit Obligations requested
hereunder are made or extended, (b) the disbursement of the proceeds of such
Loans pursuant to the instructions of Borrower Representative and (c) the
payment and accrual of all transaction costs in connection with the foregoing,
Loan Parties, taken as a whole, are Solvent.
5.23 No Regulatory Event. No Regulatory Event has occurred and is
continuing.
5.24 Trade Relations. There exists no actual or threatened termination,
cancellation or limitation of, or any modification or change in, the business
relationship between any Loan Party and any customer or supplier that could
reasonably be expected to have a Material Adverse Effect or to prevent Loan
Parties from conducting their business after the consummation of the financing
contemplated by this Agreement in substantially the same manner as is
contemplated in the Business Plan.
5.25 No Brokerage Fees. No brokerage or other fee, commission or
compensation is to be paid by any Loan Party to any Person in connection with
the Loans to be made hereunder except as contemplated herein. Each Loan Party
jointly and severally hereby indemnifies each Indemnified Person against any
claims brought against such Indemnified Person for brokerage fees or commissions
of any Person based on an agreement with such Loan Party and agrees to pay all
expenses incurred by such Indemnified Person in connection with the defense of
any action or proceeding brought to collect any such brokerage fees or
commissions.
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5.26 Margin Stock; Regulation U. No Loan Party is engaged principally,
or as one of its important activities, in the business of extending credit for
the purpose of purchasing or carrying margin stock. The making of the Advances
and the use of the proceeds thereof will not violate Regulation U or X of the
Board of Governors of the Federal Reserve System.
5.27 Investment Company; Public Utility Holding Company. No Loan Party
is an "investment company" or a "company controlled by an investment company" or
an "affiliated person" or "promoter" or "principal underwriter" for, an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended, or a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company," within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.28 Personal Holding Company; Subchapter S. No Loan Party is a
"personal holding company" as defined in Section 542 of the Code, or a
"Subchapter S" corporation within the meaning of the Code.
5.29 Securities Act, Etc. The Notes are not required to be registered
under the Securities Act of 1933, as amended, or under the securities laws of
any state.
5.30 ERISA. (i) With respect to any Plan, there is no Reportable Event
currently under consideration by the PBGC which may reasonably result in any
material liability to the PBGC with respect to any Plan, (ii) no Plan has been
terminated, (iii) no trustee has been appointed by any United States District
Court to administer any Plan, (iv) the PBGC has not instituted proceedings to
terminate any Plan or to appoint a trustee to administer any such Plan, (v) no
Loan Party or Affiliate of a Loan Party has withdrawn, completely or partially,
from any Plan and (vi) no Loan Party or Affiliate of a Loan Party has incurred
secondary liability for withdrawal liability payments under any Plan.
5.31 Intellectual Property. Each Loan Party owns or possesses the right
to use all patents, trademarks, service marks, trade names, copyrights,
know-how, franchises, Software and Software Licenses necessary for the operation
of its business, free from burdensome restrictions that could reasonably be
expected to have a Material Adverse Effect. All such rights are described on
Schedule 5.31.
5.32 Environmental Warranties. Each Loan Party is in compliance with
all Environmental Laws applicable to such Loan Party or its business or to the
real or personal property owned, leased or operated by such Loan Party, except
for such non-compliances as in the aggregate could not reasonably be expected to
have a Material Adverse Effect. No Loan Party has received notice of, or is
aware of, any violation or alleged violation, or any liability or asserted
liability, under any Environmental Law, with respect to such Loan Party or its
business or its premises. The only premises occupied by any Loan Party are
office spaces in multi-tenant commercial office buildings.
5.33 Security Interests. The provisions of Article 4 are effective to
create in favor of Administrative Agent, on behalf of Secured Parties, a legal,
valid and enforceable Lien on or security interest in all of the Collateral,
and, when the recordings and filings described on Schedule 5.33 have been
effected in the public offices listed on said Schedule 5.33, this Agreement will
create a perfected first priority security interest in all right, title, estate
and interest of each Loan Party in the Collateral which may be perfected by
filing, subject to no Liens except for Permitted Encumbrances. All action
necessary or desirable to protect and perfect such
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security interest in each item of the Collateral has been duly taken. The
recordings and filings shown on said Schedule 5.33 are all the actions necessary
or advisable in order to establish, protect and perfect the interest of
Administrative Agent, on behalf of Secured Parties, in the Collateral.
5.34 Place of Business. The chief executive office of each Loan Party
is identified on Schedule 5.34. Each Loan Party's principal place of business in
the state(s) where a Site is located is identified on Schedule 5.34. Each Loan
Party's records concerning the Collateral are kept at one or both of these
addresses.
5.35 Location of Collateral. The Collateral is and will be kept at the
locations identified by Loan Party and type of Collateral on Schedule 5.35 or
such other locations as may be permitted under Section 9.4.
5.36 Validity of Contracts and Accounts. Each Contract, General
Intangible and Account is, or will be when it is created, a bona fide, valid and
legally enforceable property or right of a Loan Party and, so far as such Loan
Party knows, of any other party thereto, except for those that do not, in the
aggregate, materially and adversely affect the value of the Collateral. All
consents, licenses, approvals or authorizations of, or declarations with, any
Governmental Authority required in connection with each Loan Party's execution,
delivery or performance of each Contract, General Intangible or Account have
been or will be duly and timely obtained, effected or given and are or will be
in full force and effect except where all failures to do or be so, in the
aggregate, do not materially and adversely affect the value of the Collateral.
No amount payable under or in connection with any of the Contracts, General
Intangibles or Accounts are evidenced by any chattel paper or any promissory
notes or other instruments that have not been delivered to Administrative Agent
on behalf of Secured Parties.
5.37 No Defaults Under Contracts or Accounts. With respect to each
Contract, Account and General Intangible, no default by any Loan Party or event
which with the giving of notice or the passage of time would be a default has
occurred and, to the knowledge of the executive officers of Holdings, the other
party or parties thereto are not in default thereunder except as referred to in
Section 5.17, and each Loan Party has fully and timely performed all its
material obligations thereunder. Except as referred to in Section 5.17, the
right, title and interest of such Loan Party thereunder is not subject to any
defense, set off, counterclaim or claim, and none of the foregoing been asserted
or alleged against such Loan Party except in respect of such defaults, defenses,
set offs, counterclaims and claims that in the aggregate do not materially
adversely affect the value of the Collateral. Except as referred to in Section
5.17, the amount represented by each Loan Party to Administrative Agent, on
behalf of Lenders, from time to time as owing on any or all Accounts, Contracts
or General Intangibles, will at such time be the correct amount actually and
unconditionally owing by such account debtors thereunder.
5.38 Subsidiaries. No Borrower has any Subsidiaries nor any current
plans to form or acquire any Subsidiary.
5.39 Assumed Names. Except as set forth on Schedule 5.39, no Loan Party
conducts business under any assumed names or trade names, or has conducted
business under any other names, or any assumed names or trade names, at any time
prior to the date hereof.
5.40 Pledge Agreements; Registration of Pledge. The Holdings Pledge
Agreement is effective to grant to Administrative Agent, on behalf of Secured
Parties, a legal, valid and enforceable security interest in 100% of the Stock
of each Borrower, to the extent that such
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security interests may be created under Article 8 and/or Article 9 of the UCC.
Such security interests constitute fully perfected, first priority security
interests in such Stock and proceeds thereof, and the security interests of
Administrative Agent on behalf of Secured Parties in Holdings' interests have
been duly registered on the books and records of such Borrower.
5.41 Transactions with Affiliates. No Affiliate and no officer or
director of any Loan Party or any individual related by blood, marriage,
adoption or otherwise to any such Affiliate, officer or director, or any Person
in which any such Affiliate, officer, director or individual related thereto
owns any material beneficial interest, is a party to any agreement, contract,
commitment or transaction with such Loan Party or has any material interest in
any material property used by such Loan Party, except as set forth on Schedule
5.41.
ARTICLE 6: CONDITIONS TO EFFECTIVENESS
This Agreement shall become effective upon satisfaction, or waiver by
all Lenders, of the following conditions:
6.1 Closing Certificates. Administrative Agent and each Lender shall
have received the following certificates, all in form and substance satisfactory
to Administrative Agent and Requisite Lenders and all dated the Effective Date
upon which Administrative Agent may conclusively rely unless and until later
certificates have been furnished to Administrative Agent and each Lender: (a) a
certificate of each Loan Party signed by a duly authorized Responsible Officer,
certifying as to (i) true copies of Organizational Documents of such Loan Party
in effect on such date; (ii) true copies of all corporate action (including,
without limitation, a corporate resolution of its board of directors ratifying
the Loan Documents, and authorizing the Obligations and the granting of the
liens and security interests in the Collateral securing the Obligations) taken
by such Loan Party relative to this Agreement, the Note and the other Loan
Documents which have been properly adopted and have not been modified or
amended; and (iii) the names, true signatures and incumbency of the Responsible
Officers of such Loan Party authorized to execute and deliver this Agreement,
the Note and the other Loan Documents; (b) a Certificate of Good Standing (or
equivalent certificate) for such Loan Party and for the managing member of any
Loan Party that is a limited liability company, duly issued by the Secretary of
State of each state in which such Loan Party intends to do business; and (c) a
certificate as to such other matters as Administrative Agent or any Lender shall
request.
6.2 Opinions of Counsel. Administrative Agent and each Lender shall
have received the following opinions, all dated the Effective Date and all in
form and substance satisfactory to Administrative Agent and each Lender:
(a) a written opinion of counsel to each Loan Party,
substantially in the form of Exhibit D, as to such matters as shall be required
by Administrative Agent, any Lender or their respective counsel, including the
corporate good standing of such Loan Party, the proper adoption of any corporate
resolution required hereby, the authority of the Person signing for such Loan
Party, the validity, binding nature and enforceability of the Loan Agreement and
related Loan Documents and perfected liens and security interests granted to
Administrative Agent on behalf of Secured Parties by such Loan Party in the
Collateral; and
(b) a written opinion of regulatory counsel for Loan Parties,
substantially in the form of Exhibit E, as to such matters as shall be required
by Administrative Agent and its counsel, including the validity of each Loan
Party's authorizations and approvals, permits or licensing required by the
Federal Communications Commission, the Public Utilities
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Commission(s) and the relevant state and local utilities commissions or
municipality, and all other applicable regulatory or governmental bodies.
6.3 Closing Documents. Administrative Agent and Lenders shall have
received the following documents, all in form and substance satisfactory to
Administrative Agent, Lenders and their respective counsel:
(a) Agreement. This Agreement, duly executed by all Loan
Parties;
(b) Notes. The Notes, duly executed by all Borrowers, to the
order of each Lender;
(c) Financing Statements. All UCC-1 financing statements
necessary to perfect the Liens granted hereby by any Borrower which was not a
party to the Existing Loan Agreement (each an "Additional Borrower"), duly
executed by such Additional Borrower, and duly recorded in all of the offices
identified on Schedule 5.33;
(d) Pledge Amendment. A Pledge Amendment, substantially in the
form attached to the Holdings Pledge Agreement as Schedule II thereto, duly
executed by Holdings, along with the original pledged stock or membership
interest certificates with executed blank stock powers or assignments attached
thereto with respect to 100% of the Stock of any Additional Borrower;
(e) Required Consents. Evidence of each Additional Borrower
obtaining the Required Consents or a certificate of a Responsible Officer of
Borrower Representative to such effect;
(f) Fees. The Fees required to be paid on the Effective Date
in the respective amounts specified in Section 2.20 (including the Fees
specified in the Fee Letter); and
(g) Pre-Closing Lien Searches. Lien searches from all
jurisdictions reasonably determined by Administrative Agent or any Lender to be
appropriate, effective as of a date reasonably close to the Effective Date, with
respect to each Additional Borrower (under their present names and any previous
names), reflecting no other Liens (other than Permitted Encumbrances) on any of
the Collateral.
6.4 No Material Adverse Change. As of the Effective Date, after giving
effect to any Advances, there shall not have been (i) any litigation commenced
which, if successful, would have a material adverse impact on any Loan Party,
its Subsidiaries, their business or their ability to repay the Loan or which
would challenge the financing contemplated by this Agreement, except those
litigations listed on Schedule 5.17 and (ii) since Holding's last audited
Financial Statements, any material increase in the liabilities, liquidated or
contingent, of any Loan Party and its Subsidiaries or a material decrease in the
assets of any Loan Party and its Subsidiaries.
6.5 No Existing Default or Event of Default. No "Default" or "Event of
Default" under the Existing Loan Agreement is continuing.
6.6 Payment of Expenses. All fees and expenses of Administrative Agent,
Syndication Agent and Lenders reimbursable by Borrowers in connection with the
Existing Loan Agreement shall have been paid.
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6.7 Facility B Loans. There shall be Facility B Loans outstanding in
the aggregate amount of at least $50,000,000.
ARTICLE 7: CONDITIONS OF LENDING
7.1 Conditions to Each Borrowing Date. The obligation of any Lender to
fund any Advance, convert or continue any Loan or portion thereof as a LIBOR
Loan or incur any Letter of Credit Obligation is subject to each Loan Party's
performance of its obligations hereunder and satisfaction of the following
further conditions on the Borrowing Date for any such Advance (including the
Effective Date), the date of such conversion or continuation or the issuance of
such Letter of Credit:
(a) Borrowing Certificate. Administrative Agent shall have
received a duly executed Borrowing Certificate in the form of Exhibit B or a
request for a Letter of Credit pursuant to Annex I.
(b) No Default or Event of Default. No Default or Event of
Default shall have occurred and be continuing or would exist upon the
consummation of transactions to occur on such Borrowing Date.
(c) Representations and Warranties. The representations and
warranties contained in Article 5 shall be true and correct in all material
respects on and as of such Borrowing Date hereunder both before and after giving
effect thereto.
(d) No Regulatory Event. No Regulatory Event (in Requisite
Lenders' reasonable determination) shall have occurred and be continuing or
would exist upon the consummation of transactions to occur on such Borrowing
Date.
(e) Expenses. All closing costs and other expenses of
Administrative Agent, Syndication Agent and Co-Arrangers that are reimbursable
by the Company shall have been paid in full (or shall be paid first from such
Advance as provided in Section 2.13).
(f) Details, Proceedings and Documents. All legal details and
proceedings in connection with the transactions contemplated by this Agreement
shall be reasonably satisfactory to Administrative Agent and Requisite Lenders,
and Administrative Agent and Requisite Lenders shall have received all such
counterpart originals or certified or other copies of such documents and
proceedings in connection with such transactions, in form and substance
reasonably satisfactory to Administrative Agent and Requisite Lenders, as
Administrative Agent and Requisite Lenders may from time to time request.
(g) Post-Closing Items. The post-closing items described on
Schedule 7.1 shall have been completed in the time permitted, and each Loan
Party shall have provided Administrative Agent and Requisite Lenders with
satisfactory evidence thereof pursuant to Section 8.25.
7.2 Affirmation of Representations and Warranties. Any Borrowing
Certificate or other request for any Advance or Letter of Credit hereunder shall
constitute a representation and warranty that (a) the representations and
warranties contained in Article 5 are true and correct on and as of the date of
such request with the same effect as though made on and as of the date of such
request and (b) on the date of such request no Default or Event of Default has
occurred and is continuing or exists or will occur or exist after giving effect
to such Advance or issuance of
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Letter of Credit (for this purpose such Advance or Letter of Credit being deemed
to have been made or issued, as the case may be, on the date of such request).
Failure of Administrative Agent to receive notice from each Loan Party to the
contrary before the applicable Borrowing Date shall constitute a further
representation and warranty by such Loan Party that (x) the representations and
warranties of such Loan Party contained in the first sentence of this Section
7.2 are true and correct on and as of such Borrowing Date with the same effect
as though made on and as of such Borrowing Date, (y) on such Borrowing Date, no
Default or Event of Default has occurred and is continuing or exists or will
occur or exist after giving effect to such Advance or issuance and (z) on such
Borrowing Date, all conditions set forth in this Article 7 have been satisfied.
7.3 Deadline for Funding Conditions. No Lender shall have any
obligation to make any Advances hereunder if all of the conditions set forth in
Article 6 and in Article 7 have not been fully satisfied or waived by Requisite
Lenders and the first Advance made hereunder, within the period of twelve (12)
calendar months following the date hereof.
ARTICLE 8: AFFIRMATIVE COVENANTS
Loan Parties hereby jointly and severally agree as to all Loan Parties
to, from and after the date hereof until the Termination Date, keep and perform
fully each and all of the following covenants:
8.1 Reporting and Information Requirements.
(a) Annual Audit Reports. As soon as practicable, and in any
event within ninety (90) days after the close of each Fiscal Year, Borrower
Representative shall furnish or cause to be furnished to Administrative Agent
and Lenders audited consolidated statements of income, cash flow and retained
earnings for Holdings for such Fiscal Year and a consolidated balance sheet of
Holdings as of the close of such Fiscal Year, and notes to each, all in
reasonable detail, and beginning with the second full Fiscal Year after the date
hereof setting forth in comparative form the corresponding figures for the
preceding Fiscal Year, with such statements and balance sheet to be certified
without qualification by independent certified public accountants of recognized
regional or national standing selected by Borrower Representative and reasonably
satisfactory to Administrative Agent and Requisite Lenders.
(b) Quarterly Reports. Within forty five (45) days after the
end of each Fiscal Quarter, Borrower Representative shall furnish to
Administrative Agent and Lenders (i) unaudited consolidated statements of
income, cash flow and retained earnings for Holdings for such quarter and for
the period from the beginning of the then current Fiscal Year to the end of such
quarter, and an unaudited consolidated balance sheet of Holdings as of the end
of such quarter, all in reasonable detail and certified by a Responsible Officer
of Borrower Representative as presenting fairly the financial position of Loan
Parties as of the end of such quarter and the results of their operations and
the changes in their financial position for such quarter, in conformity with
GAAP (except for accompanying notes thereto), subject to year-end audit
adjustments, (ii) updates of revenues, gross margin and EBITDA of Holdings on a
consolidating basis and (iii) upon request of Administrative Agent or Requisite
Lenders, an aging of accounts payable and accounts receivable.
(c) Compliance Certificates. Within forty-five (45) days after
the end of each Fiscal Quarter, Borrower Representative shall deliver to
Administrative Agent and Lenders a certificate dated as of the end of such
Fiscal Quarter, signed by a Responsible Officer of Borrower Representative (i)
stating that as of the date thereof no Event of Default has occurred
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and is continuing or exists, or if an Event of Default has occurred and is
continuing or exists, specifying in detail the nature and period of existence
thereof and any action with respect thereto taken or contemplated to be taken by
the applicable Loan Party; (ii) stating that the signer has personally reviewed
this Agreement and that such certificate is based on an examination made by or
under the supervision of the signer sufficient to assure that such certificate
is accurate; and (iii) calculating and certifying Loan Parties' compliance with
the financial covenants set forth on Schedule 8.15 and with the provisions of
Section 8.27.
(d) Accountants' Certificate. Each set of year-end audited
consolidated Financial Statements and balance sheet delivered pursuant to
Section 8.1(a) shall be accompanied by a certificate or report dated the date of
such statement and balance sheet by the accountants who certified such
statements and balance sheet stating in substance that they have reviewed this
Agreement and that in making the examination necessary for their certification
of such statements and balance sheet they did not become aware of any Event of
Default or, if they did become so aware, such certificate or report shall state
the nature and period of existence thereof.
(e) Projections. If requested by Administrative Agent or
Requisite Lenders, Borrower Representative shall deliver to Administrative Agent
and Lenders within thirty (30) days after the beginning of each calendar year
projections of Holdings' anticipated income, expenses, cash flow, assets and
liabilities for the next five (5) calendar years prepared in good faith on
assumptions believed by Holdings to be reasonable and in a manner and format
consistent with other Financial Statements provided by Borrower Representative
to Administrative Agent and Lenders.
(f) Other Reports and Information. Upon the request of
Administrative Agent or Requisite Lenders, Borrower Representative shall deliver
to Administrative Agent and Lenders copies of (i) all regular or special reports
or effective registration statements which any Loan Party shall file with
Governmental Authorities, the FCC or the PUC (or any successor thereto) or any
securities exchange, (ii) financial statements, material reports, and other
information distributed by any Loan Party to its creditors or the financial
community in general, and (iii) all press releases issued by or concerning any
Loan Party.
(g) Further Information. Each Loan Party will promptly furnish
to Administrative Agent or any Lender such other information (including any
report by independent auditors) in such form as Administrative Agent or any
Lender may reasonably request.
8.2 Other Notices. Promptly upon a Responsible Officer of any Loan
Party becoming aware of any of the following, Borrower Representative shall give
Administrative Agent and each Lender notice thereof, together with a written
statement of a Responsible Officer of Borrower Representative setting forth the
details thereof and any action with respect thereto taken or contemplated to be
taken by such Loan Party:
(a) a Default or Event of Default;
(b) any Material Adverse Change;
(c) any event or circumstance that could reasonably be
expected to have a Material Adverse Effect or cause a Material Adverse Effect;
(d) any event that could reasonably be expected to constitute
a Regulatory Event;
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(e) the commencement, existence or threat of any proceeding by
or before any Governmental Authority against such Loan Party which, if adversely
decided, could reasonably be expected to have a Material Adverse Effect;
(f) such Loan Party's receipt of any notice of violation of,
or liability under, any Environmental Laws affecting such Loan Party or any of
its properties that could reasonably be expected to have a Material Adverse
Effect; or
(g) any Change of Control or Loss of Key Management of
Holdings.
8.3 Notice of Pension-Related Events. Each Loan Party shall promptly
furnish Administrative Agent with written notice upon the receipt by such Loan
Party or the administrator of any Plan of any notice, correspondence or other
communication from the PBGC, the IRS, the Secretary of Treasury, the Department
of Labor, or any other Person, as the case may be, relating to (i) any
Reportable Event, (ii) any funding deficiency with respect to any Plan, (iii)
any liability, either primary or secondary, with respect to complete or partial
withdrawal from any Plan, (iv) proceedings to terminate any Plan or (v) the
appointment of a trustee for any Plan that could reasonably be expected to have
a Material Adverse Effect. Such notice shall be accompanied by any pertinent
documents including the relevant notice, correspondence or other communication
and a statement of a Responsible Officer of such Loan Party describing the event
or the action taken and the reasons therefor.
8.4 Inspection Rights. To the extent required by Section 2.16, each
Loan Party shall upon reasonable notice permit such persons as Administrative
Agent or any Lender may designate to visit and inspect the Collateral or any
other properties of such Loan Party, to examine its books and records and take
copies and extracts therefrom and discuss its respective affairs with its
officers, employees and independent engineers at such times and as often as
Administrative Agent may reasonably request. Each Loan Party hereby authorizes
such officers, employees and independent engineers to discuss with
Administrative Agent or such Lenders the affairs of such Loan Party.
8.5 Preservation of Corporate Existence and Qualification. Each Loan
Party shall maintain its existence, good standing and rights in full force and
effect in its jurisdiction of organization. Each Loan Party shall qualify to do
business and remain qualified and in good standing and shall obtain all
necessary authorizations to do business in each jurisdiction in which failure to
receive or retain such would have a Material Adverse Effect.
8.6 Continuation of Business. Loan Parties shall continue to engage
solely in the business of providing telecommunications services and shall
acquire and maintain in full force and effect all material rights, privileges,
franchises and licenses necessary therefor (including any license or
authorization required by the FCC or any PUC).
8.7 Insurance.
(a) Loan Parties shall, at their sole cost and expense,
provide and maintain or cause to be maintained at all times insurance in such
forms and covering such risks and hazards and in such amounts and with an
insurance corporation with a Best rating of "A" or above, licensed to do
business in the states where any Network or Loan Party is located, as may be
satisfactory to Administrative Agent, as shown on Schedule 8.7, and otherwise as
may be required by the Security Documents. If any Loan Party at any time or
times hereafter shall fail to obtain or maintain any of the policies of
insurance required above or to pay all premiums relating
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thereto, Administrative Agent may at any time or times thereafter obtain and
maintain such policies of insurance and pay such premiums and take any other
action with respect thereto which Administrative Agent deems advisable.
Administrative Agent shall have no obligation to obtain insurance for any Loan
Party or pay any premiums therefor. By doing so, Administrative Agent shall not
be deemed to have waived any Default or Event of Default arising from any Loan
Party's failure to maintain such insurance or pay any premiums therefor. All
sums so disbursed, including attorneys' fees, court costs and other charges
related thereto, shall be payable on demand by Loan Parties to Administrative
Agent and shall be additional Obligations hereunder secured by the Collateral.
(b) Administrative Agent reserves the right at any time upon
any material change in any Loan Party's risk profile (including any change in
the business conducted by any Loan Party or any laws affecting the potential
liability of such Loan Party) to require additional forms and limits of
insurance to, in Administrative Agent's reasonable opinion, adequately protect
both Administrative Agent's and Lenders' interests in all or any portion of the
Collateral and to ensure that each Loan Party is protected by insurance in
amounts and with coverage customary for its industry. If requested by
Administrative Agent, each Loan Party shall deliver to Administrative Agent from
time to time a report of a reputable insurance broker, satisfactory to
Administrative Agent, with respect to its insurance policies.
(c) Each Loan Party shall cause (i) all general liability and
automobile insurance policies to name Administrative Agent on behalf of Secured
Parties as an additional insured, (ii) all physical damage insurance policies to
contain a lender's or mortgagee's loss payable provision acceptable to
Administrative Agent, (iii) all insurance policies to provide that no
assignment, cancellation, material modification, reduction in amount or adverse
change in coverage thereof shall be effective until at least thirty (30) days
after receipt by Administrative Agent of written notice thereof, (iv) all
insurance policies to insure the interests of Administrative Agent on behalf of
Secured Parties regardless of any breach of or violation by such Loan Party of
any warranties, declarations or conditions contained therein and (v) all
insurance policies to provide that Administrative Agent and Lenders shall have
no obligation or liability for premiums, commissions, assessments or calls in
connection with such insurance. Administrative Agent shall be under no
obligation to verify the adequacy or existence of any insurance coverage. Each
Loan Party shall furnish Administrative Agent copies of, or acceptable
certificates with respect to, all such policies prior to the date hereof, and
shall provide to Administrative Agent, at least thirty (30) days prior to each
policy expiration date, evidence of the insurance being maintained by such Loan
Party in compliance with this Section 8.7(c). Certificates for insurance
required under clause (i) above shall be in ACORD Form 25S (attached to Schedule
8.7), and all certificates shall be satisfactory in form and substance to
Administrative Agent.
(d) If any of the Collateral is partially or totally damaged
or destroyed, Borrower Representative shall give prompt notice to Administrative
Agent, and all insurance proceeds, less the costs of collection thereof, shall
be paid to or retained by Administrative Agent. Settlements, adjustments or
compromises of any claims for loss, damage or destruction to the Collateral
shall be made jointly by Borrower Representative and Administrative Agent as
long as no Event of Default has occurred and is continuing, and otherwise shall
be made solely by Administrative Agent. Each Loan Party hereby authorizes and
directs any affected insurance company to pay such proceeds directly to
Administrative Agent, and to rely on Administrative Agent's statement as to
whether an Event of Default has occurred. Loan Parties shall pay all costs of
collection of insurance proceeds payable on account of such damage or
destruction. If no Event of Default has occurred and is continuing on the date
any Network is partially or totally damaged or destroyed, Administrative Agent
shall make available to Borrower Representative the proceeds of any
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physical damage insurance actually paid to Administrative Agent in respect of
such damage or destruction of any of the Collateral (after deducting therefrom
any sums retained by Administrative Agent in reimbursement for costs of
collection) to pay the cost of restoration, and Borrower Representative shall
proceed promptly with the work of restoration of the Collateral and shall pursue
the work of restoration diligently to completion. If any Event of Default has
occurred and is continuing either on the date of such damage or destruction or
on the date such insurance proceeds are paid, or if any Event of Default shall
occur prior to completion of such work of restoration, then Administrative
Agent, at its option, may apply such insurance proceeds in payment of any of the
Obligations, in such order as set forth in Section 2.10(c). Any insurance
proceeds remaining after completion of work or restoration shall, at
Administrative Agent's election, be applied in accordance with Section 2.10(c),
or paid over to Borrower Representative. Upon completion of any restoration,
Borrower Representative shall deliver to Administrative Agent a certificate
stating that the restoration has been duly completed and accounting for the use
of any insurance proceeds in such restoration.
8.8 Payment of Taxes, Charges, Claims and Current Liabilities. Each
Loan Party shall pay or discharge:
(a) on or prior to the date on which penalties thereto accrue,
all taxes, assessments and other government charges or levies imposed upon it or
any of its properties or income (including such as may arise under Section 4062,
Section 4063 or Section 4064 of ERISA, or any similar provision of law);
(b) on or prior to the date when due, all lawful claims of
materialmen, mechanics, carriers, warehousemen and other like persons which
result in creation of a Lien upon any such property;
(c) on or prior to the date when due, all other lawful claims
which, if unpaid, might result in the creation of a Lien upon any such property
(other than Permitted Encumbrances) or which, if unpaid, might give rise to a
claim entitled to priority over general creditors of such Loan Party in a case
under Title 11 (Bankruptcy) of the United States Code, as amended, or in any
insolvency proceeding or dissolution or winding-up involving such Loan Party;
and
(d) all other current liabilities so that none is overdue more
than sixty (60) days.
Notwithstanding the foregoing, each Loan Party shall be
entitled to contest or appeal the requirements of any Law or Governmental
Authority or the payment of any tax, assessment, charge, levy, claim, asserted
liability or any judgment entered against such Loan Party (collectively, in this
Section 8.8, the "requirements"), as long as (i) such requirements are being
contested in good faith by appropriate proceedings diligently conducted; (ii)
Borrower Representative has given Administrative Agent written notice of such
requirements and its intent to contest them, with supporting reasons for such
contest, before the addition of any interest or penalties that may accrue on
such requirements; (iii) such Loan Party maintains adequate cash reserves and
makes other appropriate provisions as may be required by GAAP to provide for any
liability arising from such requirements; (iv) the contesting of, or failure to
comply with, such requirements does not in any way jeopardize such Loan Party's
ability or authority to operate all or any part of its business or the value or
continuing priority of the security interests of Administrative Agent on behalf
of Secured Parties in the Collateral; (v) the contesting of, or failure to
comply with, such requirements does not have a Material Adverse Effect, in the
reasonable determination of Requisite Lenders; and (vi) any foreclosure,
attachment, execution,
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sale or similar proceeding against such Loan Party or any of its properties in
connection with any such requirements is duly stayed by posting of a bond or
security deposit or by other action sufficient under applicable law to stay such
foreclosure, attachment, execution, sale or other proceedings.
8.9 Financial Accounting Practices. Each Loan Party shall make and keep
books, records and accounts which, in reasonable detail, accurately and fairly
reflect its transactions and dispositions of its assets and maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(a) transactions are executed in accordance with management's general or
specific authorization, (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with GAAP and (ii) to maintain
accountability for assets, (c) access to assets is permitted only in accordance
with management's general or specific authorization and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
8.10 Compliance with Laws. Each Loan Party shall comply in all respects
with all Laws applicable to such Loan Party, including all Environmental Laws;
provided, however, that such Loan Party shall not be deemed to be in violation
of this Section 8.10 as a result of any failure to comply which would not result
in any liability or exposure to Administrative Agent or Lenders or any fines,
penalties, injunctive relief or other civil or criminal liabilities which, in
the aggregate, could reasonably be expected to have a Material Adverse Effect.
8.11 Use of Proceeds. Each Loan Party shall use the proceeds of
Advances hereunder only as set forth in Section 2.19.
8.12 Government Authorizations; Regulatory Authorizations, Etc. Each
Loan Party shall at all times obtain and maintain in force all Regulatory
Authorizations and all other authorizations, permits, consents, approvals,
licenses, exemptions and other actions by, and all registrations,
qualifications, designations, declarations and other filings with, any
Governmental Authority necessary in connection with execution and delivery of
this Agreement, the Notes or any other Loan Document, consummation of the
transactions herein or therein contemplated, performance of or compliance with
the terms and conditions hereof or thereof or to ensure the legality, validity
and enforceability hereof or thereof.
8.13 Contracts and Franchises. Each Loan Party shall comply with all
agreements or instruments to which it is a party or by which it or any of its
properties (now owned or hereafter acquired) may be subject or bound and shall
maintain any and all franchises it may have or hereafter acquire; provided,
however, that such Loan Party shall not be deemed to be in violation of this
Section 8.13 as a result of any failure to comply with any agreement if such
failure would not have a Material Adverse Effect on Loan Parties taken as a
whole.
8.14 Site Leases and Consents. Each Loan Party shall maintain in force
and renew as necessary all Site Leases and shall obtain such Landlord Consents
as Administrative Agent or Requisite Lenders shall reasonably request to protect
its and their Liens and access to the Collateral. All Site Leases entered into
after the date hereof shall have a term (including automatic renewals and such
Loan Party's unilateral renewal rights) equal to or greater than the term of
this Agreement and shall require that Administrative Agent be given notice of
default and the right to elect to cure defaults and/or assume such agreement
upon such Loan Party's default thereunder or an Event of Default under this
Agreement.
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8.15 Financial Covenants. Loan Parties shall comply with the financial
covenants set forth on Schedule 8.15.
8.16 Patent, Trademark and Copyright Collateral.
(i) Borrower Representative shall notify Administrative Agent
immediately if it knows or has reason to know that any application or
registration relating to any patent, trademark or copyright (now or hereafter
existing) may become abandoned or of any adverse determination or development
(including the institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the United States
Copyright Office or any court) regarding any Loan Party's ownership of any
patent, trademark or copyright, its right to register the same, or to keep and
maintain the same.
(ii) In no event shall any Loan Party, either itself or
through any agent, employee, licensee or designee, file an application for the
registration of any patent, trademark or copyright with the United States Patent
and Trademark Office, the United States Copyright Office or any similar office
or agency without giving Administrative Agent prior written notice thereof and,
upon request of Administrative Agent, such Loan Party shall execute and deliver
any and all Patent Security Agreements, Copyright Security Agreements or
Trademark Security Agreements as Administrative Agent may request to evidence
the Lien of Administrative Agent on behalf of Secured Parties on such patent,
trademark or copyright, and the General Intangibles of such Loan Party relating
thereto or represented thereby.
(iii) Each Loan Party shall take all actions necessary or
requested by Administrative Agent to maintain and pursue each application, to
obtain the relevant registration and to maintain the registration of each of the
patents, trademarks and copyrights (now or hereafter existing), including the
filing of applications for renewal, affidavits of use, affidavits of
noncontestability and opposition and interference and cancellation proceedings,
unless the applicable Loan Party shall determine that such patent, trademark or
copyright is not material to the conduct of its business.
(iv) In the event that any of the patent, trademark or
copyright Collateral is infringed upon, or misappropriated or diluted by a third
party, Borrower Representative shall notify Administrative Agent promptly after
any Loan Party learns thereof. Each Loan Party shall, unless such Loan Party
shall reasonably determine that such patent, trademark or copyright Collateral
is in no way material to the conduct of its business or operations, promptly sue
for infringement, misappropriation or dilution and to recover any and all
damages for such infringement, misappropriation or dilution, and shall take such
other actions as Administrative Agent shall deem appropriate under the
circumstances to protect such patent, trademark or copyright Collateral.
8.17 Sites. For all Sites acquired after the date hereof by any Loan
Party at any time (except for leases of retail sales offices with terms shorter
than three years), such Loan Party shall provide to Administrative Agent, all at
such Loan Party's expense and all in form and substance reasonably satisfactory
to Administrative Agent, within twenty (20) days of such Loan Party's
acquisition thereof and before placing any Collateral thereon:
(a) Site Leases. Copies of duly executed counterparts of the
Site Lease; and
(b) Consent. Duly executed Landlord Consent executed by the
owner of such real property.
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8.18 Certain Notices. Borrower Representative shall promptly provide
Administrative Agent and Lenders with written notice and verification in form
and substance satisfactory to Requisite Lenders of each occasion that (i) a
switch is installed and (ii) a switch becomes operational in one of the Markets.
8.19 Management Team. Each Loan Party shall engage and continue to
retain a professional and experienced management staff.
8.20 Enforcement of Contracts. Each Loan Party shall exercise promptly
and diligently its material rights under each Contract, General Intangible
and/or Account (other than any right of termination). Borrower Representative
shall deliver to Administrative Agent copies of all material demands or notices
received by any Loan Party relating in any way to any Contract, General
Intangible and/or Account.
8.21 Legal Fee Reserve. Loan Parties shall maintain a legal fee reserve
adequate to cover current period unpaid litigation expense for all pending
litigation in form, amount and substance satisfactory to Administrative Agent
and Requisite Lenders and, upon request of Administrative Agent or Requisite
Lenders, will provide Administrative Agent and Lenders with a quarterly analysis
evidencing its compliance with this requirement.
8.22 Subordinated Loans. Any and all Indebtedness, loans or advances to
any Loan Party by any other Loan Party shall upon request of Administrative
Agent or Requisite Lenders be subordinated to any and all Obligations of such
Loan Party to Administrative Agent and Lenders upon terms and provisions
reasonably satisfactory to Administrative Agent and Requisite Lender, and each
such other Loan Party shall deliver to Administrative Agent and Lenders a signed
subordination agreement on terms satisfactory to Administrative Agent and
Requisite Lenders.
8.23 Liens on After-Acquired Property. With respect to any assets
acquired after the date hereof of the type defined as Collateral in this
Agreement of each Loan Party or any Subsidiary of Holdings as to which
Administrative Agent on behalf of Secured Parties does not have a perfected
first-priority Lien, such Loan Party shall promptly grant or cause to be
granted, or confirm or evidence the grant herein of, to Administrative Agent on
behalf of Secured Parties a Lien, upon the terms contained herein, on all such
property and interests, free of all other Liens except those permitted under
Section 9.2. Such Loan Party at its own expense, shall (i) prepare, execute,
acknowledge and deliver, or cause the preparation, execution, acknowledgment and
delivery of, and thereafter register, file or record, or cause to be registered,
filed or recorded, in an appropriate governmental office, any document or
instrument deemed by Administrative Agent to be necessary or desirable for the
creation, perfection, renewal and continuation of the foregoing Liens, (ii) pay,
or cause to be paid, all taxes, fees and legal expenses related to such
registration, filing or recording and (iii) deliver to Administrative Agent
resolutions of Board of Directors and opinions of counsel, in form and substance
as may be reasonably acceptable to Administrative agent.
8.24 Year 2000 Compliance. Each Loan Party shall take all actions
necessary and commit adequate resources to assure that computer-based and other
systems of Holdings and its Subsidiaries are able to process dates effectively,
including dates before, on and after January 1, 2000, without experiencing any
disruption or errors that could reasonably be expected to cause a Material
Adverse Effect. At the request of Administrative Agent or Requisite Lenders,
Loan Parties will provide Administrative Agent and Lenders with assurances and
substantiations (including but not limited to the results of internal and
external audit reports prepared in the
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ordinary course of business) reasonably acceptable to Administrative Agent and
Requisite Lenders that Holdings and its Subsidiaries are taking all reasonable
actions to assure the future conduct of its and their businesses and operations
before, on and after January 1, 2000 without experiencing a disruption or errors
that could reasonably be expected to cause a Material Adverse Effect.
8.25 Post-Closing Items. Each Loan Party shall comply with the
post-closing items set forth on Schedule 7.1 in the time permitted, if any is
indicated, and shall promptly provide Administrative Agent and Requisite Lenders
with evidence thereof in form and substance as may be reasonably acceptable to
Administrative Agent and Requisite Lenders.
8.26 Further Assurances. Each Loan Party executing this Agreement
agrees that it shall and shall cause each other Loan Party to, at such Loan
Party's expense and upon request of Administrative Agent or Requisite Lenders,
duly execute and deliver, or cause to be duly executed and delivered, to
Administrative Agent and Lenders such further instruments and do and cause to be
done such further acts as may be necessary or proper in the reasonable opinion
of Administrative Agent or Requisite Lenders to carry out more effectively the
provisions and purposes of this Agreement or any other Loan Document.
8.27 Excess Cash. Beginning on the date on which Borrower
Representative delivers a compliance certificate reflecting that Loan Parties
are utilizing Excess Cash in complying with Section 8.15 with respect to the
Fixed Charges Coverage Ratio, the Loan Parties shall maintain the amount of
Excess Cash needed to effect such compliance in reserve (a) until such time as
Borrower Representative delivers a compliance certificate reflecting compliance
with the Fixed Charges Coverage Ratio without taking into account any Excess
Cash or (b) except to the extent the Loans are prepaid pursuant to Section
2.10(a)(i), which prepayment shall be applied ratably to the remaining
installments of Facility B Loans. If the amount of Excess Cash used in
calculating the Fixed Charges Cover Ratio changes from one Fiscal Quarter to the
next Fiscal Quarter, the amount of Excess Cash maintained in reserve shall be
adjusted accordingly.
ARTICLE 9: NEGATIVE COVENANTS
Each Loan Party hereby jointly and severally agrees as to all Loan
Parties that, until the Termination Date, no Loan Party shall, without prior
written consent of Requisite Lenders, do or permit to exist any of the
following:
9.1 Indebtedness. Create, incur, assume or suffer to exist at any one
time any Indebtedness, except for Permitted Debt, or purchase, redeem, prepay,
defease or otherwise acquire for value or make any payment on account or in
respect of any principal amount of Permitted Subordinated Debt.
9.2 Restrictions on Liens and Sale of Collateral. Create or suffer to
exist any Lien on the Collateral or on any other property of any Loan Party, or
any part thereof, whether superior or subordinate to the Lien of the Loan
Documents, or assign, convey, sell or otherwise dispose of or encumber its
interest in the Collateral, or any part thereof (including execution of any
lease), or permit any such action to be taken, except for the following
permitted dispositions and encumbrances (the "Permitted Encumbrances"): (i)
Liens and encumbrances in favor of Administrative Agent on behalf of Secured
Parties; (ii) government Liens, including Liens for Taxes not yet due, or which
are being contested in good faith and by appropriate proceedings in accordance
with Section 8.8; (iii) Carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
are not overdue
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for a period of not more than thirty (30) days or which are being contested in
good faith and by appropriate proceedings in accordance with Section 8.8; (iv)
pledges or liens in connection with workers' compensation, unemployment
insurance and other social security legislation; (v) deposits to secure the
performance of bids, trade contracts (other than for borrowed money), leases,
statutory obligations, surety bonds, performance bonds and other obligations of
a like nature incurred in the ordinary course of business; (vi) easements,
rights-of-way, restrictions and other similar encumbrances that are not
substantial in amount, and which do not in any case materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the business of such Loan Party; (vii) judgments and judgment liens with respect
to which execution has been stayed within ten (10) days by appropriate judicial
proceedings and the posting of adequate security which may not be any of the
Collateral; (viii) specific liens, if any, identified on Schedule 9.2; (ix)
sales and other dispositions of equipment and inventory in the ordinary course
of business for fair value, not exceeding $400,000 per year in the aggregate;
(x) Liens to secure purchase money indebtedness and Capital Leases permitted by
clause (ii) of the definition of Permitted Debt which is secured by only the
property acquired; (xi) cash collateralization of the Letters of Credit
specified on Schedule 9.1; and (xii) certain other Liens as may be permitted
with Requisite Lenders' prior written consent. Any of the foregoing Liens shall
remain "Permitted Encumbrances" as long as they are being contested by such Loan
Party in compliance with Section 8.8. In addition, no Loan Party shall become a
party to any agreement, note, indenture or instrument, or take any other action,
which would prohibit the creation of a Lien on any of its properties or other
assets in favor of Administrative Agent on behalf of Secured Parties, as
additional collateral for the Obligations, except operating leases, Capital
Leases or Licenses which prohibit Liens upon the assets that are subject
thereto.
9.3 Limitation on Contingent Obligations. Agree to, or assume,
guarantee, endorse or otherwise in any way be or become responsible or liable
for, directly or indirectly, any Contingent Obligation except for those created
or contemplated by the Loan Documents or with respect to the obligations of
another Loan Party in the ordinary course of business.
9.4 Prohibition of Mergers, Acquisitions, Name, Office or Business
Changes, Etc.
(a) Enter into, or become the subject of, any transaction of
merger, acquisition or consolidation, except for Permitted Acquisitions, or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, lease, transfer or otherwise dispose of, in one
transaction or a series of transactions, all or any substantial part of such
Loan Party's business or assets, whether now owned or hereafter acquired,
without Requisite Lenders' prior written consent.
(b) Change its name, chief executive office, principal place
of business, corporate structure or the location of any Collateral without
giving Administrative Agent and Lenders at least thirty (30) days' advance
written notice of such change, and ensuring that any steps that Administrative
Agent or Requisite Lenders may deem necessary to continue the perfection and
priority of security interests of Administrative Agent on behalf of Secured
Parties in the Collateral shall have been taken.
(c) Change the Fiscal Year end of such Loan Party from
December 31, except with the prior written consent of Requisite Lenders, which
consent shall not be unreasonably withheld.
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(d) Amend, restate or otherwise modify, or violate any terms
of, its Organizational Documents in any material respect without the prior
written consent of Requisite Lenders, which consent will not be unreasonably
withheld.
(e) Become or agree to become a general or limited partner in
any general or limited partnership, or a member in a limited liability company
or a joint venturer in any joint venture other than a wholly-owned Subsidiary.
(f) Acquire or purchase substantially all of the stock or
ownership interests in, or substantially all of the business, assets, customers
or operations of, any other entity for more than $400,000 in one transaction or
a series of related transactions, except for Permitted Acquisitions.
(g) Enter into any new business or make any material change in
any of such Loan Party's business objectives, purposes and operations from those
contemplated in the Business Plan without the prior written consent of Requisite
Lenders.
(h) Establish or seek to establish any Network outside of the
Markets.
9.5 Limitation on Equity Payments. In the case of Holdings, make any
Equity Payment and, in the case of any other Loan Party, make any Equity Payment
to a Person other than Holdings, except with respect to Disqualified Stock
issued as consideration for a Permitted Acquisition.
9.6 Prohibition on Sale or Issuance of Stock. Issue any stock, stock
option, warrant, or any other securities other than non-convertible debt
securities, or the right to receive any such security ("equity securities") of
each Loan Party; provided, however, however, that Holdings may issue (i) equity
securities so long as the issuance of such equity securities does not directly
or indirectly cause a Change of Control and (ii) Disqualified Stock as
consideration for a Permitted Acquisition.
9.7 Limitation on Investments, Advances and Loans. Organize, create,
acquire, capitalize or own any Subsidiary having assets of $100,000 or more
except in compliance with Section 9.13 or make or commit to make any advance
(except in compliance with Section 9.13 or as permitted by Section 9.10), loan,
guarantee of any Indebtedness, extension of credit or capital contribution to,
or hold or invest in or purchase or otherwise acquire any stock, bonds, notes,
debentures or other securities of, or make any other investment in, any Person,
including any officer of a Loan Party, any Affiliate of a Loan Party or any
officer of any Affiliate of a Loan Party, except for Permitted Acquisitions,
loans to another Loan Party, travel advances in the ordinary course of business,
relocation loans to employees but not in excess of $250,000 in the aggregate
outstanding at any one time, other loans to any employees of any Loan Party but
in any case in an amount (including principal and interest outstanding) not to
exceed $250,000 in the aggregate at any given time, and Cash.
9.8 Capital Expenditures. Until substantially all the switches
contemplated by the Business Plan are operating, directly or indirectly make or
commit to make any expenditure in respect of the purchase or other acquisition
(including installment purchases or Capital Leases) of fixed or capital assets,
except for expenditures in accordance with the Business Plan and normal
replacements and maintenance (including capacity expansions and enhancements for
existing Sites) which are properly charged to current operations or expenditures
of Excess Cash Flow not required to prepay the Loans pursuant to Section
2.10(b); provided, however, that Loan Parties may make Capital Expenditures in
addition to those permitted by Section 8.15 as long as such
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Capital Expenditures (i) do not exceed $50,000,000 in each Fiscal Year and, in
the aggregate, the amount collected on previously disputed amounts payable to
any Loan Party with respect to reciprocal compensation related to internet or
enhanced service providers and related facility charges and (ii) are directly
related to its Telecommunications Business.
9.9 Limitation on Leases. Enter into any agreement, or be or become
liable under any agreement, not in existence as of the date hereof and reflected
on such Loan Party's financial statements, for the lease, hire or use of any
real or personal property in excess of $100,000 in the aggregate, including
capital or operating leases, except that such Loan Party may, in the ordinary
course of business and on terms standard in the industry, enter into leases or
agreements for office space, vehicles or office equipment and for the location
or storage of Collateral.
9.10 Transactions with Affiliates. Except as described in Schedule
5.41, enter into any transactions, including any loans or advances, any
repayment of loans or advances, or the purchase, sale or exchange of property or
the rendering of any services, with any Affiliate, or enter into, assume or
suffer to exist any employment or consulting contract with any Affiliate, or
otherwise pay any fees or expenses to, or reimburse or assure any obligation for
the reimbursement of any expenses incurred by, any Affiliate.
9.11 Extension of Accounts. Without Requisite Lenders' prior written
consent, with respect to any material Accounts, General Intangibles or Contracts
(other than with respect to disputed reciprocal compensation and related
facilities charges), (i) grant any material extension of the time of payment,
(ii) compromise, compound or settle for a material amount less than the full
amount thereof, (iii) release any person liable for the payment thereof, or (iv)
allow any credit or discount whatsoever thereon, other than trade discounts
granted in the normal course of business or discounts, compromises, compounds or
settlements that will not have a Material Adverse Effect.
9.12 Assumed Names. Transact or engage in business under any assumed
name, fictitious name, trade style or "d/b/a" except those identified on
Schedule 5.39.
9.13 Subsidiaries. Permit or cause any Loan Party to create, organize
or acquire a Subsidiary owning, or any Subsidiary of Holdings that is not
already a Borrower (or, in the case of US LEC of Pennsylvania Inc., until it
obtains all Required Consents from New Jersey and Delaware) to own, assets of
more than $100,000 unless such Subsidiary delivers to Administrative Agent and
Lenders an Additional Borrower Assumption (an "Additional Borrower Assumption"),
substantially in the form of Exhibit I, pursuant to which such Subsidiary
becomes a Borrower, and satisfies the conditions set forth therein, to the
reasonable satisfaction of Requisite Lenders.
ARTICLE 10: EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. An Event of Default shall mean the occurrence
or existence of one or more of the following events or conditions (whatever the
reason for such Event of Default and whether voluntary, involuntary or effected
by operation of Law):
(a) Payment Default. Any Borrower (i) fails to make any
payment of principal of, or interest on, or Fees owing in respect of, the Loans
or any of the other Obligations within two (2) Business Days after such amount
becomes due and payable or (ii) fails to pay or reimburse Administrative Agent
or Lenders for any expense reimbursable hereunder or under any
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other Loan Document within ten (10) Business Days following demand for such
reimbursement or payment of expenses.
(b) False Statement. If any statement, representation or
warranty made or deemed made by any Loan Party in any Loan Document or made in
any financial statement, certificate, report, exhibit or document furnished to
Administrative Agent or any Lender pursuant to any Loan Document, proves to have
been untrue, incomplete, false or misleading in any material respect as of the
time when made or deemed made (including by omission of material information
necessary to make such representation, warranty or statement not misleading).
(c) Immediate Default. Any Loan Party shall fail or neglect to
perform, keep or observe any of the provisions of Sections 8.2, 8.7, 8.11, 8.15,
8.24 and Article 9.
(d) Covenant Defaults. If any Loan Party fails or neglects to
perform, keep or observe any provision of this Agreement, and such default
continues for a period of twenty (20) calendar days after the earlier of such
Loan Party's knowledge thereof or receipt of written notice from Lender thereof,
except for violations of Section 8.8(d), which shall become an Event of Default
at the end of the sixty (60) day period stated therein and except for specific
Defaults listed elsewhere in this Section 10.1, as to which no notice or cure
period shall apply unless specified.
(e) Undischarged Judgments. If one or more judgments for the
payment of money have been entered against Borrower in an amount in excess of
$200,000 in the aggregate and such judgment or judgments have remained
undischarged and unstayed for a period of thirty (30) calendar days or, if
stayed, all of the conditions in Section 8.8 have not been satisfied.
(f) Attachments, Etc. If a writ or warrant of attachment,
garnishment, execution, distraint or similar process has been issued against any
Loan Party or any of its properties in an amount in excess of $200,000, which
has remained undischarged and unstayed for a period of thirty (30) consecutive
days or, if stayed, all of the conditions in Section 8.8 have not been
satisfied.
(g) Default Under Third Party Agreements. A default or breach
occurs under any other agreement, document or instrument to which any Loan Party
is a party which is not cured within any applicable grace period, and such
default or breach (i) involves the failure to make any payment $200,000 in the
aggregate, or (ii) causes, or permits any holder of such Indebtedness or a
trustee to cause, Indebtedness or a portion thereof in excess of $200,000 in the
aggregate to become due prior to its stated maturity or prior to its regularly
scheduled dates of payment, regardless of whether such default is waived, or
such right is exercised, by such holder or trustee.
(h) Dissolution; Discontinuance of Business, Etc. If any Loan
Party discontinues its usual business, dissolves, has its charter revoked, winds
up or liquidates itself or its business.
(i) Involuntary Bankruptcy or Receivership Proceedings. A case
or proceeding commences against any Loan Party seeking a decree or order in
respect of any Loan Party (i) under Title 11 of the United States Code, as now
constituted or hereafter amended or any other applicable federal, state or
foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for any Loan
Party or of any substantial part of any such Person's assets, or (iii) ordering
the winding-up or liquidation of
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the affairs of any Loan Party, and such case or proceeding shall remain
undismissed or unstayed for sixty (60) days or more or such court shall enter a
decree or order granting the relief sought in such case or proceeding.
(j) Voluntary Bankruptcy. Any Loan Party (i) prepares to file
or files a petition seeking relief under Title 11 of the United States Code, as
now constituted or hereafter amended, or any other applicable federal, state or
foreign bankruptcy or other similar law, (ii) fails to contest in a timely and
appropriate manner or consents to the institution of proceedings thereunder or
to the filing of any such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or
similar official) of any Loan Party or of any substantial part of any such
Person's assets, (iii) makes an assignment for the benefit of creditors, (iv)
takes any corporate action in furtherance of any of the foregoing or (v) admits
in writing its inability to, or shall be generally unable to, pay its debts as
such debts become due.
(k) Assignments for Benefit of Creditors, Etc. If any Loan
Party makes an assignment for the benefit of creditors, or admits in writing its
inability to pay its debts generally as they become due, or consents to the
appointment of a receiver, trustee or liquidator of itself or of all or any part
of its properties.
(l) Non-compliance with Governmental Requirements. If any Loan
Party fails to comply with any requirement of any Governmental Authority within
twenty (20) calendar days after notice in writing of such requirement shall have
been given to such Loan Party by such Governmental Authority or such longer
period of time permitted by such Governmental Authority and is not being
contested by such Loan Party in compliance with Section 8.8.
(m) Regulatory Authorizations. If any Regulatory Authorization
in connection with this Agreement or any other Loan Document or any such
Regulatory Authorization now or hereafter necessary or advisable to make this
Agreement or any other Loan Documents legal, valid, enforceable and admissible
in evidence or to permit each Loan Party to conduct its business is not obtained
or has ceased to be in full force and effect or has been modified or amended or
has been held to be illegal or invalid or is revoked or terminated, and is not
being contested by such Loan Party in compliance with Section 8.8, and Requisite
Lenders have reasonably determined in good faith (which determination shall be
conclusive) that such event or occurrence may have a Material Adverse Effect.
(n) Damage or Destruction. If the proceeds of any physical
damage insurance actually paid in respect of the partial or total damage or
destruction of any material amount of Equipment are insufficient to cover the
cost of the restoration thereof or if Administrative Agent determines that such
damage or destruction is so extensive that repair or restoration cannot be
expected within a time period short enough to prevent a Material Adverse Effect.
(o) Landlord Consents. If Loan Party fails to provide the
Landlord Consents required hereunder and Requisite Lenders determine in their
sole discretion that such failure results in a material impairment of Lenders'
security for the Loans.
(p) ERISA Defaults. If, with respect to any Plan, (i) there
has occurred a Reportable Event being considered by the PBGC which may
reasonably result in any material liability to the PBGC with respect to any
Plan, (ii) a Plan has been terminated, (iii) a trustee has been appointed by a
United States District Court to administer a Plan, (iv) a PBGC or any other
person has instituted proceedings to terminate a Plan or to appoint a trustee to
administer any
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such Plan, (v) any Loan Party or any Affiliate has withdrawn, completely or
partially, from any Plan, (vi) any Loan Party or any Affiliate has incurred
secondary liability for withdrawal liability payments under any Plan or (vii) a
Plan has failed to meet the minimum funding standards established under the Code
or ERISA.
(q) Defaults Under Other Loan Documents. If any default,
misrepresentation or breach should occur under any Pledge Agreement, Security
Document, Guaranty or other Loan Document and is not cured or waived within the
time permitted therein, or any such Loan Documents should cease to be in full
force and effect, or any Loan Party thereto should assert any unenforceability
of, or deny liability on, or admit inability to perform under, any such Loan
Document.
(r) Security Interest. Any material provision of any Loan
Document shall for any reason cease to be valid, binding and enforceable in
accordance with its terms (or any Loan Party shall challenge the enforceability
of any Loan Document or shall assert in writing, or engage in any action or
inaction based on any such assertion, that any provision of any of the Loan
Documents has ceased to be or otherwise is not valid, binding and enforceable in
accordance with its terms), or any security interest created under any Loan
Document shall cease to be a valid and perfected first priority security
interest or Lien (except as otherwise permitted herein or therein) in any of the
Collateral purported to be covered thereby.
(s) Change of Control, Etc. Any Change of Control or Loss of
Key Management occurs.
10.2 Remedies.
(a) If any Event of Default shall have occurred and be
continuing or if a Default shall have occurred and be continuing and Requisite
Lenders shall have determined not to make any Advances or incur any Letter of
Credit Obligations so long as that specific Default is continuing,
Administrative Agent shall (at the written request of the Requisite Lenders),
without notice, suspend the Commitments with respect to further Advances and/or
the incurrence of further Letter of Credit Obligations, whereupon any further
Advances and Letter of Credit Obligations shall be made or extended (in the sole
discretion of the Requisite Lenders) so long as such Default or Event of Default
is continuing. If any Event of Default shall have occurred and be continuing,
Administrative Agent shall (at the written request of Requisite Lenders),
without notice except as otherwise expressly provided herein, increase the rate
of interest applicable to the Loans and the Letter of Credit Fees to the Default
Rate.
(b) If any Event of Default shall have occurred and be
continuing, Administrative Agent shall (at the written request of the Requisite
Lenders), upon notice to Borrower's Representative, (i) terminate the
Commitments with respect to further Advances or the incurrence of further Letter
of Credit Obligations; (ii) declare all or any portion of the Obligations,
including all or any portion of any Loan to be forthwith due and payable, and
require that the Letter of Credit Obligations be cash collateralized as provided
in Annex I, all without presentment, demand, protest or further notice of any
kind, all of which are expressly waived by Borrowers and each other Loan Party;
and (iii) exercise any rights and remedies provided to Administrative Agent on
behalf of Secured Parties under the Loan Documents and/or at law or equity,
including all remedies provided under the Code; provided, however, that upon the
occurrence of an Event of Default specified in Sections 10.1(i), (j) or (k), the
Commitments shall be immediately terminated and all of the Obligations,
including the Loans, shall become immediately due and payable without
declaration, notice or demand by any Person.
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10.3 Waivers by Loan Parties. Except as otherwise provided for in this
Agreement or by applicable law, each Loan Party waives (including for purposes
of Article 11): (a) presentment, demand and protest and notice of presentment,
dishonor, notice of intent to accelerate, notice of acceleration, protest,
default, nonpayment, maturity, release, compromise, settlement, extension or
renewal of any or all commercial paper, accounts, contract rights, documents,
instruments, chattel paper and guaranties at any time held by Administrative
Agent on behalf of Secured Parties on which any Loan Party may in any way be
liable, and hereby ratifies and confirms whatever Administrative Agent on behalf
of Secured Parties may do in this regard, (b) all rights to notice and a hearing
prior to Administrative Agent's taking possession or control of, or to
Administrative Agent's replevy, attachment or levy upon, the Collateral or any
bond or security which might be required by any court prior to allowing
Administrative Agent on behalf of Secured Parties to exercise any of its
remedies, and (c) the benefit of all valuation, appraisal, marshaling and
exemption laws. If any notification of intended disposition of any of the
Collateral is required by law, such notification shall be deemed reasonably and
properly given if given in accordance with Section 12.5 at least ten (10) days
before such disposition.
10.4 Exercise of Rights. Subject to any requirements for FCC, PUC or
other governmental approval upon the occurrence of any Event of Default, the
rights, powers and privileges provided in this Section 10.4 and all other
remedies available to Administrative Agent and Lenders under this Agreement or
by statute or by rule of law may be exercised by Administrative Agent or any
Lender at any time from time to time whether or not the Obligations shall be due
and payable, and whether or not Administrative Agent or any Lender shall have
instituted any foreclosure or other action for the enforcement of this Agreement
or any other Loan Document. No failure to exercise, nor any delay in exercising
on the part of Administrative Agent or any Lender, any right, remedy, power or
privilege hereunder or under any of the other Loan Documents shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or future exercise thereof
or the exercise of any other right, remedy, power or privilege.
10.5 Rights of Secured Party. In addition to all other rights and
remedies granted to it under this Agreement, the other Loan Documents and under
any other instrument or agreement securing, evidencing or relating to any of the
Obligations, if any Event of Default shall have occurred and be continuing,
Administrative Agent may exercise all rights and remedies of a secured party.
10.6 Additional Remedies. Remedies of Administrative Agent and Lenders
upon the occurrence and during the continuance of an Event of Default shall
include, in addition to, and not in lieu of, such remedies as are available at
law or in equity or provided for in any of the Loan Documents, the following:
(a) Foreclosure; Receivership. Administrative Agent shall be
entitled to file one or more suits at law or in equity to collect the
Obligations and/or to foreclose on the Liens on and security interests created
by this Agreement or any other Loan Document. Administrative Agent may apply or
require any Loan Party to apply for any necessary transfers, assignments,
orders, consents or licenses in connection with the operation or abandonment of
any Network or any part thereof, and shall also be entitled as a matter of right
and without notice and without requiring bond (notice and bond being hereby
waived), without regard to the solvency or insolvency of any Loan Party at the
time of application and without regard to the value of the Collateral at that
time, to have a receiver appointed by a court of competent jurisdiction in order
to manage, protect and preserve the Collateral or any part thereof and to
continue the operation of the business of any Loan Party, and to collect all
revenues and profits thereof and apply the same to the payment of
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all expenses and other charges of such receivership until the sale or other
final disposition of the Collateral. Each Loan Party hereby consents to the
appointment of such receiver.
(b) Collection of Accounts, Etc. At any time after the
occurrence and during the continuance of an Event of Default notify account
debtors that the Accounts have been assigned to Administrative Agent on behalf
of Secured Parties and that payments shall be made directly to Administrative
Agent on behalf of Secured Parties. Upon the request of Requisite Lenders at any
time after the occurrence and during the continuance of an Event of Default,
Borrowers shall so notify such account debtors. Upon the occurrence of an Event
of Default, Administrative Agent on behalf of Secured Parties shall be entitled,
but not obligated, to collect, compromise, settle and otherwise act with respect
to any Accounts, Contracts or General Intangibles, and shall be authorized to
(i) endorse checks and other instruments, (ii) communicate directly with any
Loan Party's customers or other obligors to collect payments and/or (iii) bring
actions to enforce such collection, and otherwise take any actions necessary to
collect and recover any amounts owing to such Loan Party. Any amounts so
received by Administrative Agent on behalf of Secured Parties shall be held for
the account of Borrowers and may be applied to the Obligations at Administrative
Agent's option, at the direction of Requisite Lenders, but shall not be deemed
to be payment of the Obligations until so applied. Borrower Representative
shall, at Requisite Lenders' request, deliver to Administrative Agent copies of
all original and other documents evidencing or relating to the Accounts,
Contracts or General Intangibles, including without limitation all original
orders, sublease contracts, invoices, shipping receipts, computer records and
databases.
(c) Segregation of Payments. Upon Administrative Agent's
request, at the direction of Requisite Lenders, following an Event of Default,
Borrowers shall immediately deliver to Administrative Agent on behalf of Lenders
all Proceeds received by any Loan Party, in the form received except for
Borrower's endorsement if required. Alternatively, Administrative Agent may, at
the direction of Requisite Lenders, require Borrowers, at the direction of
Requisite Lenders, to immediately deliver, or may require the delivery of, such
Proceeds to a special bank account or post office box from which only
Administrative Agent on behalf of Secured Parties can withdraw them. In either
case, all such Proceeds and any payments received by any Loan Party under or in
connection with any of the Collateral received by such Loan Party shall be held
by Borrowers in trust for Administrative Agent on behalf of Secured Parties and
shall be segregated from other funds of Borrowers. Any and all such payments so
received by Administrative Agent on behalf of Secured Parties (whether from
Borrowers or otherwise) may, in the sole discretion of Administrative Agent, be
held by Administrative Agent on behalf of Secured Parties as collateral security
for, and/or then or at any time thereafter applied in whole or in part by
Administrative Agent, against all or any part of the Obligations of Loan Parties
in such order as Administrative Agent may determine in its sole discretion. Any
balance of such payments held by Administrative Agent and remaining after
payment in full of all the Obligations shall be paid over to Borrowers or to any
Person lawfully entitled to receive the same.
(d) Right to Cure. If any Loan Party fails in any material
respect to perform or comply with any of its agreements contained herein or in
any of the other Loan Documents or any Contracts, Administrative Agent may take
whatever actions it may deem appropriate to perform or comply or otherwise cause
performance or compliance with such agreement, all at the risk, cost and expense
of Borrowers.
(e) Set Off. If the unpaid principal amount of the Loans,
interest accrued thereon or any other amount owing by Loan Parties hereunder or
under the Loans shall have become due and payable (by acceleration or
otherwise), each Lender and each Affiliate of a
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Lender shall have the right, in addition to all other rights and remedies
available to it, without notice to Loan Parties, to set off against and to
appropriate and apply to such due and payable amounts any debt owing to, and any
other funds held in any manner for the account of, any of the Loan Parties by
such Lender or Affiliate. Such right shall exist whether or not such Lender or
Affiliate shall have given notice or made any demand hereunder or under the
Other Loan Documents, whether or not such debt owing to or funds held for the
account of Loan Parties is or are matured or unmatured, and regardless of the
existence or adequacy of any collateral, guaranty or any other security, right
or remedy available to Administrative Agent and Lenders. Each Loan Party hereby
consents to and confirms the foregoing arrangements and confirms such Lender's
and Affiliate's rights of set off.
10.7 Application of Proceeds. Any proceeds of any of the Collateral,
received by Administrative Agent through sale or disposition of the Collateral
or otherwise, shall be applied by Administrative Agent toward the payment of the
Obligations, including expenses in connection with the Collateral (including
reasonable fees and legal expenses) as specified in Section 2.13(a).
10.8 Discontinuance of Proceedings. If Administrative Agent or any
Lender should proceed to enforce any right or remedy under this Agreement or any
other Loan Document, and then discontinue or abandon such proceeding for any
reason, all rights, powers and remedies of Administrative Agent and Lenders
hereunder shall continue as if no such proceeding had been taken.
10.9 Power of Attorney. For the purpose of carrying out the provisions
and exercising the rights, powers and privileges granted by the Loan Documents,
including this Article 10, each Loan Party hereby irrevocably constitutes and
appoints Administrative Agent for the benefit of Administrative Agent and
Lenders its true and lawful attorney-in-fact to execute, acknowledge and deliver
any instruments and do and perform any acts such as are referred to in the Loan
Documents, including this Article 10, in the name and on behalf of such Loan
Party, from time to time in Administrative Agent's reasonable discretion after
the occurrence and during the continuance of an Event of Default, in accordance
with the Loan Documents and any statute or rule of law. This power of attorney
is a power coupled with an interest and cannot be revoked. Each Loan Party
hereby ratifies all that said attorney-in-fact shall lawfully do or cause to be
done by virtue and in accordance with the terms hereof.
Without limiting the generality of the foregoing, Administrative Agent
may, after the occurrence and during the continuance of an Event of Default, do
the following without notice to or assent by any Loan Party to accomplish the
purposes of this Agreement:
(a) upon failure of such Loan Party to timely pay or discharge
taxes or Liens levied or placed on or threatened against the Collateral, effect
any repairs or any insurance called for by the terms of this Agreement or any
other Loan Document, and pay all or any part of the premiums therefor and the
costs thereof;
(b) file any application, petition or other request with the
FCC, PUC or any other Governmental Authority for the purpose of obtaining any
consent or approval from or satisfying any filing or notice requirement of any
Governmental Authority in order to effect a sale or transfer of any or all the
Collateral, or a change in control of, or to permit Administrative Agent to
complete or operate, or both, any Network; and
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(c) (i) direct any party liable for any payment under any of
the Contracts or Accounts to make payment of any and all monies due and to
become due thereunder directly to Administrative Agent or as Administrative
Agent shall direct; (ii) in the name of such Loan Party or its own name or
otherwise, take possession of and endorse and collect any checks, drafts, notes,
acceptances, or other instruments for the payment of monies due under, or
otherwise receive payment of and receipt for any and all monies, claims and
other amounts due and to become due at any time in respect of or arising out of
any Collateral; (iii) sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with Accounts and other
documents relating to the Collateral; (iv) commence and prosecute any suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction or before any arbitrator to collect all or any of the Collateral
and to enforce any other right in respect of any Collateral; (v) defend any
suit, action or proceeding brought against such Loan Party with respect to any
Collateral; (vi) settle, compromise or adjust any suit, action or proceeding
described above upon commercially reasonable terms under the circumstances and,
in connection therewith, give such discharges or releases as Administrative
Agent may reasonably deem appropriate; (vii) cure any default under any Contract
and/or modify and/or assume any such Contract; and (viii) generally sell, use,
operate, transfer, pledge, make any agreement with respect to or otherwise deal
with any of the Collateral as fully and completely as though Administrative
Agent were the absolute owner thereof for all purposes, and, at Administrative
Agent's option and Loan Parties' expense, at any time or from time to time after
the occurrence and during the continuance of an Event of Default, all other acts
and things that Administrative Agent reasonably deems necessary to perfect,
preserve or realize upon the Collateral and Administrative Agent's security
interest therein on behalf of Secured Parties, in order to effect the intent of
this Agreement and the other Loan Documents all as fully and effectively as such
Loan Party might do.
10.10 Regulatory Matters.
(a) Loan Parties' Cooperation; Consents. Notwithstanding any
provision to the contrary contained herein, Administrative Agent and Lenders
will not exercise any right or remedy under this Agreement that requires prior
FCC or PUC approval without first obtaining such approval. If counsel to
Administrative Agent reasonably determines that the consent of the FCC or PUC is
required in connection with any of the actions that may be taken by
Administrative Agent in the exercise of its rights hereunder or under any of the
other Loan Documents, then Loan Parties, at their sole cost and expense, agree
to use their best efforts to secure such consent and to cooperate with
Administrative Agent in any action commenced by Administrative Agent to secure
such consent. Upon the occurrence and during the continuation of an Event of
Default the applicable Borrower shall promptly execute and/or cause the
execution of all applications, certificates, instruments and other documents and
papers that may be required in order to obtain any necessary governmental
consent, approval or authorization, and if such Borrower fails or refuses to
execute such documents, the clerk of the court with jurisdiction may execute
such documents on behalf of such Borrower.
(b) Loan Parties' Cooperation; Transfers. In connection with
the enforcement by Administrative Agent of any remedies available to it as a
result of any Event of Default and subject to the provisions of Section
10.10(a), Loan Parties shall join and cooperate fully with Administrative Agent,
and with any receiver or trustee referred to herein and with the successful
bidder or bidders at any foreclosure sale when any of these entities file an
application with the FCC or PUC, or with any necessary federal, state and local
governmental authorities, requesting their prior approval of (i) the operation
or abandonment of all or any portion of the Collateral and (ii) the assignment
or transfer to such entity of all licenses, authorizations and permits issued to
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any Loan Party by the FCC, PUC or any such other authorities with respect to
Loan Parties' business and the operation thereof. Loan Parties' cooperation
shall include, without limitation, the furnishing of any information that may be
required in connection with such applications.
(c) Conveyance of Regulatory Authorizations. Subject to any
necessary FCC or PUC approval, each Loan Party agrees to assign, transfer and
convey the Regulatory Authorizations to Administrative Agent (or its designee)
upon Administrative Agent's request following the occurrence of an Event of
Default, to the extent that any such assignment or transfer may be deemed
necessary to allow Administrative Agent to exercise its remedies hereunder or
under the Loan Documents.
(d) Specific Performance. Each Loan Party recognizes that its
Regulatory Authorizations are unique assets that may have to be transferred in
order for Administrative Agent to adequately realize the value of its security
interests. Each Loan Party further recognizes that a violation of this provision
would result in irreparable harm to Administrative Agent and Lenders for which
monetary damages are not readily ascertainable. Therefore, in addition to any
other remedy that may be available to Administrative Agent and Lenders at law or
in equity, Administrative Agent shall have the remedy of specific performance to
enforce the provisions of this section.
ARTICLE 11: JOINT AND SEVERAL OBLIGATIONS; GUARANTY
11.1 Guaranty. Each Borrower hereby agrees that such Borrower is
jointly and severally liable for, and hereby absolutely and unconditionally
guarantees to Administrative Agent and Lenders and their respective successors
and assigns, the full and prompt payment (whether at stated maturity, by
acceleration or otherwise) and performance of, all Obligations owed or hereafter
owing to Administrative Agent and Lenders by each other Borrower; provided,
however, that US LEC of Georgia Inc. shall not be liable for Obligations in
excess of $75,000,000. In addition, Holdings hereby absolutely and
unconditionally guarantees to Administrative Agent and Lenders and their
respective successors and assigns, the full and prompt payment (whether at
stated maturity, by acceleration or otherwise) and performance of all
Obligations owed or hereafter owing to Administrative Agent and Lenders by each
Borrower. Each Loan Party agrees that its guaranty obligation hereunder is a
continuing guaranty of payment and performance and not of collection, that its
obligations under this Article 11 shall not be discharged until payment and
performance, in full, of the Obligations has occurred, and that its obligations
under this Article 11 shall be absolute and unconditional, irrespective of, and
unaffected by:
(a) the genuineness, validity, regularity, enforceability or
any future amendment of, or change in, this Agreement, any other Loan Document
or any other agreement, document or instrument to which any Loan Party is or may
become a party;
(b) the absence of any action to enforce this Agreement
(including this Article 11) or any other Loan Document or the waiver or consent
by Administrative Agent and Lenders with respect to any of the provisions
thereof;
(c) the existence, value or condition of, or failure to
perfect its Lien against, any security for the Obligations or any action, or the
absence of any action, by Administrative Agent and Lenders in respect thereof
(including the release of any such security);
(d) the insolvency of any Loan Party; or
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(e) any other action or circumstances which might otherwise
constitute a legal or equitable discharge or defense of a surety or guarantor.
Each Loan Party shall be regarded, and shall be in the same position,
as principal debtor with respect to the Obligations guaranteed hereunder.
11.2 Waivers by Loan Parties. Each Loan Party expressly waives all
rights it may have now or in the future under any statute, or at common law, or
at law or in equity, or otherwise, to compel Administrative Agent or Lenders to
marshall assets or to proceed in respect of the Obligations guaranteed hereunder
against any other Loan Party, any other party or against any security for the
payment and performance of the Obligations before proceeding against, or as a
condition to proceeding against, such Loan Party. It is agreed among each Loan
Party, Administrative Agent and Lenders that the foregoing waivers are of the
essence of the transaction contemplated by this Agreement and the other Loan
Documents and that, but for the provisions of this Article 11 and such waivers,
Administrative Agent and Lenders would decline to enter into this Agreement.
Without limiting the effect of the foregoing, if and to the extent that North
Carolina law is applicable, the Loan Parties hereby expressly waive the
provisions of N.C. Gen. Stat. ss.ss. 26-7 through 26-9, inclusive.
11.3 Benefit of Guaranty. Each Loan Party agrees that the provisions of
this Article 11 are for the benefit of Administrative Agent and Lenders and
their respective successors, transferees, endorsees and assigns, and nothing
herein contained shall impair, as between any Loan Party and Administrative
Agent or Lenders, the obligations any Loan Party has under the Loan Documents.
11.4 Subordination of Subrogation, Etc. Notwithstanding anything to the
contrary in this Agreement or in any other Loan Document, and except as set
forth in Section 11.7, each Loan Party hereby expressly and irrevocably
subordinates to payment of the Obligations any and all rights at law or in
equity to subrogation, reimbursement, exoneration, contribution, indemnification
or set off and any and all defenses available to a surety, guarantor or
accommodation co-obligor until the Obligations are indefeasibly paid in full in
cash. Each Loan Party acknowledges and agrees that this subordination is
intended to benefit Administrative Agent and Lenders and shall not limit or
otherwise affect such Loan Party's liability hereunder or the enforceability of
this Article 11 and that Administrative Agent, Lenders and their respective
successors and assigns are intended third-party beneficiaries of the waivers and
agreements set forth in this Section 11.4.
11.5 Election of Remedies. If Administrative Agent or any Lender may,
under applicable law, proceed to realize its benefits under any of the Loan
Documents giving Administrative Agent or such Lender a Lien upon any Collateral,
whether owned by any Loan Party or by any other Person, either by judicial
foreclosure or by non-judicial sale or enforcement, Administrative Agent or any
Lender may, at its sole option, determine which of its remedies or rights it may
pursue without affecting any of its rights and remedies under this Article 11.
If, in the exercise of any of its rights and remedies, Administrative Agent or
any Lender shall forfeit any of its rights or remedies, including its right to
enter a deficiency judgment against any Loan Party or any other Person, whether
because of any applicable laws pertaining to "election of remedies" or the like,
each Loan Party hereby consents to such action by Administrative Agent or such
Lender and waives any claim based upon such action, even if such action by
Administrative Agent or such Lender shall result in a full or partial loss of
any rights of subrogation which each Loan Party might otherwise have had but for
such action by Administrative Agent or such Lender. Any election of remedies
which results in the denial or impairment of the right of
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Administrative Agent or any Lender to seek a deficiency judgment against any
Loan Party shall not impair any other Loan Party's obligation to pay the full
amount of the Obligations. In the event Administrative Agent or any Lender shall
bid at any foreclosure or trustee's sale or at any private sale permitted by law
or the Loan Documents, Administrative Agent or such Lender may bid all or less
than the amount of the Obligations and the amount of such bid need not be paid
by Administrative Agent or such Lender but, at the election of Administrative
Agent or such Lender, shall be credited against the Obligations. The amount of
the successful bid at any such sale, whether Administrative Agent, Lender or any
other party is the successful bidder, shall be conclusively deemed to be the
fair market value of the Collateral and the difference between such bid amount
and the remaining balance of the Obligations shall be conclusively deemed to be
the amount of the Obligations guaranteed under this Article 11, notwithstanding
that any present or future law or court decision or ruling may have the effect
of reducing the amount of any deficiency claim to which Administrative Agent or
any Lender might otherwise be entitled but for such bidding at any such sale.
11.6 Limitation. Notwithstanding any provision herein contained to the
contrary, each Borrower's liability under this Article 11 (which liability is in
any event in addition to amounts for which such Borrower is primarily liable
under Article 2) shall be limited to an amount not to exceed as of any date of
determination the greater of:
(a) the net amount of all Loans advanced to any other Borrower
under this Agreement and then re-loaned or otherwise transferred to, or for the
benefit of, such Borrower; and
(b) the amount which could be claimed by Administrative Agent
and Lenders from such Borrower under this Article 11 without rendering such
claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy
Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform
Fraudulent Conveyance Act or similar statute or common law after taking into
account, among other things, such Borrower's right of contribution and
indemnification from each other Borrower under Section 11.7.
11.7 Contribution with Respect to Guaranty Obligations.
(a) To the extent that any Borrower shall make a payment under
this Article 11 of all or any of the Obligations (other than Loans made to that
Borrower for which it is primarily liable) (a "Guarantor Payment") which, taking
into account all other Guarantor Payments then previously or concurrently made
by any other Borrower, exceeds the amount which such Borrower would otherwise
have paid if each Borrower had paid the aggregate Obligations satisfied by such
Guarantor Payment in the same proportion that such Borrower's "Allocable Amount"
(as defined below) (as determined immediately prior to such Guarantor Payment)
bore to the aggregate Allocable Amounts of each of Borrowers as determined
immediately prior to the making of such Guarantor Payment, then, following
indefeasible payment in full in cash of the Obligations and termination of the
Commitments, such Borrower shall be entitled to receive contribution and
indemnification payments from, and be reimbursed by, each other Borrower for the
amount of such excess, pro rata based upon their respective Allocable Amounts in
effect immediately prior to such Guarantor Payment.
(b) As of any date of determination, the "Allocable Amount" of
any Borrower shall be equal to the maximum amount of the claim which could then
be recovered from such Borrower under this Article 11 without rendering such
claim voidable or avoidable under Section
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548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform
Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or
common law.
(c) This Section 11.7 is intended only to define the relative
rights of Borrowers and nothing set forth in this Section 11.7 is intended to or
shall impair the obligations of Borrowers, jointly and severally, to pay any
amounts as and when the same shall become due and payable in accordance with the
terms of this Agreement, including Section 11.1. Nothing contained in this
Section 11.7 shall limit the liability of any Borrower to pay the Loans made
directly or indirectly to that Borrower and accrued interest, fees and expenses
with respect thereto for which such Borrower shall be primarily liable.
(d) The parties hereto acknowledge that the rights of
contribution and indemnification hereunder shall constitute assets of Borrowers
to which such contribution and indemnification are owing.
(e) The rights of the indemnifying Borrowers against other
Loan Parties under this Section 11.7 shall be exercisable upon the full and
indefeasible payment of the Obligations and the termination of the Commitments.
11.8 Liability Cumulative. The liability of Borrowers under this
Article 11 is in addition to and shall be cumulative with all liabilities of
each Borrower to Administrative Agent and Lenders under this Agreement and the
other Loan Documents to which such Borrower is a party or in respect of any
Obligations or obligation of the other Borrowers without any limitation as to
amount, unless the instrument or agreement evidencing or creating such other
liability specifically provides to the contrary.
ARTICLE 12: GENERAL CONDITIONS/MISCELLANEOUS
The following conditions shall be applicable throughout the term of
this Agreement:
12.1 Amendments, Modifications and Waivers.
(a) No amendment, modification or waiver of any provision of
this Agreement nor consent to any departure by any Loan Party therefrom shall in
any event be effective unless the same shall be in writing and signed by the
Requisite Lenders, and then any such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given; provided,
however, that no amendment, modification, waiver or consent shall, unless in
writing and signed by each Lender affected thereby, do any of the following: (i)
waive any of the conditions specified in Article 6, except as otherwise provided
therein; (ii) increase the Commitments or subject any Lender to any additional
obligations; (iii) reduce the principal of, or interest on, the Loans or any
fees or other amounts payable hereunder; (iv) amend any of the provisions in
Article 2; (v) release any material amount of Collateral except as shall
otherwise be provided herein; (vi) release any Guarantor having a material
amount of assets; (vii) amend the definition of Requisite Lenders; or (viii)
amend this Section 12.1; and provided, further, that no amendment, modification,
waiver or consent shall, unless in writing and signed by Administrative Agent in
addition to Lenders required above to take such action, affect the rights or
duties of Administrative Agent under this Agreement or the other Loan Documents.
No failure on the part of any Lender or Administrative Agent to exercise, and no
delay in exercising, any right hereunder or under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right preclude any other or further exercise thereof or the exercise of any
other right.
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(b) Administrative Agent, Lenders and Loan Parties recognize
that certain financial covenants set forth in Section 8.15 may need to be
adjusted to permit Loan Parties to remain in compliance therewith upon the
issuance of the full amount of Permitted Subordinated Debt and, accordingly,
upon receipt of notice from Holdings of any proposed issuance of Permitted
Subordinated Debt, agree to negotiate in good faith to adjust the financial
covenants set forth in Section 8.15 to reflect such issuance.
12.2 Advances Not Implied Waivers. No waiver of the requirements
contained in any Loan Document shall be effective unless in writing duly signed
by the required number of Lenders provided for herein. No Advance hereunder
shall constitute a waiver of any of the conditions of Lenders' obligation to
make further Advances. Any Advance made by any Lender and any sums expended by
any Lender pursuant to the Loan Documents shall be deemed to have been made
pursuant to this Agreement, notwithstanding the existence of an uncured Default
or Event of Default. No Advance at a time when an Event of Default exists shall
constitute a waiver of any right or remedy by Administrative Agent or any Lender
existing by reason of such Event of Default, including the right to accelerate
the maturity of the Indebtedness evidenced by the Loan Documents or to foreclose
the Lien on the Collateral or to refuse to make further advances hereunder.
12.3 Business Day. Except as otherwise provided herein, whenever any
payment or action to be made or taken hereunder or under any other Loan Document
shall be stated to be due on a day which is not a Business Day, such payment or
action shall be made or taken on the next Business Day and such extension of
time shall be included in computing interest or fees, if any, in connection with
such payment or action.
12.4 Records. From time to time Administrative Agent may send Borrower
Representative statements of the unpaid principal amount of the Loans, the
unpaid interest accrued thereon, the interest rate or rates applicable to such
unpaid principal amount, the duration of such applicability, and the amount
remaining available on any Commitment, and each statement shall be deemed
correct and conclusively binding on Borrowers (absent manifest error) unless
Borrower Representative notifies Administrative Agent of an error in the
statement in writing within thirty (30) days of the date on which any such
statement is provided to Borrower Representative.
12.5 Notices. All notices, requests, demands, directions and other
communications (collectively, "notices") required under the provisions of this
Agreement or any other Loan Document shall be in writing (including
communication by facsimile transmission) unless otherwise expressly permitted
hereunder and shall be sent by hand, by registered or certified mail (return
receipt requested), by overnight courier service (maintaining records of
receipt) or by facsimile transmission with confirmation of receipt, in all cases
with charges prepaid, and any such properly given notice shall be effective upon
the earliest of (i) receipt, (ii) when delivered by hand, (iii) the third
Business Day after being mailed, (iv) the following Business Day if sent by
overnight courier service or (v) upon transmission when sent by facsimile. All
notices shall be addressed as follows:
If to any Loan Party, to the Notice Address set forth on Schedule 1,
with copies, if any, as set forth on Schedule 1.
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<PAGE>
If to Administrative Agent:
General Electric Capital Corporation
10 Riverview Drive
Danbury, Connecticut 06810
Attention: TFS Portfolio Manager
Telecopy: (203) 749-4531
With a copy to: General Electric Capital Corporation
501 Corporate Center Drive
Suite 600
Franklin, Tennessee 37067
Attention: Corporate Counsel
Telecopy: (615) 771-6187
If to any Lender, to the Notice Address set forth on Annex II or in the
Assignment Agreement by which it became a Lender.
All notices shall be sent to the applicable party at the address stated
above or in accordance with the last unrevoked written direction from such party
to the other party hereto, given in accordance with the terms hereof. The giving
of any notice required hereunder may be waived in writing by the party entitled
to receive such notice.
12.6 FCC and PUC Approval. The exercise of any rights or remedies
hereunder or under any other Loan Document by Administrative Agent or any Lender
that may require FCC or PUC approval shall be subject to obtaining such
approval. Pending the receipt of any PUC or FCC approval, no Loan Party shall
delay, hinder, interfere with or obstruct the exercise of Administrative Agent's
or Lenders' rights or remedies hereunder or the obtaining of such approvals.
12.7 Lenders Sole Beneficiary. All conditions of the obligation of
Lenders to make any Advances hereunder are imposed solely and exclusively for
the benefit of Lenders and their respective assigns; no other Person shall have
standing to require satisfaction of such conditions in accordance with their
terms or be entitled to assume that any Lender will refuse to make any Advances
in the absence of strict compliance with any or all such conditions; and no
other Person shall under any circumstances be deemed to be a beneficiary of such
conditions, any or all of which may be freely waived in whole or in part by
Lenders at any time if, in their sole discretion, Lenders deem it advisable to
do so. Each Lender's sole obligation hereunder is to make the Advances if and to
the extent required by this Agreement or any other Loan Document.
12.8 Lender's Review of Information. Each Loan Party acknowledges and
agrees that any review or analysis by Administrative Agent or any Lender of
financial information, operating information, marketing data or other
information provided to Administrative Agent or such Lender by or on behalf of
such Loan Party at any time is and shall be conducted solely for Administrative
Agent's and such Lender's benefit and internal use and that neither
Administrative Agent nor any Lender is under any duty or obligation to make the
results of such review or analysis available to any Loan Party. No Loan Party is
relying, and will not rely, on Administrative Agent or any Lender for financial
or business advice.
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<PAGE>
12.9 No Joint Venture. Nothing in this Agreement or any other Loan
Document shall be deemed to constitute any kind of partnership, joint venture or
fiduciary relationship between Administrative Agent, any Lender or any Loan
Party.
12.10 Severability. The provisions of this Agreement are intended to be
severable. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement or any other Loan Document shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
12.11 Rights Cumulative. All rights, powers and remedies herein given
to Administrative Agent and Lenders are cumulative and not alternative and are
in addition to all statutes or rules of law.
12.12 Duration; Survival. All representations and warranties of any
Loan Party contained herein or made in connection herewith shall survive the
making of and shall not be waived by the execution and delivery of this
Agreement and the other Loan Documents, any investigation by Administrative
Agent or any Lender, or the making of any Advances hereunder. All covenants and
agreements of any Loan Party contained herein shall continue in full force and
effect from and after the date hereof so long as it may borrow hereunder and
until payment in full of the Loans, interest thereon, all fees and all other
Obligations of Borrowers. Without limitation, it is understood that all
obligations of Loan Parties to make payments to or indemnify Lenders shall
survive the payment in full of the Loans and of all other Obligations.
12.13 Governing Law. This Agreement, the Notes and each of the other
Loan Documents shall be governed by and construed and enforced in accordance
with the law of the State of New York, except to the extent that the law of
jurisdictions where the Collateral is located may be required to apply to the
Collateral.
12.14 Counterparts. This Agreement may be executed in any number of
counterparts (by facsimile transmission or otherwise) and by the different
parties hereto on separate counterparts, each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute one and the
same instrument.
12.15 Successors and Assigns. This Agreement and the other Loan
Documents shall be binding on and shall inure to the benefit of each Loan Party,
Administrative Agent, Lenders and their respective successors and assigns
(including, in the case of any Loan Party, a debtor-in-possession on behalf of
such Loan Party), except as otherwise provided herein or therein. No Loan Party
may assign, transfer, hypothecate or otherwise convey its rights, benefits,
obligations or duties hereunder or under any of the other Loan Documents without
the prior express written consent of Administrative Agent and Lenders. Any such
purported assignment, transfer, hypothecation or other conveyance by any Loan
Party without the prior express written consent of Administrative Agent and
Lenders shall be void. The terms and provisions of this Agreement are for the
purpose of defining the relative rights and obligations of each Loan Party,
Administrative Agent and Lenders with respect to the transactions contemplated
hereby and no Person shall be a third-party beneficiary of any of the terms and
provisions of this Agreement or any of the other Loan Documents.
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<PAGE>
12.16 Disclosures and Confidentiality.
(a) Each Loan Party agrees that it and each of its Affiliates
will obtain Administrative Agent's written consent before using or generating
any press release, advertisement, publicity materials or other publication in
which the name or logo of Administrative Agent or any Lender or any of their
Affiliates is used or may be reasonably inferred and will not distribute any
such materials in the absence of such prior written approval.
(b) Each Loan Party agrees that it will not, directly or
indirectly, disclose to any third party the terms of this Agreement or the other
Loan Documents or prior or future correspondence relating thereto, or the
transactions contemplated hereby, or any other information regarding
Administrative Agent, any Lender or their Affiliates learned by such Loan Party
during the course of negotiation thereof. The term "third party" shall exclude
only the Loan Parties, their Affiliates and their respective attorney(s) and
certified public accountant(s). This Section 12.16(b) shall not restrict the
disclosure of information if such disclosure is required by law, by order of any
court or by the order, rule or regulation of any administrative agency,
including any requirements of the FCC, any PUC or any state or federal
securities commissions (the "Commissions"); provided, however, that, except for
disclosures required by the FCC, PUC or Commissions, Borrower Representative
shall provide Administrative Agent with advance notice of any such required
disclosure of information so that Administrative Agent or the applicable Lender
may seek an appropriate protective order and/or waive compliance with this
Section 12.16(b). Each Loan Party shall not oppose any action taken by
Administrative Agent or any Lender to obtain an appropriate protective order or
other reliable assurance that the information will be accorded confidential
treatment. The obligations set forth in this Section 12.16(b) shall survive the
termination of this Agreement.
(c) Administrative Agent and each Lender agree to use
commercially reasonable efforts (equivalent to the efforts Administrative Agent
or such Lender applies to maintaining the confidentiality of its own
confidential information) to maintain as confidential all confidential
information provided to them by the Loan Parties and designated as confidential
for a period of two (2) years following receipt thereof, except that
Administrative Agent and each Lender may disclose such information (a) to
Persons employed or engaged by Administrative Agent or such Lender in
evaluating, approving, structuring or administering the Loans and the
Commitments; (b) to any bona fide assignee or participant or potential assignee
or participant that has agreed to comply with the covenant contained in this
Section 12.16 (and any such bona fide assignee or participant or potential
assignee or participant may disclose such information to Persons employed or
engaged by them as described in clause (b) above); (c) as required or requested
by any Governmental Authority or reasonably believed by Administrative Agent or
such Lender to be compelled by any court decree, subpoena or legal or
administrative order or process; (d) as, in the opinion of Administrative
Agent's or such Lender's counsel, required by law; (e) in connection with the
exercise of any right or remedy under the Loan Documents or in connection with
any litigation to which Administrative Agent or such Lender is a party; or (f)
which ceases to be confidential through no fault of Administrative Agent or such
Lender.
(d) The disclosure of information by any of Administrative
Agent, Lenders or Loan Parties will not be restricted under this Agreement if
such information (i) has been or becomes published or is now, or in the future,
in the public domain through (A) no fault of the parties, (B) disclosure other
than unauthorized disclosure by the party to whom the information is disclosed
or (C) disclosure to third parties by the disclosing party without similar
restriction; (ii) is property (other than proposal letters, commitment letters
or other correspondence between Lenders and Loan Parties) within the legitimate
possession of the receiving party prior to
III-77
<PAGE>
disclosure hereunder; (iii) subsequent to disclosure hereunder, is lawfully
received from a third party having rights therein without restriction of the
third party's or receiving party's rights to disseminate the information and
without notice of any restriction against its further disclosure; (iv) is
disclosed with the written approval of the other party; or (v) is or becomes
publicly available free of any obligation to keep it confidential.
(e) Each Loan Party authorizes Administrative Agent and each
Lender to discuss with and furnish to any Affiliate of Administrative Agent or
such Lender, any government or self-regulatory agency with jurisdiction over
Administrative Agent or such Lender, any other Governmental Authority or,
subject to such Person's agreeing to this Section 12.16, any assignee,
successor, participant, successor, or prospective assignee, successor or
participant, all financial statements, audit reports and other information
pertaining to such Loan Party and/or its Subsidiaries whether such information
was provided by such Loan Party or prepared or obtained by Administrative Agent,
Lenders or third parties. No representation or warranty is made by
Administrative Agent, Lenders or any of their employees, officers, directors or
agents to any existing or prospective assignee, successor or participant
regarding any audit reports or other analyses of any Loan Party that
Administrative Agent or any Lender may distribute, whether such information was
provided by any Loan Party or prepared or obtained by Administrative Agent,
Lenders or third parties, nor shall Administrative Agent, Lenders or any of
their employees, officers, directors or agents be liable to any Person receiving
a copy of such reports or analyses for any inaccuracy or omission contained in
such reports or analyses or relating thereto.
(f) Every reference in this Agreement to disclosures of any
Loan Party to any Lender or Administrative Agent (except the Business Plan and
financial statements), to the extent that such references refer or are intended
to refer to disclosures at or prior to the execution of this Agreement, shall be
deemed strictly to refer only to written disclosures delivered to Administrative
Agent or Lenders concurrently with the execution of this Agreement and referred
to specifically in the Loan Documents. The parties intend that such disclosures
are to be limited to those presented in an orderly manner at the time of
executing this Agreement and are not to be deemed to include expressly or
impliedly any disclosures that previously may have been delivered from time to
time to Administrative Agent or any Lender, except to the extent that such
previous disclosures are again presented to Administrative Agent or such Lender
in writing concurrently with the execution of this Agreement.
12.17 Jurisdiction and Venue. EACH LOAN PARTY HEREBY IRREVOCABLY
CONSENTS TO THE JURISDICTION OF THE STATE OR FEDERAL COURTS LOCATED IN NEW YORK
COUNTY, CITY OF NEW YORK, NEW YORK FOR ANY SUIT BROUGHT OR ACTION COMMENCED IN
CONNECTION WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS AND
AGREES NOT TO CONTEST VENUE IN ANY SUCH COURTS. In any such litigation, each
Loan Party waives personal service of any summons, complaint or other process,
and agree that the service thereof may be made by certified or registered mail
directly to Borrower Representative at its address set forth in Section 12.5.
The choice of forum set forth herein shall not be deemed to preclude the
enforcement of any judgment obtained in such forum or the taking of any action
under this Agreement to enforce the same in any appropriate jurisdiction.
12.18 Jury Waiver. THE PARTIES HERETO HEREBY KNOWINGLY AND WILLINGLY
WAIVE THEIR RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING
THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE OBLIGATIONS OR ANY RELATIONSHIP
AMONG ADMINISTRATIVE AGENT, LENDERS AND ANY LOAN PARTY. EACH LOAN PARTY
REPRESENTS AND
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<PAGE>
WARRANTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND
HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY
BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
12.19 Limitation on Liability. NONE OF ADMINISTRATIVE AGENT, ANY LENDER
OR ANY LOAN PARTY SHALL HAVE ANY LIABILITY UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS FOR SPECIAL, EXEMPLARY, PUNITIVE,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT IN ANY SUIT BROUGHT OR
ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR
THE OBLIGATIONS AND, EXCEPT TO THE EXTENT PROHIBITED BY LAW, EACH PARTY WAIVES
ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH ACTION ANY SPECIAL,
EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT
OTHER THAN ACTUAL DAMAGES.
12.20 Schedules, Exhibits and Annexes. The Schedules, Exhibits and
Annexes attached to this Agreement are an integral part hereof, and are hereby
made a part of this Agreement.
12.21 Agreement to Govern. In case of any conflict between the terms of
this Agreement and any of the other Loan Documents, the terms of this Agreement
shall govern.
12.22 Entire Agreement. This Agreement, the other Loan Documents and
other documents, agreements and certificates executed by the parties
contemporaneously herewith or subsequent hereto constitute the entire agreement
of the parties and supersede all prior understandings and agreements, written or
oral, among the parties hereto relating to the subject matter hereof. No Loan
Party is entering into this Agreement in reliance on statements or
representations made by any Person other than as set forth herein, except for
the Fee Letter.
[SIGNATURE PAGE APPEARS ON THE NEXT PAGE.]
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
date first above written.
Administrative Agent and Lender:
GENERAL ELECTRIC CAPITAL CORPORATION
By:
-----------------------------------
Name: Michael Baum
Title: Senior Vice President
Lenders:
FIRST UNION NATIONAL BANK, as a Lender
By:
-----------------------------------
Name: John Burlingame
Title: Senior Vice President
WACHOVIA BANK, N.A.
By:
-----------------------------------
Name: Fitzhugh L. Wickham
Title: Vice President
FIRSTAR BANK, N.A.
By:
-----------------------------------
Name: Dirk Davidson
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION
By:
-----------------------------------
Name: Robert D. Mace
Title: Vice President
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<PAGE>
BANK AUSTRIA CREDITANSTALT CORPORATE
FINANCE, INC.
By:
-----------------------------------
Name: Gary W. Andresen
Title: Senior Associate
By:
-----------------------------------
Name: Robert M. Biringer
Title: Executive Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P.
By:
-----------------------------------
Name:
Title:
Borrower Representative And Guarantor:
US LEC CORP.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and Chief
Financial Officer
Borrowers:
US LEC OF ALABAMA INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and Chief
Financial Officer
US LEC COMMUNICATIONS INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and
Chief Financial Officer
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<PAGE>
US LEC OF FLORIDA INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and Chief
Financial Officer
US LEC OF GEORGIA INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and Chief
Financial Officer
US LEC OF MARYLAND INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and
Chief Financial Officer
US LEC OF NORTH CAROLINA INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and
Chief Financial Officer
US LEC OF PENNSYLVANIA INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and
Chief Financial Officer
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<PAGE>
US LEC OF SOUTH CAROLINA INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and
Chief Financial Officer
US LEC OF TENNESSEE INC.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and
Chief Financial Officer
US LEC OF VIRGINIA L.L.C.
By:
-----------------------------------
Name: Michael K. Robinson
Title: Executive Vice President and
Chief Financial Officer
III-83
US LEC - The Competitive Telephone Company
Selected Financial Data
For the years ended December 31, 1997, 1998 and 1999
(In Thousands, Except Per Share Data and Operating Data, as noted below)
<TABLE>
<CAPTION>
1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
Statement of Operations:
<S> <C> <C> <C>
Revenue, Net $ 6,458 $ 84,716 $ 175,180
Cost of Services 4,201 33,646 73,613
Gross Margin 2,257 51,070 101,567
Selling, General and Administrative 6,117 25,020 48,375
Depreciation and Amortization 443 4,941 11,720
-------------- -------------- -------------
Earnings (Loss) from Operations (4,303) 21,109 41,472
Interest Income (Expense), Net (355) 1,623 (2,046)
-------------- -------------- -------------
Earnings (Loss) before Income Taxes (4,658) 22,732 39,426
Provision for Income Taxes - 9,305 15,617
-------------- -------------- -------------
Net Earnings (Loss) $ (4,658) $ 13,427 $ 23,809
Net Earnings (Loss) Per Share-Basic $ (0.25) $ 0.53 $ 0.87
Net Earnings (Loss) Per Share-Diluted $ (0.25) $ 0.52 $ 0.84
Weighted Average Shares Outstanding-Basic 18,653 25,295 27,431
Weighted Average Shares Outstanding-Diluted 18,653 25,804 28,411
Other Financial Data:
Capital Expenditures $ 13,055 $ 47,292 $ 57,396
EBITDA (3,860) 26,050 53,192
Net Cash Flow Used in Operating Activities (5,594) (19,143) (25,935)
Net Cash Flow Used in Investing Activities (5,951) (48,538) (49,696)
Net Cash Flow Provided in Financing Activities 14,008 106,457 48,840
Operating Data:
Business Trunks NA 15,823 46,019
ISP/ESP Trunks NA 23,481 33,169
Business Lines NA 3,058 13,237
Number of States 1 4 7
Number of Local Switches 3 11 16
Number of Long Distance Switches - - 1
Number of Customers 142 558 1,946
Number of Employees 78 253 460
Number of Sales Employees 24 98 180
Balance Sheet Data:
Working Capital (Deficit) $ (2,269) $ 76,215 $ 113,109
Accounts Receivable, net 6,006 66,214 193,943
Current Assets 9,656 112,184 213,269
Property and Equipment, Net 12,889 56,219 102,002
Total Assets 22,681 170,203 320,100
Long-Term Debt 5,000 20,000 72,000
Total Stockholders' Equity 5,757 112,975 138,870
</TABLE>
<PAGE>
US LEC - The Competitive Telephone Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the historical information contained herein, this annual
report contains forward-looking statements, subject to uncertainties and risks,
including the demand for US LEC's services, the ability of the Company to
introduce additional products, the ability of the Company to successfully
attract and retain personnel, competition, issues related to Year 2000,
uncertainties regarding its dealings with incumbent local exchange carriers
("ILECs") and other telecommunications carriers and facilities providers,
regulatory uncertainties, the possibility of an adverse decision related to
reciprocal compensation owing to the Company by BellSouth Telecommunications,
Inc. ("BellSouth"), the risk that the planned investments by affiliates of Bain
Capital, Inc. and Thomas H. Lee Partners, L.P., may not close due to such
factors as the failure of the parties to agree on the terms of definitive
agreements or the inability of the parties to satisfy the closing conditions, as
well as the Company's ability to begin operations in additional markets. These
and other applicable risks are summarized in the "Forward-Looking Statements and
Risk Factors" section and elsewhere in the Company's annual report on Form 10-K
for the period ended December 31, 1999, and in other reports which are on file
with the Securities and Exchange Commission.
The following discussion and analysis should be read in conjunction
with the "Selected Financial Data" on page 12 of this report and the Company's
consolidated financial statements and related notes thereto appearing elsewhere
in this report.
COMPANY OVERVIEW
US LEC is a rapidly growing switch-based competitive local exchange
carrier ("CLEC") that provides integrated telecommunications services to its
customers. The Company primarily serves telecommunication-intensive customers
including businesses, universities, financial institutions, professional service
firms, hospitals, enhanced service providers ("ESPs"), Internet service
providers ("ISPs"), hotels and government agencies. US LEC was founded in June
1996 after passage of the Telecommunications Act of 1996 (the "Telecom Act"),
which enhanced the competitive environment for local exchange services. US LEC
initiated service in North Carolina in March 1997, becoming one of the first
CLECs in North Carolina to provide switched local exchange services. US LEC
currently offers local, long-distance, data and enhanced services to customers
in selected markets in North Carolina, Florida, Georgia, Tennessee, Virginia,
Alabama, Washington D.C., Pennsylvania, Mississippi, Maryland, South Carolina
and Kentucky. In addition, US LEC is currently certified to provide
telecommunication services in Delaware, New Jersey, New York, Ohio, Texas and
Massachusetts. US LEC's current network is comprised of seventeen Lucent 5ESSR
AnyMedia digital switches in Charlotte, Raleigh/Durham,
Greensboro/Winston-Salem, Atlanta, Memphis, Nashville, Knoxville, Orlando,
Miami, Tampa/St. Petersburg, Jacksonville, Norfolk/Virginia Beach, Richmond,
Birmingham, Philadelphia, Northern Virginia/Washington D.C., and Baltimore in
addition to its Alcatel MegaHubR 600ES switch in Charlotte.
Revenue and Cost of Services
US LEC's revenue is comprised of two primary components: (1) fees paid
by customers for local, long distance, data and enhanced services and (2) access
charges including reciprocal compensation, which is discussed below. Local, long
distance, data and enhanced service revenue is comprised of monthly recurring
charges, usage charges, and initial non-recurring charges. Monthly recurring
charges include the fees paid by customers for facilities (lines and trunks) in
service and additional features on those facilities. Usage charges consist of
usage-sensitive fees paid for calls made. Initial non-recurring charges consist
primarily of installation charges. Access charges are comprised of charges paid
by interexchange carriers ("IXCs") for the origination and termination of
interexchange toll and toll-free calls and reciprocal compensation, which is
discussed below. US LEC's "core business" revenue is comprised of local, long
distance, data, enhanced service fees and toll and toll-free access charges as
described above. The Company does not resell any ILEC services.
Reciprocal compensation arises when a local exchange carrier completes
a call that originated on another local exchange carrier's network. Reciprocal
compensation rates are fixed by an interconnection agreement negotiated between
those carriers. The majority of the Company's 1999 revenue was earned from
reciprocal compensation and is currently being disputed by BellSouth. This
dispute arises from reciprocal compensation charges related to traffic that is
terminated to enhanced service providers, including internet service providers.
As part of this dispute BellSouth has disputed reciprocal compensation charges
related to Metacomm, LLC ("Metacomm"), a company over which Richard T. Aab, the
majority stockholder and Chairman of the Board of Directors of the Company
acquired control after this dispute arose. BellSouth contends in part that such
traffic does not constitute "telecommunications" subject to reciprocal
compensation under the Telecom Act and the existing
<PAGE>
US LEC - The Competitive Telephone Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
interconnection agreement between BellSouth and the Company. See Disputed
Reciprocal Compensation Revenue appearing below for a description of these
proceedings and uncertainties associated with their outcome.
Although the Company has generated a majority of its revenue from
reciprocal compensation, US LEC was founded to establish a company that would
provide a wide array of telecommunications services to its customers and
reciprocal compensation is not considered to be a part of the Company's core
revenue. US LEC has deployed a significant regional network, and as of December
1999 has active switches in 17 sites, serving over 1,900 customers. Management
believes this customer base, achieved in less than three years, is indicative of
the markets' acceptance of US LEC's strategy and service offerings in its core
business. Management expects the Company's core business revenue to continue to
increase and reciprocal compensation to continue to decrease significantly as
percentages of total revenue in future periods as US LEC continues to deploy its
network, expand its customer base, reciprocal compensation rates decline and the
Metacomm Network Facilities are terminated. (See Note 6 to the Company's
Consolidated Financial Statements.)
In order to provide local exchange services, the Company has signed
interconnection agreements with various ILECs, including BellSouth, Bell
Atlantic, GTE and Sprint. These agreements provide the framework for the Company
to serve its customers when other local carriers are involved. The Company's
interconnection agreement with BellSouth expired in June 1999. At that time, as
allowed by the 1996 Telecom Act, the Company adopted an existing agreement which
expired on December 31, 1999 but continues in force until new interconnection
agreements are entered into. Any new agreements will be effective as of January
1, 2000. Management does not anticipate any interruption of interconnect
services. While the Company does not anticipate that BellSouth will agree to
renew the agreements with terms consistent with the Company's existing
agreements as they relate to reciprocal compensation, it intends to pursue such
consistent terms vigorously. The Company's ultimate ability to obtain such terms
will depend on a number of factors, including the decisions of the Federal
Communications Commission and state regulatory authorities.
Cost of services is comprised primarily of leased transport charges and
commissions payable with respect to reciprocal compensation revenue. The
Company's leased transport charges are the lease payments incurred by US LEC for
the transmission facilities used to connect the Company's customers to its
switch and to connect to the ILEC and other carrier networks. US LEC, as part of
its "smart-build" strategy, does not currently own any fiber or copper transport
facilities. These facilities are leased from various providers including, in
many cases, the ILEC. The Company's strategy of leasing rather than building its
own fiber transport facilities results in the Company's cost of services being a
significant component of total costs. Management believes that this strategy has
several benefits, including faster time-to-market, more efficient asset
utilization, and diverse interconnection opportunities. The Company has to date
been successful in negotiating lease agreements which generally match the
duration of its customer contracts, thereby allowing the Company to mitigate the
risk of incurring charges associated with transmission facilities that are not
being utilized by customers. The Company shares revenue in the case of toll-free
access and reciprocal compensation revenue. While the majority of the Company's
cost of services is comprised of leased transport charges and reciprocal
compensation commissions, management expects that over time outbound traffic and
other usage sensitive charges will become a major component of cost of services
as the Company begins to carry more of its customers' outbound calls.
Selling, General and Administrative Expenses; Depreciation and Amortization
In addition to the costs of services described above, the Company
incurs certain other expenses. The largest component of selling, general and
administrative expense ("SG&A") relates to employee salaries, related taxes and
benefits, and other incentive-based compensation. Other major categories of SG&A
include expenses associated with leasing real estate for the Company's offices
and network, travel, supplies, legal and accounting.
Depreciation and amortization expense is primarily due to capital
expenditures made by the Company. Gross property, plant, and equipment increased
from $61.3 million in 1998 to $118.5 million in 1999. Depreciation and
amortization expense increased from $4.9 million in 1998 to $11.7 million in
1999.
As the Company continues to build its network, SG&A and depreciation
and amortization expense will continue to grow.
<PAGE>
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1999 to Year Ended December 31,
1998 Net revenue increased to $175.2 million for the year ended December 31,
1999 from $84.7 million in 1998. The increase in revenue of $90.5 resulted from
an increase of $58.2 million related to reciprocal compensation and $32.3
million increase in core revenue. These increases were caused by the Company's
continued expansion into new markets, an increase in the total number of
customers in existing markets and an increase in telecommunications traffic on
its network. The Company's core business revenue continued to grow, as well as
the revenue related to reciprocal compensation. Core business revenue, or
revenue other than reciprocal compensation increased to $62.6 million for the
year ended December 31, 1999 from $30.3 million for the year ended December 31,
1998. For the years ended December 31, 1999 and 1998, reciprocal compensation
revenue increased to $112.6 million from $54.4 million, respectively, net of
allowances. Due to the disputed reciprocal compensation issues as described
below, the Company recorded a $27.8 million and $12.0 million allowance against
reciprocal compensation revenue and related receivables for the years ended
December 31, 1999 and 1998, respectively bringing the total allowance offsetting
the related receivables to $39.8 million at December 31, 1999. Unless otherwise
specified, the results of operations reflected in this report are net of these
and other normal operating adjustments. This allowance was made due to the
current judicial and regulatory proceedings related to this disputed revenue,
and does not reflect a change in the Company's commitment to pursue the matter
to a satisfactory conclusion. See also Disputed Reciprocal Compensation Revenue
appearing below for a further discussion related to reciprocal compensation and
other disputed amounts due from BellSouth.
To quantify the size of its network, the Company uses the number of
Customer Connections for business trunks, ISP/ESP trunks and business lines.
Customer connections at December 31, 1999 and December 31, 1998 were as follows:
business trunks increased to 46,019 from 15,823, ISP/ESP trunks increased to
33,169 from 23,481 and business lines increased to 13,237 from 3,058. Prior to
December 1999, the Company quantified the size of its network by reporting its
number of Equivalent Access Lines in service.
Cost of services is comprised primarily of leased transport, facility
installation, commissions and usage charges. Cost of services increased from
$33.6 million for 1998 to $73.6 million for 1999. This increase was primarily a
result of the increase in the size of US LEC's network, increased usage by its
customers, and increased commissions on reciprocal compensation. For the years
ended December 31, 1998 and 1999, network costs represented 39.7% and 42.0% of
revenue, respectively. The increase in cost as a percentage of revenue was due
to the increase of core revenue as a percentage of total revenue and the
one-time costs associated with entering several new markets.
SG&A for 1999 increased to $48.4 million, or 27.6% of revenue, compared
to $25.0 million, or 29.5% of revenue, for 1998. This increase was primarily a
result of costs associated with developing and expanding the infrastructure of
the Company as it expands into new markets, such as expenses associated with
personnel, sales and marketing, occupancy, administration and billing as well as
legal expenses associated with the BellSouth litigation.
Depreciation and amortization for 1999 increased to $11.7 million from
$4.9 million in 1998 primarily due to the increase in depreciable assets in
service related to US LEC's network expansion.
Interest income for 1999 decreased to $1.1 million from $1.9 million in
1998. Interest expense for 1999 increased from 1998 by $2.9 million to $3.1
million. This increase was due to borrowings under the Company's loan agreement
totaling $52.0 million in 1999, bringing total debt to $72.0 million at December
31, 1999.
Provision for income taxes for 1999 was $15.6 million, based on an
effective tax rate of 39.6% compared to a provision in 1998 for $9.3 million,
based on an effective tax rate of 40.9%. As a result of timing differences
between book and tax
<PAGE>
US LEC - The Competitive Telephone Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
income primarily related to disputed reciprocal compensation, the Company had a
tax net operating loss carryforward of $40.2 million at December 31, 1999.
Net earnings for 1999 amounted to $23.8 million, or $0.84 per share
(diluted), compared to a net earnings of $13.4 million, or $0.52 per share
(diluted) for 1998. The increase in net earnings and net earnings per share is
attributed to the factors discussed above.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Net revenue increased to $84.7 million for the year ended December 31,
1998 from $6.5 million in 1997. The increase in revenue of $78.2 resulted from
the Company's expansion into new markets, an increase in the total number of
customers in existing markets and an increase in telecommunications traffic on
its network. As mentioned above, a majority of the Company's revenue was
comprised of reciprocal compensation originated by customers of ILECs. In
consideration of the industry-wide dispute concerning reciprocal compensation,
the Company recorded a $12.0 million allowance against reciprocal compensation
revenue and related receivables during 1998. The results discussed in this
report are net of this adjustment.
Cost of services is comprised primarily of leased transport, facility
installation, commissions and usage charges. Cost of services increased from
$4.2 million, or 65.1% of revenue, for 1997, to $33.6 million, or 39.7% of
revenue, for 1998. This increase was primarily a result of the increase in the
size of US LEC's network, increased usage by its customers, and increased
commissions due to reciprocal compensation.
SG&A for 1998 increased to $25.0 million, or 29.5% of revenue, compared
to $6.1 million, or 94.7% of revenue, for 1997. This increase was primarily a
result of costs associated with developing and expanding the infrastructure of
the Company as it expands into new markets, such as expenses associated with
personnel, sales and marketing, occupancy, administration and billing as well as
legal expenses associated with the BellSouth litigation.
Depreciation and amortization for 1998 increased to $4.9 million from
$0.4 million in 1997 primarily due to the increase in depreciable assets in
service related to US LEC's network expansion.
Interest income for 1998 increased by $1.8 million over 1997 to $1.9
million as a result of investing the proceeds from the Company's initial public
offering. Interest expense for 1998 decreased from 1997 by $184 thousand to $237
thousand. This decrease was primarily due to the full repayment of $3.3 million
in notes payable in June 1998.
Provision for income taxes for 1998 was $9.3 million, based on an
effective tax rate of 40.9%. US LEC was organized as a limited liability company
during 1997 and effectively converted to C Corporation status as of January 1,
1998. Accordingly, no provision (benefit) for income taxes was necessary for
1997 since income taxes were the responsibility of the individual limited
liability company members.
Net earnings after tax for 1998 amounted to $13.4 million, or $.52 per
share (diluted), compared to a net loss of $4.7 million, or ($.25) per share
(diluted) for 1997. The increase in net earnings and net earnings per share is
attributed to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
US LEC's business is capital intensive and its operations require
substantial capital expenditures for the purchase and installation of network
switches, related electronic equipment and facilities. The Company's cash
capital expenditures were $49.7 million and $47.7 million for the years ended
December 31, 1999 and 1998, respectively. The Company anticipates that it will
have substantial capital requirements in connection with its planned expansion
into additional locations during 2000 and beyond. In June 1999, the Company
amended the loan agreement with General Electric Capital Corporation and
<PAGE>
First Union National Bank to increase the amount available under the agreement
from $50.0 million to $75.0 million. In December 1999, the Company again amended
the loan agreement increasing the amount available from $75.0 million to $150.0
million. As of December 31, 1999, the outstanding amount under the loan
agreement was $72.0 million; therefore, $78.0 million was available to borrow
under the loan agreement. While management believes the current availability
under the loan agreement and operations will fund the Company's planned
expansion in 2000, funding for expansion beyond the Company's planned network
deployment in 2000 may require additional financing unless the Company receives
payment of the outstanding receivable due from BellSouth. However, the Company
believes the net receivable will be collected by December 31, 2000.
The Company anticipates that any new interconnection agreements will
provide for reciprocal compensation at rates lower than in the Company's
interconnection agreement, which expired on December 31, 1999. The Company also
anticipates that the reciprocal compensation related to Metacomm will not
continue due to changes in Metacomm's business or the architecture of its
network or a combination thereof. In February 2000, the Company received a
notice by which Metacomm notified BellSouth that due to BellSouth's failure to
pay reciprocal compensation, Metacomm was no longer able to sustain its network
operations. Metacomm instructed BellSouth to terminate the facilities it
provides to Metacomm, and as a result, that termination will eliminate US LEC's
revenue from the Metacomm network after December 31, 1999. In spite of the
elimination of Metacomm revenues, management believes that the $78.0 million
unused line of credit at December 31, 1999 and cash flows from operations will
be sufficient to meet the Company's needs over the next 12 months.
Furthermore, in February 2000, the Company announced it had executed a
letter of intent with affiliates of Bain Capital, Inc. and Thomas H. Lee
Partners, L.P. to invest up to $300 million in convertible preferred stock of US
LEC, the proceeds of which will be used for additional expansion. This
transaction is expected to close in the second quarter 2000.
Cash used in operating activities was approximately $25.9 million in
1999 compared to $19.1 million in 1998. The increase in cash used in operating
activities was primarily due to a $65.6 million increase related to accounts
receivable (net of allowances) offset by increases in net income of $10.4
million, depreciation of $6.8 million, prepaid and other assets of $1.1 million,
accounts payable of $1.7 million, accrued commissions payable-related party and
accrued network cost of $17.9 million, commissions payable of $14.9 million,
deferred taxes of $7.3 million and deferred revenue $1.2 million and accrued
expenses - other of $1.1 million. The majority of the Company's accounts
receivable at December 31, 1999 represented amounts due from BellSouth for
reciprocal compensation, facility charges, toll and other charges. Although the
Company received a payment of $11.2 million from BellSouth in July 1999
representing a portion of the amounts due the Company for reciprocal
compensation in North Carolina, management expects receivables due from
BellSouth to continue to increase until the judicial and regulatory proceedings
with BellSouth are resolved. (See Disputed Reciprocal Compensation Revenue
appearing below for a further discussion related to reciprocal compensation and
other disputed amounts due from BellSouth). The increase in depreciation was due
to the increase in depreciable assets in service related to US LEC's network
expansion. The increase in accounts payable, accrued expenses, accrued network
cost, prepaid expenses and other assets and deferred revenue was related to the
continued expansion of the Company.
Cash used in investing activities increased to $49.7 million in 1999
from $48.5 million in 1998. The investing activities are related to purchases of
switching and related telecommunications equipment, office equipment and
leasehold improvements associated with the Company's expansion into additional
locations and markets during 1999.
Cash provided by financing activities decreased to $48.8 million for
1999 from $106.5 million in 1998. The decrease was primarily due to the $87.1
million of net proceeds from the initial public stock offering in 1998 partially
offset by $52.0 of borrowing under the Company's credit facility in 1999, which
is discussed above.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Disputed Reciprocal Compensation Revenue
A majority of the Company's revenue is derived from reciprocal
compensation amounts due from ILECs, principally BellSouth. In August 1997,
BellSouth notified the Company and other CLECs that it considered traffic
terminated to Enhanced Service Providers ("ESPs"), including internet service
providers ("ISPs"), to be interstate traffic, and therefore not subject to
reciprocal compensation, and that BellSouth would not pay (or bill) reciprocal
compensation under interconnection agreements for this traffic. BellSouth is
disputing (1) the portion of reciprocal compensation billed by the Company
related to the transport and termination of local traffic from its customers to
ESPs, including ISPs and information service providers, primarily on the basis
that such traffic does not terminate in the same local exchange and, (2) as
described below, the portion of the reciprocal compensation billings related to
traffic on the Metacomm network (collectively referred to as "Disputed
Reciprocal Compensation"). The Company recorded Disputed Reciprocal Compensation
revenue of approximately $0.0 million, $42.0 million and $92.0 million for 1997,
1998 and 1999, respectively, net of a $0.0 million, $12.0 million and $27.0
million allowance, respectively. Management believes that the Company has earned
and is legally entitled to this revenue and payments are due from BellSouth
pursuant to the interconnection agreements that BellSouth has with the Company.
On February 26, 1998, following a petition by the Company, the North
Carolina Utilities Commission (the "NCUC") ordered BellSouth to bill and pay for
all ISP-related traffic (the "NCUC Order"). Following motions filed by
BellSouth, the NCUC stayed enforcement of its order until June 1, 1998. On April
27, 1998, BellSouth filed a petition for judicial review of the NCUC Order and
an action for declaratory judgment and other relief (including a request for an
additional stay) with the United States District Court for the Western District
of North Carolina ("U.S. District Court") pending determination of certain
related issues by the Federal Communications Commission ("FCC"). This action was
filed against the Company and the NCUC. In June 1999, the U.S. District Court
dismissed BellSouth's petition without prejudice and remanded back to the NCUC
for further review. Following the U.S District Court's remand, on June 22, 1999,
the NCUC denied BellSouth's request for a further stay of the NCUC Order. On
July 16, 1999, the Company received an $11.2 million payment from BellSouth for
a portion of the Disputed Reciprocal Compensation earned from terminating calls
to ISPs that are customers to the Company's North Carolina operations, and
subject to the NCUC Order.
Other than denying BellSouth's request for a further stay, the only
action taken by the NCUC with respect to the remand from the U.S. District Court
is that the NCUC filed with the U.S. Fourth Circuit Court of Appeals (the "4th
Circuit") a notice of appeal of the U.S. District Court's order that rejected
the NCUC's defenses, including its defense that the 11th Amendment to the United
States Constitution bars BellSouth from making the NCUC a party to our
proceeding in the federal courts. The Company has also appealed and the United
States Justice Department has intervened in the appeal. The Appellate hearing on
this matter is tentatively scheduled for early June, 2000.
In February, 1999, the FCC issued a declaratory ruling (the "FCC
Ruling") which concluded that for jurisdictional purposes most calls delivered
to ISPs should be deemed to continue to internet web sites, which are often
located in other states. Thus, the FCC ruled that such calls are
jurisdictionally "interstate" in nature. However, the FCC further declared that
where parties have previously agreed in interconnection agreements that
reciprocal compensation must be paid for traffic bound for ISPs, the parties
should be bound by those agreements, as interpreted and enforced by state
regulatory bodies. The FCC also recognized that some commissions might
reconsider their decisions in light of its ruling. As noted, the NCUC ruled on
February 26, 1998 in favor of the Company with respect to payment for traffic
bound to ISPs under the Company's first interconnection agreement with
BellSouth. To date, state regulatory bodies in at least twenty-three states have
considered the effect of the FCC Ruling and have overwhelmingly reaffirmed their
earlier decisions requiring payment of reciprocal compensation for this type of
traffic or for the first time determined that such compensation is due. Included
among these states are Alabama, Florida, and Tennessee, all of which are in
BellSouth's operating territory. In this regard, the Alabama Public Service
Commission concluded that the treatment of ISP traffic as local was so prevalent
in the industry at the time BellSouth entered into interconnection agreements
with CLECs that, if it is so intended, BellSouth had an obligation to negate
such local treatment in the agreements by specifically delineating that ISP
traffic was not local traffic subject to the payment of reciprocal compensation.
The Florida Public Service Commission reached a similar conclusion. Georgia and
Tennessee have
<PAGE>
also reaffirmed decisions that reciprocal compensation is owed for calls to
ISPs. In an arbitration of the terms of a new interconnection agreement between
BellSouth and another CLEC, the NCUC recently determined that until the FCC
issues a definitive ruling pursuant to the notice of proposed rulemaking which
was part of the FCC Ruling, reciprocal compensation should continue to be paid
under the new interconnection agreement. While US LEC was not a party to this
arbitration, management believes this decision to be favorable in light of the
U.S. District Court's remand (discussed above). Two BellSouth states - South
Carolina and Louisiana - have ruled that reciprocal compensation is not due for
traffic to ISPs. These decisions also came after the FCC's Declaratory Ruling.
All of these decisions have been appealed. The South Carolina and Louisiana
decisions represent a view adopted by very few other states. (The Company does
not provide local service in Louisiana and has no reciprocal compensation
recorded for traffic in South Carolina or Louisiana).
In February 2000, the Company received payment from GTE for reciprocal
compensation related to ISP and voice traffic in North Carolina. This payment
was pursuant to a commercial arbitration award rendered January 4, 2000
resulting from a proceeding before the American Arbitration Association. GTE was
ordered to pay US LEC for all ISP traffic for the period ending September 1999
(approximately $650,000). The Company is currently working through dispute
resolution procedures with respect to subsequent periods and anticipates a
favorable ruling.
On September 14, 1998, the Company filed a complaint with the NCUC
seeking payment of facilities charges, non-ISP based reciprocal compensation and
intraLATA toll termination charges from BellSouth. Also on September 14, 1998,
BellSouth filed a complaint with the NCUC seeking to be relieved from its
obligations under its interconnection agreement with the Company to pay
reciprocal compensation for traffic related to networks including that operated
by Metacomm, a customer of BellSouth and the Company and, as of June 1998, a
related party of the Company. The two proceedings were consolidated for purposes
of discovery, which concluded June 16, 1999, and hearings concluded in August
1999 with respect to BellSouth's complaint. Hearings concerning US LEC's
complaint have been continued by the NCUC pending an order in the BellSouth
complaint. The Company anticipates that the NCUC will issue its ruling on
BellSouth's complaint before the end of 2000. The BellSouth proceeding primarily
involves the treatment of traffic over a network established by Metacomm and
whether, under the interconnection agreements between the Company and BellSouth
and the Telecommunications Act of 1996 (the "Telecom Act"), BellSouth is
required to pay reciprocal compensation to the Company for traffic associated
with this network and whether BellSouth has breached its interconnection
agreements with the Company by failing to pay reciprocal compensation for this
traffic.
In the NCUC proceedings filed September 14, 1998, BellSouth claims
principally that the traffic on Metacomm's network does not qualify for
reciprocal compensation because the Metacomm network was designed to generate
reciprocal compensation and that such traffic does not constitute
"telecommunications" subject to the reciprocal compensation payment provisions
of the Telecom Act and the interconnection agreements with BellSouth. In
addition BellSouth has identified other issues on which it bases its claim that
the traffic on the Metacomm network is not compensable, including (1) that the
Company agreed to share reciprocal compensation with Metacomm, (2) that, as
disclosed in the Company's Form 10-Q for the period ended September 30, 1998,
Richard T. Aab, the largest shareholder of the Company and the Chairman of its
Board of Directors, acquired a controlling interest in Metacomm after the
dispute arose, (3) reciprocal compensation has been billed on an "always-on"
basis even though there is no measurement of the amount of data transversing the
network that is originated by customers of Metacomm, (4) that the billed traffic
includes traffic during periods when Metacomm had not yet connected customers to
its network or when customers of Metacomm were not sending data over the
network, (5) that the Metacomm network includes facilities that cross LATA
boundaries and, therefore, data traversing these facilities is not local (and,
therefore, is ineligible for reciprocal compensation), (6) that Metacomm is an
unlicensed reseller of US LEC's services, not an end-user, and (7) that the
Metacomm network is a quasi-dedicated network which should not be eligible for
reciprocal compensation.
It is the Company's understanding that during the relevant period
Metacomm was engaged in the business of developing and operating a high-speed,
always-on data network in North Carolina and its network provides users with
continuous access
<PAGE>
US LEC - The Competitive Telephone Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
to data, wide area network services, software applications and other
services, including access to the Internet. In the course of the these
proceedings, the Company concluded, based on positions taken and information
provided by Metacomm, that Metacomm related traffic should not be considered to
be solely ISP traffic, in part because its network provides additional services
and functions to users. Notwithstanding this determination, the Company believes
BellSouth will continue to contend the Disputed Reciprocal Compensation related
to the Metacomm network traffic is subject, in the first instance, to the
resolution of the ISP issue. The Company has recorded approximately $0.0
million, $50.0 million and $98.0 million of gross revenue, before allowances and
late payment charges, for fiscal 1997, 1998 and 1999, respectively, related to
reciprocal compensation revenue generated as a result of Metacomm network
traffic.
When the Metacomm network was originally developed, the Company agreed
to pay Metacomm commissions equal to a specified percentage of the reciprocal
compensation the Company receives from ILEC's for the network traffic. The
Company recorded approximately $0.2 million, $20.0 million and $39.0 million for
1997, 1998 and 1999, respectively, in reciprocal compensation commission expense
earned by Metacomm, which is included in cost of services in the accompanying
financial statements. As of December 31, 1998 and 1999, the Company had a
liability to Metacomm net of amounts owed by Metacomm to the Company in the
amount of $5.3 million and $22.8 million, respectively, which is recorded as
accrued commissions, net - related party in the accompanying financial
statements. The Company and Metacomm are parties to agreements by which
commissions earned by Metacomm related to reciprocal compensation are not
payable until the related reciprocal compensation is collected from the ILEC.
However, in fiscal 1997, 1998 and 1999, the Company advanced to Metacomm $0.0
million, $8.3 million and $12.0 million prior to collecting the earned
reciprocal compensation from BellSouth. These payments are subject to a
repayment agreement whether or not the related reciprocal compensation is
ultimately collected from BellSouth and are offset with commissions due to
Metacomm since the legal right of offset exists.
The Company believes that calls to establish, maintain and manage data
network connections and intra-network communications generated by data
processing routers, which were necessary to maintain the functionality and
integrity of the Metacomm network, are within the definition of
"telecommunications" under the Telecom Act and constitute compensable traffic
subject to reciprocal compensation under the interconnection agreements the
Company has with BellSouth. The Company also believes that the issues raised by
BellSouth as additional bases for nonpayment do not excuse BellSouth from its
obligation to pay reciprocal compensation under its interconnection agreement
with the Company. Accordingly, the Company intends to defend vigorously against
BellSouth's claims and to prosecute vigorously its claims against BellSouth in
the above proceedings.
As noted above, on July 16, 1999, the Company received a payment of
$11.2 million from BellSouth representing a portion of the amounts due the
Company for ISP reciprocal compensation in North Carolina. In making the
payment, BellSouth stated that it was for ISP traffic the NCUC had ordered it to
pay for in February 1998, including late fees, and that it was reserving all of
its appeal rights with respect to the payment. BellSouth also stated that this
payment did not include any amounts at issue in its September 14, 1998 NCUC
proceeding. This partial payment did not cover all outstanding amounts the
Company claims are due from BellSouth in North Carolina and other states the
Company serves. For example, while the Company has outstanding amounts due from
BellSouth for ISP traffic in Tennessee, Georgia and Florida, BellSouth has not
paid these amounts, presumably because no orders specific to US LEC have been
entered by state commissions in those states directing BellSouth to pay the
Company. However, state commissions in these states have issued rulings in favor
of other competitive carriers and as discussed above, the state commissions in
Florida and Alabama have made rulings subsequent to the FCC Ruling. To address
this issue, the Company has filed the following additional actions against
BellSouth related to delinquent reciprocal compensation payments, none of which
involve Metacomm or any similar network:
o On July 1, 1999, the Company filed a complaint against BellSouth before the
Georgia Public Service Commission ("GAPSC"). The hearing with relation to this
complaint concluded January 21, 2000. The Company anticipates receiving the
ruling from the hearing officer in April 2000.
<PAGE>
o On July 2, 1999, the Company filed a complaint against BellSouth before the
Florida Public Service Commission ("FLPSC"). This matter is scheduled for
hearing in late April 2000.
o On August 6, 1999, the Company filed a complaint against BellSouth before the
Tennessee Regulatory Authority ("TRA"). This matter has not yet been scheduled
for hearing.
Management believes that the Company will ultimately obtain favorable
results in the state proceedings described above before the NCUC, GAPSC, FLPSC
and the TRA; however, BellSouth may elect to initiate additional proceedings (by
way of appeal or otherwise) challenging amounts owed to the Company. In this
regard, BellSouth recently has asserted a variety of other objections to paying
portions of the reciprocal compensation billed by the Company. They include
assertions that US LEC has miscalculated late payment fees due from BellSouth
and that US LEC has billed reciprocal compensation using the wrong rates. The
Company believes BellSouth has asserted these issues and will attempt to raise
further issues in order to avoid or delay payment.
If a decision adverse to the Company is issued in any of these
proceedings by any of the state commissions, and in particular the NCUC, or in
any appeal or review of a favorable decision by the Fourth Circuit Court of
Appeals, state commissions, or the FCC, or if either the FCC or any of the
applicable state commissions were to alter its view of reciprocal compensation,
such an event could have a material adverse effect on the Company's operating
results and financial condition. The Company's gross trade accounts receivable
as of December 31, 1998 and 1999 included approximately $54.0 million and $190.0
million, respectively, of earned but uncollected Disputed Reciprocal
Compensation (before a $12.0 million and $39.0 million allowance and before late
payment charges) of which approximately $50.0 million and $148.0 million,
respectively was generated as a result of traffic related to the Metacomm
network.
In June 1999, the Company adopted an existing agreement to extend local
interconnection with BellSouth replacing the previous interconnection agreement,
which expired on June 15, 1999. The adopted interconnection agreement with
BellSouth expired on December 31, 1999 but continues in force until new
interconnection agreements are reached. The new agreements will be effective as
of January 1, 2000. The Company filed petitions for arbitration in all nine
states in BellSouth operating territory seeking to obtain a PSC ordered
interconnection agreement, but the Company anticipates that it will be able to
avoid the arbitration process by adopting interconnection agreements that are
either currently in effect or which will result from arbitrations involving
other CLECs. The Company's ability to obtain favorable terms for interconnection
following December 31, 1999 will depend on a number of factors, including
decisions of the FCC and state regulatory authorities. However, the Company
intends to pursue such agreements vigorously and does not anticipate any
interruption in interconnection service.
The Company does anticipate that any such new interconnection
agreements will provide for reciprocal compensation at rates lower than in the
Company's current interconnection agreement. The Company also anticipates that
the reciprocal compensation related to Metacomm will not continue due to changes
in the terms of the interconnection agreement, changes in Metacomm's business or
the architecture of its network or a combination thereof. In light of this, the
Company determined to stop advancing any payment to Metacomm in February 2000.
In February, 2000 the Company received a notice by which Metacomm notified
BellSouth that due to BellSouth's failure to pay reciprocal compensation,
Metacomm was no longer able to sustain its network operations. Metacomm
instructed BellSouth to terminate the facilities it provides to Metacomm. One
effect of that termination will be to eliminate US LEC's revenue from the
Metacomm network. Based on fourth quarter 1999 results, US LEC estimates that
the reduction in revenue during 2000 will be approximately $18.0 million per
quarter, the reduction in cost of services related to commissions approximately
$9.0 million per quarter, resulting in a decrease in earnings from operations of
approximately $9.0 million per quarter.
<PAGE>
US LEC - The Competitive Telephone Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Disputed Access Revenues
In February 2000, US LEC filed suit in U.S. District Court for the
Western District of North Carolina against Sprint Communications. This action
seeks to collect amounts owed to US LEC for access charges for intrastate and
interstate traffic which was either handed off to Sprint by the Company or
terminated to the Company by Sprint. As of December 31, 1999, Sprint owed US LEC
$4.3 million in access charges. Sprint has refused to pay the amounts invoiced
by US LEC on the basis that the rates are higher than the amounts that Sprint is
willing to pay. US LEC's invoices to Sprint are at the rates specified in US
LEC's state and federal tariffs. The FCC recently determined that a long
distance company may not withhold access charges on the basis that it believes
the charges to be too high [MGC Communications, Inc. v. AT&T Corp., FCC Release
99-408]. As such, US LEC anticipates a favorable resolution of this matter.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the effective date of SFAS No. 133". The Company has not yet completed its
analysis of any potential impact of SFAS No. 133 on its financial statements.
YEAR 2000 COMPLIANCE
Many computer systems may experience difficulty processing dates beyond
the year 1999 and will need to be modified prior to the Year 2000. Failure to
make such modifications could result in system failures or miscalculations
causing a disruption of operations. No piece of equipment or software, owned or
maintained by the Company predates August 1996, with the majority of all
technology purchases concentrated in the period following March 1997. Since all
of its internal systems are relatively new and there were no legacy systems to
integrate, the Company believes that it does not face material Year 2000 issues
that may afflict many technology owners and that its internal software and
hardware systems will function properly in all material respects with regard to
Year 2000 issues. In addition, Year 2000 issues are also addressed as the
Company's network and internal systems are upgraded in the normal course of
business. As of December 31, 1999, the Company's costs expended towards Year
2000 compliance has been minimal and it does not expect its additional
expenditures directly related to Year 2000 compliance cost to exceed $0.1
million. Management continually reassessed the status of the Company's Year 2000
compliance efforts through March 2000.
The Company began conducting verification testing of all its internal
information technology and information systems in 1998. The testing was
concluded on September 25, 1999. The testing was a multi-phased process which
includes, but is not limited to, setting the system clocks to simulate several
key dates and times in the Year 2000, then performing daily activities. The
infrastructure, servers and workstations, as well as software systems were
tested and validated using this process. The Company's internal information
technology and systems, based on manufacturer supplied information and internal
testing, are 100% compliant, barring new contradictory information from the
manufactures or vendors. The core of the Company's telecommunication operations,
the Lucent Technologies 5ESS(R) Any Media(TM) switch, is fully compliant at this
time, as are other telecommunications systems owned by the Company. The majority
of the services and facilities vendors to the Company are compliant. While the
Company has no control over vendors of telecommunications systems and
facilities, based on information provided to the Company, the Company believed
that the vendors utilized by the Company would be and were Year 2000 compliant
by the end of 1999.
The Company assessed the building access, security, and related issues
at all of its switch locations. Each switch site is accessible by manual methods
in the event of building systems failure. Further, each US LEC switch site was
built with a Year 2000 compliant uninterruptible power supply and a back-up
generator. The Company's corporate office and network operations center received
assurances from the building management that all systems within these buildings
are Year 2000 compliant. The Company's supporting services are centralized at
the corporate offices.
<PAGE>
The Company (as are all other telecommunications providers) is heavily
dependent on the public switched network, over which the Company has little
control. The Company cannot give comfort on the status of the public switched
network or other telecommunications carriers and facility providers (such as
other local exchange carriers ("LECs"), competitive access providers ("CAPs") or
interexchange carriers ("IXCs")).
The Company experienced no major Year 2000 issues, therefore,
management believes that its internal hardware and software applications are
Year 2000 compliant in all material respects. There can be no absolute assurance
that future problems may arise due to undetected issues with the Company's or
supplier's systems. The Company is monitoring all key vendors and suppliers for
Year 2000 issues. While most of the Company's significant suppliers and vendors
have advised the Company that they are or anticipate being Year 2000 compliant,
if the software applications of other LECs, IXCs, CAPs, or others on whose
services the Company depends are not Year 2000 compliant, a material adverse
effect on the Company's financial condition and results of operations could
result. The Company is not aware of any significant vendor who may be unable to
provide services to the Company as a result of Year 2000 non-compliance. The
Company has developed Year 2000 contingency plans, in conjunction with its
disaster recovery plans, in the event of a Year 2000 related failure including
if its suppliers and vendors are not Year 2000 compliant, but there can be no
assurance that the contingency plan will avoid service disruptions related to
Year 2000 issues.
MARKET RISK
US LEC is exposed to various types of market risk in the normal course
of business, including the impact of interest rate changes on its investments
and debt. As of December 31, 1999, investments consisted primarily of
institutional money market funds. All of the Company's long-term debt consist of
variable rate instruments with interest rates that are based on a floating rate
which, at the Company's option, is determined by either a base rate or the
London Interbank Offered Rate, plus, in each case, a specified margin.
Although US LEC does not currently utilize any interest rate management
tools, it will evaluate the use of derivatives such as, but not limited to,
interest rate swap agreements to manage its interest rate risk. As the Company's
investments are all short-term in nature and its long-term debt is at variable
short-term rates, management believes the carrying values of the Company's
financial instruments approximate fair values.
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders of
US LEC Corp.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of US LEC
Corp. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally
accepted in the United States of America. 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, such financial statements present fairly in all
material respects, the financial position of the companies as of December 31,
1998 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 6 to the financial statements, a significant
portion of the Company's accounts receivable and revenues relate to reciprocal
compensation which is currently in dispute.
/s/ Deloitte & Touche LLP
February 29, 2000
Charlotte, North Carolina
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1999 (In Thousands)
<TABLE>
<CAPTION>
1998 1999
- -------------------------------------------------------------------------------------------------------------
ASSETS (Note 5)
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents (Note 2) $ 41,965 $ 15,174
Certificates of deposit and restricted cash (Note 2 and 6) 1,167 1,173
Accounts receivable, net of allowance of $12,024 and $40,074, at 1998
and 1999, respectively (Notes 2 and 6) 66,214 193,943
Prepaid expenses and other assets 2,838 2,979
------------------------------
Total current assets 112,184 213,269
Property and Equipment, Net (Notes 2, 3 and 5) 56,219 102,002
Other Assets (Note 2) 1,800 4,829
------------------------------
Total Assets $ 170,203 $ 320,100
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 8) $ 8,909 $ 13,050
Deferred revenue (Note 2) 829 1,702
Accrued network costs (Note 2) 4,521 12,911
Accrued commissions, net - related party (Note 8) 5,345 22,809
Deferred income taxes (Notes 2 and 7) 7,108 15,160
Commissions Payable (Note 2) 4,600 23,702
Accrued expenses - other 4,657 10,826
------------------------------
Total current liabilities 35,969 100,160
------------------------------
Long-Term Debt (Note 5) 20,000 72,000
Deferred Income Taxes, Noncurrent (Notes 2 and 7) 1,259 8,796
Other Liabilities - Noncurrent - 274
Stockholders' Equity (Note 10):
Common stock - Class A, $.01 par (72,925 authorized shares, 10,345 and 10,426
outstanding at December 31, 1998 and 1999, respectively) 103 104
Common stock - Class B, $.01 par (17,076 shares authorized shares, 17,076 and
17,076 outstanding at December 31, 1998 and 1999, respectively) 171 171
Additional paid-in capital 106,800 108,665
Retained earnings 6,556 30,365
Unearned compensation - stock options (655) (435)
------------------------------
Total stockholders' equity 112,975 138,870
------------------------------
Total Liabilities and Stockholders' Equity $ 170,203 $ 320,100
==============================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue, Net (Notes 2, 6 and 8 - includes related party transactions
totaling $6,239 and $9,511 in 1998 and 1999, respectively) $ 6,458 $ 84,716 $ 175,180
Cost of Services (Notes 6 and 8 - includes related party transactions
totaling $19,759 and $38,990 in 1998 and 1999, respectively) 4,201 33,646 73,613
----------------------------------------------
Gross Margin 2,257 51,070 101,567
Selling, General and Administrative (Note 8) 6,117 25,020 48,375
Depreciation and Amortization 443 4,941 11,720
----------------------------------------------
Earnings (Loss) from Operations (4,303) 21,109 41,472
Other (Income) Expense
Interest income (66) (1,860) (1,050)
Interest expense (Note 4) 421 237 3,096
----------------------------------------------
Earnings (Loss) Before Income Taxes (4,658) 22,732 39,426
Provision For Income Taxes (Note 7) - 9,305 15,617
Net Earnings (Loss) $ (4,658) $ 13,427 $ 23,809
----------------------------------------------
Net Earnings (Loss) Per Share (Note 11):
Basic $ (0.25) $ 0.53 $ 0.87
----------------------------------------------
Diluted $ (0.25) $ 0.52 $ 0.84
----------------------------------------------
Weighted Average Shares Outstanding (Note 11):
Basic 18,653 25,295 27,431
----------------------------------------------
Diluted 18,653 25,804 28,411
----------------------------------------------
</TABLE>
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Common Stock
Class A Class B
-------------------- --------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance (Deficiency), December 31, 1996 -- $ -- -- $ --
Issuance of nonvoting units -- -- -- --
Issuance of voting units -- -- -- --
Issuance of warrants -- -- -- --
Contribution to capital -- -- -- --
Exchange of limited liability company units
for C Corporation shares 3,855 39 16,595 166
Net loss -- -- -- --
----------------------------------------------------
Balance, December 31, 1997 3,855 39 16,595 166
Public stock offering 6,325 63 -- --
Conversion of $5,000 stockholder loans for 481 shares
of Class B common stock -- -- 481 5
Dividend (Note 4) -- -- -- --
Issuance of stock warrants -- -- -- --
Unearned compensation - stock options -- -- -- --
Exercise of warrants 165 1 -- --
Tax effect of non-qualified options exercised -- -- -- --
Net earnings -- -- -- --
----------------------------------------------------
Balance, December 31, 1998 10,345 103 17,076 171
----------------------------------------------------
Exercise of stock options 14 -- -- --
Exercise of warrants 5 -- -- --
Tax effects of warrants exercised -- -- -- --
Issuance of Shares 62 1 -- --
Unearned compensation - stock options -- -- -- --
Tax effect of Unearned Comp - Stock Options -- -- -- --
Tax effect of disqualified dispositions - ISO's -- -- -- --
Net earnings -- -- -- --
----------------------------------------------------
Balance, December 31, 1999 10,426 $ 104 17,076 $ 171
----------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock/ Common Stock/
Voting Units (1) Nonvoting Units (1) Additional
------------------------- ------------------------ Paid-in
Shares Amount Shares Amount Capital
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance (Deficiency), December 31, 1996 -- $ -- $ -- $ -- $ --
Issuance of nonvoting units 10 600 2 28 --
Issuance of voting units 1 1 4,413 --
Issuance of warrants -- 4,555 -- -- 70
Contribution to capital -- -- -- -- 1,711
Exchange of limited liability company units
for C Corporation shares (11) (5,155) (3) (4,441) 9,392
Net loss -- -- -- -- --
------------------------------------------------------------------
Balance, December 31, 1997 -- -- -- -- 11,173
Public stock offering -- -- -- -- 87,079
Conversion of $5,000 stockholder loans for 481 shares
of Class B common stock -- -- -- -- 4,995
Dividend (Note 4) -- -- -- -- 1,250
Issuance of stock warrants -- -- -- -- 75
Unearned compensation - stock options -- -- -- -- 819
Exercise of warrants -- -- -- -- 471
Tax effect of non-qualified options exercised -- -- -- -- 938
Net earnings -- -- -- -- --
-----------------------------------------------------------------
Balance, December 31, 1998 -- -- -- -- 106,800
-----------------------------------------------------------------
Exercise of stock options -- -- -- -- 103
Exercise of warrants -- -- -- -- 14
Tax effects of warrants exercised -- -- -- -- 23
Issuance of Shares -- -- -- -- 1,749
Unearned compensation - stock options -- -- -- -- (29)
Tax effect of Unearned Comp - Stock Options -- -- -- -- (76)
Tax effect of disqualified dispositions - ISO's -- -- -- -- 81
Net earnings -- -- -- -- --
-----------------------------------------------------------------
Balance, December 31, 1999 -- $ -- -- $ -- $ 108,665
-----------------------------------------------------------------
<CAPTION>
Unearned
Retained Compensation
Earnings Stock
(Deficit) Options Total
------------------------------------------
<S> <C> <C> <C>
Balance (Deficiency), December 31, 1996 $ (963) -- $ (335)
Issuance of nonvoting units -- -- 4,413
Issuance of voting units -- -- 4,555
Issuance of warrants -- -- 70
Contribution to capital -- -- 1,711
Exchange of limited liability company units
for C Corporation shares -- -- 1
Net loss (4,658) -- (4,658)
-----------------------------------------
Balance, December 31, 1997 (5,621) -- 5,757
Public stock offering -- -- 87,142
Conversion of $5,000 stockholder loans for 481 shares
of Class B common stock -- -- 5,000
Dividend (Note 4) (1,250) -- --
Issuance of stock warrants -- -- 75
Unearned compensation - stock options -- (655) 164
Exercise of warrants -- -- 472
Tax effect of non-qualified options exercised -- -- 938
Net earnings 13,427 -- 13,427
-----------------------------------------
Balance, December 31, 1998 6,556 (655) 112,975
-----------------------------------------
Exercise of stock options -- -- 103
Exercise of warrants -- -- 14
Tax effects of warrants exercised -- -- 23
Issuance of Shares -- -- 1,750
Unearned compensation - stock options -- 220 191
Tax effect of Unearned Comp - Stock Options -- -- (76)
Tax effect of disqualified dispositions - ISO's -- -- 81
Net earnings 23,809 -- 23,809
-----------------------------------------
Balance, December 31, 1999 $ 30,365 $ (435) $ 138,870
-----------------------------------------
</TABLE>
(1) On December 31, 1997, all limited liability units were converted into C
Corporation common shares based upon a conversion ratio of 1,500 shares for
each unit.
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1998, and 1999
(In Thousands)
<TABLE>
<CAPTION>
1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C> <C>
Net earnings (loss) $ (4,658) $ 13,427 $ 23,809
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Depreciation and amortization 443 4,941 11,720
Accounts receivable allowance -- 12,024 28,050
Stock compensation 71 240 --
Deferred compensation -- (655) 191
Deferred taxes -- 8,367 15,617
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (6,006) (74,177) (155,779)
Prepaid expenses and other assets 31 (579) 495
Other assets (14) (1,271) (41)
Accounts payable 459 1,609 (96)
Deferred revenue 1,141 (312) 873
Accrued expenses - other 634 5,082 3,995
Commissions Payable 440 4,160 19,103
Other Liabilities - Noncurrent -- -- 274
Accrued Commissions Payable - Related Party 81 5,264 17,464
Accrued network costs 1,784 2,737 8,390
--------------------------------------
Total adjustments (936) (32,570) (49,744)
--------------------------------------
Net cash used in operating activities (5,594) (19,143) (25,935)
--------------------------------------
Investing Activities:
Purchase of property and equipment (5,802) (47,721) (49,690)
Purchases of certificates of deposit and restricted cash (349) (817) (6)
(Advances to) repayments from stockholder (200) -- --
--------------------------------------
Net cash used in investing activities (5,951) (48,538) (49,696)
--------------------------------------
Financing Activities:
Issuance of common shares and limited liability company units 8,968 471 --
Proceeds from public stock offering -- 87,142 114
Contribution of capital 1,711 -- --
Proceeds from long-term debt -- 20,000 52,000
Payment for deferred loan fees -- (1,156) (3,274)
Proceeds from notes payable - stockholders 4,289 3,289 --
Repayment of notes payable - stockholders (960) (3,289) --
--------------------------------------
Net cash provided by financing activities 14,008 106,457 48,840
--------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,463 38,776 (26,791)
Cash and Cash Equivalents, Beginning of Period 726 3,189 41,965
Cash and Cash Equivalents, End of Period $ 3,189 $ 41,965 $ 15,174
--------------------------------------
Supplemental Cash Flows Disclosures
Cash paid for:
Interest $ 672 $ 505 $ 2,748
--------------------------------------
Taxes $ -- $ 1,860 $ 2
--------------------------------------
Supplemental Noncash Investing and Financing Activities:
During 1997, accrued interest of $55 due to stockholders was converted into voting equity.
At December 31, 1997, 1998, and 1999, $7,267, $6,838 and $11,079 respectively, of property and equipment
additions are included in outstanding accounts payable.
During 1998, the majority stockholder converted $5,000 of loans to the Company for 481 shares of Class B Stock.
The dividend resulting from the cancellation of the loan was $1,250.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
1. ORGANIZATION AND NATURE OF BUSINESS
The consolidated financial statements include the accounts of US LEC
Corp. (the "Company") and its ten wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company was incorporated in 1996 as an S Corporation. Effective December 31,
1996, US LEC Corp. was converted to a limited liability company ("US LEC
L.L.C.") through an exchange of the S Corporation common stock for voting and
nonvoting units of US LEC L.L.C. On December 31, 1997, in anticipation of an
initial public offering of common stock, the Company became a C Corporation
through a merger of US LEC L.L.C. into the Company and the exchange of all of
the limited liability company units into shares of Class A or Class B Common
Stock. On April 29, 1998, the Company completed the sale of 5,500 shares of
Class A Common Stock through an initial public offering. Additionally, on May
12, 1998, the Company issued 825 shares of Class A Common Stock in connection
with the underwriters' exercise of their option to cover over-allotments. The
total offering resulted in net proceeds of approximately $87,142, after
deducting underwriting discounts, commissions and offering expenses. The Company
has used all of the net proceeds of the initial public offering to further
expand and develop its telecommunications network and services.
The Company, through its subsidiaries, provides switched local, long
distance and enhanced telecommunications services primarily to businesses and
other organizations in selected markets in the southeastern United States. The
Company was a development stage enterprise from inception until March 1997, when
it began generating telecommunications revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - The Company recognizes revenue on
telecommunications and enhanced communications services in the period that the
service is provided. Revenue is recognized when it meets specific criteria: 1)
the revenue is earned and our earnings process is complete, 2) the revenue is
realizable in that it was due and payable, and 3) ultimate collectibility of the
revenue is reasonably assured. Reciprocal compensation that we record as revenue
from other local exchange carriers represents compensation for local
telecommunications traffic terminated on our network that originates on another
carrier's network. To date, a majority of our reciprocal compensation revenue
has been generated through the Metacomm network from traffic originated by
customers of BellSouth Telecommunications, Inc. ("BellSouth"). The billing,
payment and other arrangements for this reciprocal compensation are governed by
an interconnection agreement between BellSouth and the Company. Reciprocal
compensation revenue recognized by the Company is earned because we have
completed performance of the service that the BellSouth interconnection
agreement requires us to perform. Revenue is recorded net of amounts which are
rebated to a customer or outside sales agent pursuant to each respective
telecommunications service contract as well as net of amounts relating to the
allowance for potentially uncollectible receivables related to ISP reciprocal
compensation. For the year ended December 31, 1998 and December 31, 1999,
commissions expense of $6,377 and $25,265, respectively, and an allowance of
$12,000 and $27,944, respectively, are netted with gross revenues in the
accompanying financial statements. Revenue related to billings in advance of
providing services is deferred and recognized when earned. At December 31, 1997,
deferred revenue primarily represented billings to incumbent local exchange
carriers ("ILECs") relating to internet service provider ("ISP") reciprocal
compensation. Reciprocal compensation represents the compensation paid to and by
a competitive local exchange carrier ("CLEC") and the ILEC for termination of a
local call on the other's network. The Company deferred the recognition of such
amounts in 1997 pending a ruling from the North Carolina Utilities Commission
("NCUC") relating to ISP reciprocal compensation. During 1998, such amounts were
subsequently recorded as revenue as a result of the decision by the NCUC on
February 26, 1998 in favor of the Company. As a result of this ruling, the
Company began recognizing all such ISP reciprocal compensation revenue in the
period in which the service was provided. However, due to current regulatory and
judicial proceedings related to this type of revenue, the Company established an
allowance of $39,823 at December 31, 1999, which has been recorded as a
reduction of revenue of $12,000 and $27,823 during the years ended December 31,
1998 and December 31, 1999 respectively (see Note 6).
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
Cash and Cash Equivalents - Cash equivalents consist of highly liquid
investments with original maturities of three months or less at the time of
purchase.
Restricted Cash - The restricted cash balance as of December 31, 1998
and December 31, 1999 serves as collateral for letters of credit related to
certain office leases.
Accounts Receivable - The majority of the accounts receivable at
December 31, 1998 and December 31, 1999 arose from reciprocal compensation
revenue earned in accordance with terms of an interconnection agreement with
BellSouth Telecommunications, Inc. ("BellSouth"). The Company established an
allowance of $12,000 and $39,823 as of December 31, 1998 and December 31, 1999,
respectively, due to the current judicial and regulatory proceedings related to
this disputed revenue. The Company anticipates a ruling on these proceedings and
collection within twelve months and therefore continues to treat the disputed
amounts as current on the accompanying financial statements (see Note 6).
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, except for leasehold
improvements as noted below.
The estimated useful lives of the Company's principal classes of property and
equipment are as follows:
Telecommunications switching and other 5 - 9 years
equipment
Office equipment, furniture and other 5 years
Leasehold improvements The lesser of the estimated
useful lives or the lease term
In 1999, the Company capitalized $264 and $81 in payroll related and
interest costs respectively in accordance with the AICPA Statement of Position
("SOP ") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
Long-Lived Assets - The Company reviews the carrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable.
Measurement of any impairment would include a comparison of estimated
undiscounted future operating cash flows anticipated to be generated during the
remaining life of the assets with their net carrying value. An impairment loss
would be recognized as the amount by which the carrying value of the assets
exceeds their fair value.
Accrued Network Costs - Accrued network costs include management's
estimate of charges for direct access lines, facility charges, outgoing and
incoming minutes, reciprocal compensation and other costs of revenue for a given
period for which bills have not been received by the Company. Management's
estimate is developed from the minutes of use and rates charged by each
respective service provider. Subsequent adjustments to this estimate may result
when actual costs are billed by the service provider to the Company. However,
management does not believe such adjustments will be material to the Company's
financial statements.
Debt Issuance Cost - The Company capitalizes loan fees associated with
securing long term debt and amortizes such deferred loan fees over the term of
the debt agreement. The Company had deferred loan fees of $1,156 and $4,664 as
of December 31, 1998 and 1999, respectively recorded in other assets on the
accompanying balance sheet which are being amortized over 7 years (see Note 5).
Fair Value of Financial Instruments - Management believes the fair
values of the Company's financial instruments, including cash equivalents,
restricted cash, accounts receivables, and accounts payable approximate their
carrying value. In addition, because the long-term debt consists of variable
rate instruments, their carrying values approximate fair values.
<PAGE>
Income Taxes - The Company was a limited liability company for the
period from January 1, 1997 to December 31, 1997, on which date it was converted
to a C Corporation. Accordingly, no provision (benefit) for income taxes was
necessary for 1997 since income taxes were the responsibility of the individual
limited liability company members. On a pro forma basis, had the Company been
structured as a C Corporation, there would have been no change in the net loss
or net loss per share for 1996 and 1997. At December 31, 1997, deferred tax
assets and liabilities related to the conversion to a C Corporation were not
significant.
For 1998 and 1999, income taxes are provided for temporary differences
between the tax and financial accounting basis of assets and liabilities using
the liability method. The tax effects of such differences, as reflected in the
balance sheet, are at the enacted tax rates expected to be in effect when the
differences reverse.
Concentration of Risk - The Company is exposed to concentration of
credit risk principally from trade accounts receivable. The Company's trade
customers are located in the southeastern United States. The Company performs
ongoing credit evaluations of its customers but does not require collateral to
support customer receivables. Credit risk may be reduced by the fact that the
Company's most significant trade receivables are from large, well-established
telecommunications entities. However, at December 31, 1998 and 1999, the
majority of the accounts receivable balance is due from BellSouth and is
currently in dispute (see Note 6).
The Company is dependent upon certain suppliers for the provision of
telecommunications services to its customers. The Company has executed
interconnection agreements for all of its current operating networks, and a
number of these agreements were re-negotiated in 1999. Management believes that
suitable interconnection agreements can be negotiated for the remaining
agreements that will expire during 2000 and, accordingly, does not expect any
disruption of services. The interconnection agreement with BellSouth expired on
December 31, 1999 but continues in force until new interconnection agreements
are reached. The new BellSouth agreements will be effective as of January 1,
2000 (see Note 6).
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. Actual results could differ from those estimates.
Significant estimates relate to the accrual of network costs payable to other
telecommunications entities and the estimate for the allowance for receivables
due from BellSouth (see Note 6). Any difference between the amounts recorded and
amounts ultimately realized or paid will be adjusted prospectively as new facts
become known.
Advertising - The Company expenses advertising costs in the period
incurred. Advertising expense amounted to $137, $276, and $522 for 1997, 1998
and 1999, respectively, which for 1999 were entirely offset by marketing
incentives provided by a vendor.
Significant Customer - In fiscal 1997, 1998, and 1999, BellSouth,
operating in the majority of the Company's markets, accounted for approximately
65%, 80%, and 70%, respectively, of the Company's net revenue (before reduction
for the $12,000 and $27,823 allowance in 1998 and 1999, respectively, described
in Note 6). The majority of this revenue for 1998 and 1999 was generated from
ISP reciprocal compensation. Although ISP reciprocal compensation owed to the
Company by BellSouth is not a customer relationship in the traditional sense,
BellSouth is shown here due to the significant contribution to revenue. At
December 31, 1997, 1998, and 1999, BellSouth accounted for 67%, 94%, and 92% of
the Company's total accounts receivable before allowance, respectively. The
majority of such receivables and revenues have resulted from traffic associated
with Metacomm, LLC ("Metacomm"), a customer of the Company and BellSouth, and
which became a related party to the Company during 1998 (see Notes 6 and 8).
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
Recent Accounting Pronouncements - In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
standard addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the effective date of SFAS No. 133". The
Company has not yet completed its analysis of any potential impact of this
standard on its financial statements.
Reclassifications - Certain reclassifications have been made to 1997
and 1998 amounts to conform to the 1999 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 is summarized by
major class as follows:
1998 1999
- --------------------------------------------------------------------------------
Telecommunications switching and other equipment $ 45,334 $ 79,494
Office equipment, furniture and other 9,158 24,950
Leasehold improvements 6,785 14,071
-------------------------
61,277 118,515
Less accumulated depreciation and amortization (5,058) (16,513)
-------------------------
Total $ 56,219 $ 102,002
=========================
4. NOTES PAYABLE-STOCKHOLDERS
During 1997, the Company's majority stockholder loaned an aggregate of
$5,000 to the Company. Interest charged on loaned amounts was at prime plus 2%
(10.5% per annum at December 31, 1997). On February 14, 1998, the Company's
majority stockholder exchanged the $5,000 loan for 481 shares of Class B Common
Stock with a fair value of $10.40 per share. The fair value of the Class B
Common Stock issued in the exchange was $1,250 in excess of the carrying value
of the debt. Accordingly, the difference between the carrying value of the debt
and the fair value of the Class B Common Stock issued in the exchange was
recorded as a dividend to the majority stockholder in the first quarter of 1998.
In January 1998, an entity controlled by this stockholder loaned an additional
$2,289 to the Company with an interest rate of 12%. The Company repaid all the
outstanding amounts due under the loan in June 1998.
Another stockholder loaned the Company an aggregate of $960 in 1996,
with an interest rate of prime plus 2%. These loans were repaid in 1997. In
January 1998, this stockholder loaned $1,000 to the Company, with an interest
rate of 12%. The Company repaid all the outstanding amounts due under the loan
in June 1998.
Interest expense to related parties totaled $420, $223 and $0 in 1997,
1998 and 1999, respectively.
5. LONG-TERM DEBT
In December 1998, the Company entered into a $50,000 senior secured
loan agreement with General Electric Capital Corporation and First Union
National Bank. The loan agreement was comprised of a $42,500 one-year revolving
credit facility which converted to a seven year term loan and a $7,500 reducing
revolving credit facility with a six year term. The amount outstanding at
December 31, 1998 was $20,000. In June 1999, the Company amended the loan
agreement to increase the amount available under the agreement from $50,000 to
$75,000. In December 1999, the Company again amended the loan agreement
increasing the amount available from $75,000 to $150,000. The credit facility is
now comprised of (i) a $125,000 revolving credit facility with a term of 18
months and an option to convert into a six-year term loan at the end of that 18
month period and (ii) a $25,000 reducing revolving credit facility with a
six-year term. The interest rate for the facility is a floating rate based, at
the Company's option, on a base rate (as defined in the loan agreement) or the
London Interbank Offered Rate (LIBOR), plus a specified margin. The amount
outstanding under the credit facility at December 31, 1999 was $72,000. Advances
under the agreement as of December 31, 1999 bear interest at an annual rate
ranging between approximately 10.5% and 11.7%. The credit facility is subject to
certain financial covenants, the most
<PAGE>
significant of which relate to the maintenance of levels of revenue, earnings
and debt ratios. The credit facility is secured by a pledge of the capital stock
of the Company's principal operating subsidiaries and a security interest in a
substantial portion of the Company's and its operating subsidiaries' equipment,
receivables, leasehold improvements and general intangibles. Proceeds from the
credit facility have been and will be used to fund capital expenditures and
working capital requirements and for other general corporate purposes. Scheduled
maturities of long-term debt, assuming conversion to a term loan are as follows:
Year ending December 31:
2000 $ -
2001 -
2002 10,800
2003 10,800
2004 14,400
Thereafter 36,000
-----------
Total $ 72,000
===========
6. COMMITMENTS AND CONTINGENCIES
Disputed Reciprocal Compensation Revenues - A majority of the Company's
revenue is derived from reciprocal compensation amounts due from ILECs,
principally BellSouth. In August 1997, BellSouth notified the Company and other
CLECs that it considered traffic terminated to Enhanced Service Providers
("ESPs"), including internet service providers ("ISPs"), to be interstate
traffic, and therefore not subject to reciprocal compensation, and that
BellSouth would not pay (or bill) reciprocal compensation under interconnection
agreements for this traffic. BellSouth is disputing the portion of reciprocal
compensation billed by the Company related to the transport and termination of
local traffic from its customers to ESPs, including ISPs and information service
providers, primarily on the basis that such traffic does not terminate in the
same local exchange and, as described below, the portion of the reciprocal
compensation billings related to traffic on the network of Metacomm, LLC
("Metacomm") (collectively referred to as "Disputed Reciprocal Compensation").
The Company recorded Disputed Reciprocal Compensation revenue of approximately
$0, $42,000 and $92,000 for 1997, 1998 and 1999, respectively, net of a $0,
$12,000 and $27,000 allowance, respectively. Management believes that the
Company has earned and is legally entitled to this revenue and payments are due
from BellSouth pursuant to the interconnection agreements that BellSouth has
with the Company.
On February 26, 1998, following a petition by the Company, the North
Carolina Utilities Commission (the "NCUC") ordered BellSouth to bill and pay for
all ISP-related traffic (the "NCUC Order"). Following motions filed by
BellSouth, the NCUC stayed enforcement of its order until June 1, 1998. On April
27, 1998, BellSouth filed a petition for judicial review of the NCUC Order and
an action for declaratory judgment and other relief (including a request for an
additional stay) with the United States District Court for the Western District
of North Carolina ("U.S. District Court") pending determination of certain
related issues by the Federal Communications Commission ("FCC"). This action was
filed against the Company and the NCUC. In June 1999, the U.S. District Court
dismissed BellSouth's petition without prejudice and remanded back to the NCUC
for further review. Following the U.S District Court's remand, on June 22, 1999,
the NCUC denied BellSouth's request for a further stay of the NCUC Order. On
July 16, 1999, the Company received an $11,187 payment from BellSouth for a
portion of the Disputed Reciprocal Compensation earned from terminating calls to
ISPs that are customers to the Company's North Carolina operations, and subject
to the NCUC Order.
Other than denying BellSouth's request for a further stay, the only
action taken by the NCUC with respect to the remand from the U.S. District Court
is that the NCUC filed with the U.S. Fourth Circuit Court of Appeals (the "4th
Circuit") a notice of appeal of the U.S. District Court's order that rejected
the NCUC's defenses, including its defense that the 11th Amendment to the United
States Constitution bars BellSouth from making the NCUC a party to our
proceeding in the federal courts. The Company has also appealed and the United
States Justice Department has intervened in the appeal. The Appellate hearing on
this matter is tentatively scheduled for early June, 2000.
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
In February, 1999, the FCC issued a declaratory ruling (the "FCC
Ruling") which concluded that for jurisdictional purposes most calls delivered
to ISPs should be deemed to continue to internet web sites, which are often
located in other states. Thus, the FCC ruled that such calls are
jurisdictionally "interstate" in nature. However, the FCC further declared that
where parties have previously agreed in interconnection agreements that
reciprocal compensation must be paid for traffic bound for ISPs, the parties
should be bound by those agreements, as interpreted and enforced by state
regulatory bodies. The FCC also recognized that some commissions might
reconsider their decisions in light of its ruling. As noted, the NCUC had ruled
on February 26, 1998 in favor of the Company with respect to payment for traffic
bound to ISPs under the Company's first interconnection agreement with
BellSouth. To date, state regulatory bodies in at least twenty-three states have
considered the effect of the FCC Ruling and have overwhelmingly reaffirmed their
earlier decisions requiring payment of reciprocal compensation for this type of
traffic or for the first time determined that such compensation is due. Included
among these states are Alabama, Florida, and Tennessee, all of which are in
BellSouth's operating territory. In this regard, the Alabama Public Service
Commission concluded that the treatment of ISP traffic as local was so prevalent
in the industry at the time BellSouth entered into interconnection agreements
with CLECs that, if it is so intended, BellSouth had an obligation to negate
such local treatment in the agreements by specifically delineating that ISP
traffic was not local traffic subject to the payment of reciprocal compensation.
The Florida Public Service Commission reached a similar conclusion. Georgia and
Tennessee have also reaffirmed decisions that reciprocal compensation is owed
for calls to ISPs. In an arbitration of the terms of a new interconnection
agreement between BellSouth and another CLEC, the NCUC recently determined that
until the FCC issues a definitive ruling pursuant to the notice of proposed
rulemaking which was part of the FCC Ruling, reciprocal compensation should
continue to be paid under the new interconnection agreement. While US LEC was
not a party to this arbitration, management believes this decision to be
favorable in light of the U.S. District Court's remand (discussed above). Two
BellSouth states - South Carolina and Louisiana - have ruled that reciprocal
compensation is not due for traffic to ISPs. These decisions also came after the
FCC's Declaratory Ruling. All of these decisions have been appealed. The South
Carolina and Louisiana decisions represent a view adopted by very few other
states. (The Company does not provide local service and has no reciprocal
compensation recorded for traffic in South Carolina or Louisiana).
In February 2000, the Company received payment from GTE for reciprocal
compensation related to ISP and voice traffic in North Carolina. This payment
was pursuant to a commercial arbitration award rendered January 4, 2000
resulting from a proceeding before the American Arbitration Association. GTE was
ordered to pay US LEC for all ISP traffic for the period ending September 1999
(approximately $650). The Company is currently working through dispute
resolution procedures with respect to subsequent periods and anticipates a
favorable ruling.
On September 14, 1998, the Company filed a complaint with the NCUC
seeking payment of facilities charges, non-ISP based reciprocal compensation and
intraLATA toll termination charges from BellSouth. Also on September 14, 1998,
BellSouth filed a complaint with the NCUC seeking to be relieved from its
obligations under its interconnection agreement with the Company to pay
reciprocal compensation for traffic related to networks including that operated
by Metacomm, a customer of BellSouth and the Company and, as of June 1998, a
related party of the Company. The two proceedings were consolidated for purposes
of discovery, which concluded June 16, 1999, and hearings concluded in August
1999 with respect to BellSouth's complaint. Hearings concerning US LEC's
complaint have been continued by the NCUC pending an order in the BellSouth
complaint. The Company anticipates that the NCUC will issue its ruling on
BellSouth's complaint before the end of 2000. The BellSouth proceeding primarily
involves the treatment of traffic over a network established by Metacomm and
whether, under the interconnection agreements between the Company and BellSouth
and the Telecommunications Act of 1996 (the "Telecom Act"), BellSouth is
required to pay reciprocal compensation to the Company for traffic associated
with this network and whether BellSouth has breached its interconnection
agreements with the Company by failing to pay reciprocal compensation for this
traffic.
In the NCUC proceedings filed September 14, 1998, BellSouth claims
principally that the traffic on Metacomm's network does not qualify for
reciprocal compensation because the Metacomm network was designed to generate
reciprocal
<PAGE>
compensation and that such traffic does not constitute "telecommunications"
subject to the reciprocal compensation payment provisions of the Telecom Act and
the interconnection agreements with BellSouth. In addition BellSouth has
identified other issues on which it bases its claim that the traffic on the
Metacomm network is not compensable, including (1) that the Company agreed to
share reciprocal compensation with Metacomm, (2) that, as disclosed in the
Company's Form 10-Q for the period ended September 30, 1998, Richard T. Aab, the
largest shareholder of the Company and the Chairman of its Board of Directors,
acquired a controlling interest in Metacomm after the dispute arose, (3)
reciprocal compensation has been billed on an "always-on" basis even though
there is no measurement of the amount of data transversing the network that is
originated by customers of Metacomm, (4) that the billed traffic includes
traffic during periods when Metacomm had not yet connected customers to its
network or when customers of Metacomm were not sending data over the network,
(5) that the Metacomm network includes facilities that cross LATA boundaries
and, therefore, data traversing these facilities is not local (and, therefore,
is ineligible for reciprocal compensation), (6) that Metacomm is an unlicensed
reseller of US LEC's services, not an end-user, and (7) that the Metacomm
network is a quasi-dedicated network which should not be eligible for reciprocal
compensation.
It is the Company's understanding that during the relevant period
Metacomm was engaged in the business of developing and operating a high-speed,
always-on data network in North Carolina and its network provides users with
continuous access to data, wide area network services, software applications and
other services, including access to the Internet. In the course of the these
proceedings, the Company concluded, based on positions taken and information
provided by Metacomm, that Metacomm related traffic should not be considered to
be solely ISP traffic, in part because its network provides additional services
and functions to users. Notwithstanding this determination, the Company believes
BellSouth will continue to contend the Disputed Reciprocal Compensation related
to the Metacomm network traffic is subject, in the first instance, to the
resolution of the ISP issue. The Company has recorded approximately $0, $50,000
and $98,000 of gross revenue, before allowances and late payment charges, for
fiscal 1997, 1998 and 1999, respectively, related to reciprocal compensation
revenue generated as a result of Metacomm network traffic.
When the Metacomm network was originally developed, the Company agreed
to pay Metacomm commissions equal to a specified percentage of the reciprocal
compensation the Company receives from ILEC's for the network traffic. The
Company recorded approximately $200, $20,000 and $39,000 for 1997, 1998 and
1999, respectively, in reciprocal compensation commission expense earned by
Metacomm, which is included in cost of services in the accompanying financial
statements. As of December 31, 1998 and 1999, the Company had a liability to
Metacomm net of amounts owed by Metacomm to the Company in the amount of $5,345
and $22,809, respectively, which is recorded as accrued commissions, net -
related party in the accompanying financial statements. The Company and Metacomm
are parties to agreements by which commissions earned by Metacomm related to
reciprocal compensation are not payable until the related reciprocal
compensation is collected from the ILEC. However, in fiscal 1997, 1998 and 1999,
the Company advanced to Metacomm $0, $8,257 and $12,015 prior to collecting the
earned reciprocal compensation from BellSouth. These payments are subject to a
repayment agreement whether or not the related reciprocal compensation is
ultimately collected from BellSouth and are offset with commissions due to
Metacomm since the legal right of offset exists.
The Company believes that calls to establish, maintain and manage data
network connections and intra-network communications generated by data
processing routers, which were necessary to maintain the functionality and
integrity of the Metacomm network, are within the definition of
"telecommunications" under the Telecom Act and constitute compensable traffic
subject to reciprocal compensation under the interconnection agreements the
Company has with BellSouth. The Company also believes that the issues raised by
BellSouth as additional bases for nonpayment does not excuse BellSouth from its
obligation to pay reciprocal compensation under its interconnection agreement
with the Company. Accordingly, the Company intends to defend vigorously against
BellSouth's claims and to prosecute vigorously its claims against BellSouth in
the above proceedings.
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
As noted above, on July 16, 1999, the Company received a payment of
$11,187 from BellSouth representing a portion of the amounts due the Company for
ISP reciprocal compensation in North Carolina. In making the payment, BellSouth
stated that it was for ISP traffic the NCUC had ordered it to pay for in
February 1998, including late fees, and that it was reserving all of its appeal
rights with respect to the payment. BellSouth also stated that this payment did
not include any amounts at issue in its September 14, 1998 NCUC proceeding. This
partial payment did not cover all outstanding amounts the Company claims are due
from BellSouth in North Carolina and other states the Company serves. For
example, while the Company has outstanding amounts due from BellSouth for ISP
traffic in Tennessee, Georgia and Florida, BellSouth has not paid these amounts,
presumably because no orders specific to US LEC have been entered by state
commissions in those states directing BellSouth to pay the Company. However,
state commissions in these states have issued rulings in favor of other
competitive carriers and as discussed above, the state commissions in Florida
and Alabama have made rulings subsequent to the FCC Ruling. To address this
issue, the Company has filed the following additional actions against BellSouth
related to delinquent reciprocal compensation payments, none of which involve
Metacomm or any similar network:
o On July 1, 1999, the Company filed a complaint against BellSouth
before the Georgia Public Service Commission ("GAPSC"). The
hearing with relation to this complaint concluded January 21,
2000. The Company anticipates receiving the ruling from the
hearing officer in April 2000.
o On July 2, 1999, the Company filed a complaint against BellSouth
before the Florida Public Service Commission ("FLPSC"). This
matter is scheduled for hearing in late April 2000.
o On August 6, 1999, the Company filed a complaint against
BellSouth before the Tennessee Regulatory Authority ("TRA"). This
matter has not yet been scheduled for hearing.
Management believes that the Company will ultimately obtain favorable
results in the state proceedings described above before the NCUC, GAPSC, FLPSC
and the TRA; however, BellSouth may elect to initiate additional proceedings (by
way of appeal or otherwise) challenging amounts owed to the Company. In this
regard, BellSouth recently has asserted a variety of other objections to paying
portions of the reciprocal compensation billed by the Company. They include
assertions that US LEC has miscalculated late payment fees due from BellSouth
and that US LEC has billed reciprocal compensation using the wrong rates. The
Company believes BellSouth has asserted these issues and will attempt to raise
further issues in order to avoid or delay payment.
If a decision adverse to the Company is issued in any of these
proceedings by any of the state commissions, and in particular the NCUC, or in
any appeal or review of a favorable decision by the Fourth Circuit Court of
Appeals, state commissions, or the FCC, or if either the FCC or any of the
applicable state commissions were to alter its view of reciprocal compensation,
such an event could have a material adverse effect on the Company's operating
results and financial condition. The Company's gross trade accounts receivable
as of December 31, 1998 and 1999 included approximately $54,000 and $190,000,
respectively, of earned but uncollected Disputed Reciprocal Compensation (before
a $12,000 and $39,000 allowance and before late payment charges) of which
approximately $50,000 and $148,000, respectively was generated as a result of
traffic related to the Metacomm network.
In June 1999, the Company adopted an existing agreement to extend local
interconnection with BellSouth replacing the previous interconnection agreement,
which expired on June 15, 1999. The adopted interconnection agreement with
BellSouth expired on December 31, 1999 but continues in force until new
interconnection agreements are reached. The new agreements will be effective as
of January 1, 2000. The Company filed petitions for arbitration in all nine
states in BellSouth operating territory seeking to obtain a PSC ordered
interconnection agreement, but the Company anticipates that it will be able to
avoid
<PAGE>
the arbitration process by adopting interconnection agreements that are
either currently in effect or which will result from arbitrations involving
other CLECs. The Company's ability to obtain favorable terms for interconnection
following December 31, 1999 will depend on a number of factors, including
decisions of the FCC and state regulatory authorities. However, the Company
intends to pursue such agreements vigorously and does not anticipate any
interruption in interconnection service.
The Company does anticipate that any such new interconnection
agreements will provide for reciprocal compensation at rates lower than in the
Company's current interconnection agreement. The Company also anticipates that
the reciprocal compensation related to Metacomm will not continue due to changes
in the terms of the interconnection agreement, changes in Metacomm's business or
the architecture of its network or a combination thereof. In light of this, the
Company determined to stop advancing any payment to Metacomm in February 2000.
In February, 2000 the Company received a notice by which Metacomm notified
BellSouth that due to BellSouth's failure to pay reciprocal compensation,
Metacomm was no longer able to sustain its network operations. Metacomm
instructed BellSouth to terminate the facilities it provides to Metacomm. One
effect of that termination will be to eliminate US LEC's revenue from the
Metacomm network. Based on fourth quarter 1999 results, US LEC estimates that
the reduction in revenue during 2000 will be approximately $18,000 per quarter,
the reduction in cost of services related to commissions approximately $9,000
per quarter, resulting in a decrease in earnings from operations of
approximately $9,000 per quarter.
Disputed Access Revenues - In February 2000, US LEC filed suit in U.S.
District Court for the Western District of North Carolina against Sprint
Communications. This action seeks to collect amounts owing to US LEC for access
charges for intrastate and interstate traffic which was either handed off to
Sprint by the Company or terminated to the Company by Sprint. As of December 31,
1999, Sprint owed US LEC $4,320 in access charges. Sprint has refused to pay the
amounts invoiced by US LEC on the basis that the rates are higher than the
amounts that Sprint is willing to pay. US LEC's invoices to Sprint are at the
rates specified in US LEC's state and federal tariffs. The FCC recently
determined that a long distance company may not withhold access charges on the
basis that it believes the charges to be too high [MGC Communications, Inc. v.
AT&T Corp., FCC Release 99-408]. As such, US LEC anticipates a favorable
resolution of this matter.
Leases - The Company leases office premises in various locations under
operating lease arrangements. Total rent expense on these leases amounted to
$1,801, $1,853, and $4,195 in 1997, 1998 and 1999, respectively. The Company's
restricted cash balance as of December 31, 1999 serves as collateral for letters
of credit for some of these office leases. (See Note 8)
Future minimum rental payments under operating leases having initial or
remaining non-cancelable lease terms in excess of one year are as follows (See
Note 8):
2000 $ 5,054
2001 5,478
2002 5,460
2003 4,932
2004 4,087
Beyond 18,229
--------------
$ 43,240
==============
Purchase Commitments - At December 31, 1998 and 1999, the Company has
outstanding commitments to purchase switching equipment with an aggregate cost
of $6,154 and $5,275, respectively.
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
7. INCOME TAXES
The provision for income taxes in 1998 and 1999 consists of the
following components:
1998 1999
- --------------------------------------------------------------------------------
Current - Charge equivalent to net tax benefit of stock
warrant exercise and issuance of stock options $ 938 $ 28
------------------
Deferred
Federal 6,702 12,869
State 1,665 2,720
------------------
8,367 15,589
------------------
Total provision for income taxes $ 9,305 $15,617
==================
The reconciliation of the statutory federal income tax rate to the
Company's federal and state overall effective income tax rate is as follows:
1998 1999
- --------------------------------------------------------------------------
Statutory federal rate 35.00% 35.00%
State income taxes 5.30 4.49
Miscellaneous .63 .11
------------------
Effective tax rate 40.93% 39.60%
==================
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1998 and
1999 are as follows:
Deferred tax assets:
1998 1999
- ----------------------------------------------------------------
Net operating loss carryforward $ 1,192 $17,054
Deferred state taxes and other 584 1,696
Accrued expenses 328 727
------------------
Total deferred tax assets 2,104 19,477
------------------
Deferred tax liabilities:
Net deferred revenues 7,834 33,476
Depreciation and amortization 2,591 9,811
Other 46 146
------------------
Total deferred tax
liabilities 10,471 43,433
------------------
Net deferred tax liability $ 8,367 $23,956
==================
At December 31, 1999 the Company has net operating loss carryforwards
for federal purposes of approximately $40,206 expiring through 2019.
8. RELATED PARTIES
In 1997, the Company repaid $200 for amounts advanced to its major
stockholder and received services under consulting agreements with two entities
controlled by Company stockholders. Under these agreements in fiscal 1997, the
Company expensed $175 which is included in selling, general and administrative
expenses in the accompanying financial statements. No such consulting agreements
existed during the years ended December 31, 1998 and 1999.
<PAGE>
During 1998, the Company's majority stockholder acquired an indirect
controlling interest in Metacomm. Metacomm is engaged in the business of
developing and operating a high-speed data network in North Carolina, and is a
customer of the Company and BellSouth. During 1998 and 1999, respectively, the
Company recorded $6,239 and $9,511 in revenue earned from services provided to
Metacomm (which did not include revenue from reciprocal compensation due from
BellSouth, see Note 6). Metacomm also earns commissions from the Company for
reciprocal compensation revenue relating to Metacomm's network. The Company
recorded $19,759 and $38,990 for 1998 and 1999, respectively, in reciprocal
compensation commission expense earned by Metacomm, which is included in cost of
services in the accompanying financial statements. Because the amounts due from
Metacomm relating to services provided by the Company and commissions due to
Metacomm have the legal right of offset, the Company has recorded a net
liability to Metacomm of $5,345 and $22,809, in accrued commissions, net --
related party in the accompanying financial statements. The Company and Metacomm
are parties to agreements by which commissions earned by Metacomm related to
reciprocal compensation would not be paid to Metacomm until the related
reciprocal compensation is collected from the ILEC. However, in 1998 and 1999
the Company advanced to Metacomm $8,257 and $12,015, respectively, prior to
collecting the earned reciprocal compensation from BellSouth. These payments are
subject to a repayment agreement if the related reciprocal compensation is
ultimately determined not to be collectible from BellSouth. In Feb. 2000,
Metacomm notified the Company they would no longer be able to sustain their
operations. (See Note 6.)
During 1998, the Company incurred $35 in expenses for chartered
aircraft services provided by the majority stockholder.
The Company incurred $89 and $50 in 1998 and 1999, respectively, in
expenses for consulting services provided by Global Vista Communications, LLC
("Global Vista"). As of December 31, 1998 and 1999, a liability totaling $6 and
$66, respectively, was included in accounts payable in the Company's financial
statements, relating to software and consulting services purchased from Global
Vista. In addition, during 1998 and 1999, the Company acquired $471 and $2,081,
respectively, in software from Global Vista Communications, LLC ("Global
Vista"), a company controlled by the Company's majority stockholder.
During 1999, the Company capitalized $185 in site acquisition costs for
services performed by Lincoln Harris LLC, a company controlled by a member of
the Company's Board of Directors, these costs are included in leasehold
improvements in the accompanying financial statements. In addition, the Company
incurred $3 in expenses for services provided by Lincoln Harris. As of December
31, 1999, a liability totaling $46 was recorded in accounts payable in the
Company's financial statements relating to leasehold improvements and services
purchased from Lincoln Harris LLC.
During 1999, the Company entered into an operating lease with H-C REIT,
Inc., a Company controlled by a member of the Company's Board of Directors. The
lease commences on May 1, 2000, and continues for a period of ten years. As part
of the new lease agreement, H-C REIT, Inc. agreed to limit the company's
liability under their existing lease agreement to $500 for early termination and
lease incentive costs. The company has recognized this expense in 1999. Future
minimum rental payments under the new lease are as follows and are included in
total future minimum rental payments defined under Leases (See Note 6):
2000 $ 1,391
2001 2,127
2002 2,190
2003 2,255
2004 2,322
Beyond 13,584
-------
Total $23,869
=======
Company management believes that all of the above transactions were
under terms no less favorable to the Company than could be arranged with
unrelated parties.
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan under which employees can
contribute up to 15% of their annual salary. For 1999, the Company made matching
contributions to the plan totaling $381 based on 50% of the first 6% of an
employee's contribution to the plan. For 1998, the Company made matching
contributions to the plan totaling $41.
10. STOCKHOLDERS' EQUITY
Common Stock - The Company has authorized two classes of common stock,
Class A and Class B. The rights of holders of the Class A Common Stock and the
Class B Common Stock are substantially identical, except that (i) holders of the
Class A Common Stock are entitled to one vote per share and holders of the Class
B Common Stock are entitled to ten votes per share; (ii) holders of the Class B
Common Stock vote as a separate class to elect two members of the Company's
Board of Directors in addition to voting with the holders of Class A Common
Stock in the election of the other members of the Board of Directors; and (iii)
the Class B Common Stock is fully convertible at any time into Class A Common
Stock, at the option of the holder, or automatically upon transfer to certain
third persons, on a one-for-one basis. Pursuant to an agreement among the Class
B stockholders, if a Class B stockholder proposes to sell or transfer Class B
Common Stock to anyone other than a permitted transferee (as defined in the
agreement), the other Class B stockholders who are parties to the agreement
would have a right to acquire the Class B Common Stock that is proposed to be
sold or transferred.
Preferred Stock - The Company is authorized to issue 10,000 shares of
preferred stock ($.01 par value) in one or more series without stockholder
approval, subject to any limitations prescribed by law. Each series of preferred
stock shall have such rights and preferences as shall be determined by the
Company's Board of Directors. No shares of preferred stock have been issued.
(See Note 12).
Capital Contribution - During 1997, the Company's majority stockholder
contributed an aggregate of $1,711 to additional paid-in capital. In addition,
during 1998, this stockholder exchanged a $5,000 loan for 481 shares of Class B
Common Stock (see Note 4).
Warrants - During 1997, the Company issued warrants to three employees
to purchase an aggregate of 345 shares of Class A Common Stock and a warrant to
an outside sales agent to purchase 99 shares of Class A Common Stock. All of
these warrants are fully vested and are exercisable at $2.86 per share for a
three-year period from the date of issuance. Management believes that these
employee warrants issued through October 1997 are non-compensatory based upon an
internal valuation of their fair value.
For the warrant issued in 1997 to the outside sales agent, the fair
value charged to expense was $24. The exercise price of those warrants is the
same as the issuance price in 1997 of shares to numerous outside investors. In
November 1997, the Company granted to an employee a warrant to purchase 15
shares of Class A Common Stock at an exercise price of $2.86 per share. This
warrant was fully vested at date of grant and exercisable over three years.
Management estimated the fair value of the warrant granted in November to be
$6.00 per share. As a result, compensation of $47 was charged to expense
relating to the difference between the fair value and the exercise price of the
warrant on the date of grant. In January 1998, the Company issued a warrant to a
consultant to purchase 25 shares of Class A Common Stock at $10 per share,
exercisable at any time through January 1, 2001. These warrants are fully vested
and exercisable over three years. The Company recorded compensation expense of
$75 in 1998 associated with the warrant issued in January 1998.
Stock Option Plan - In January 1998, the Company adopted the US LEC
Corp. 1998 Omnibus Stock Plan (the "Stock Plan"). In August 1998, the Company
filed a registration statement to register (i) 1,300 shares of Class A Common
Stock reserved for issuance under the Stock Plan and (ii) 180 shares of Class A
Common Stock reserved for issuance upon the exercise of nontransferable warrants
granted by the Company to employees. In April 1999, the Company's stockholders
voted to amend the Plan to increase the number of Class A Common Stock reserved
for issuance under the Plan from 1,300 shares
<PAGE>
to 2,000 shares and in May 1999, the Company filed a registration statement to
register these additional 700 shares. Under the amended Stock Plan, 2,000 shares
of Class A Common Stock have been reserved for issuance for stock options, stock
appreciation rights, restricted stock, performance awards or other stock-based
awards. Options granted under the Stock Plan are at exercise prices determined
by the Board of Directors or its Compensation Committee. For incentive stock
options, the option price may not be less than the market value of the Class A
Common Stock on the date of grant (110% of market value for greater than 10%
stockholders).
In January 1998, the Company granted incentive stock options to
substantially all employees to purchase an aggregate of 183 shares of Class A
Common Stock at $10 per share (fair market value on date of grant was $13 per
share). These options began vesting annually in four equal installments
beginning in January 1999. The Company recorded deferred compensation of $548 in
1998 associated with these options which will be amortized to compensation
expense over the four-year vesting period. During 1998 and 1999, the Company
amortized $105 and $101, respectively, to compensation expense relating to these
options, after consideration of forfeitures.
Also, during 1998, the Company granted to an employee, an option to
purchase 360 shares of Class A Common Stock at $13 per share (fair market value
on the date of grant was $14 per share). The Company recorded deferred
compensation of $360 associated with these options and will amortize this amount
to compensation expense over the four year vesting period. During 1998 and 1999,
the Company amortized $60 and $90, respectively, to compensation expense
relating to these options. In both 1998 and 1999 the Company granted options to
purchase 5 shares of Class A Common Stock at the fair market value on the date
of grant to each of the Company's two and three outside directors, respectively.
These options vested immediately upon grant.
In September 1998, the Company repriced 744 options outstanding to the
fair value on such date of $7.31 per share. As a condition to the repricing,
these options (other than the directors' options) vest over four years beginning
at the repricing date.
A summary of the option and warrant activity is as follows:
<TABLE>
<CAPTION>
Options Warrants
------------------------------- ----------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Fair Value Number Exercise Fair Value
of Price at Date of of Price at Date of
Shares Per Share Grant Warrants Per Warrant Grant
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996
Granted at fair market value 429 $ 2.86 $ 2.86
Granted at less than fair market value 15 2.86 6.00
-------- -----------
Balance at December 31, 1997 (all exercisable) 444 2.86
Granted at fair market value* 1,324 $ 10.27 $ 3.95
Granted at less than fair
market value 575 11.88 6.89 25 10.00 $ 13.00
Exercised -- (165) 2.86
Forfeited or cancelled* (817) 14.41 -- --
-------- --------- -----------
Balance at December 31, 1998 1,082 $ 8.00 304 $ 3.45
-------- --------- -------- -----------
Granted at fair market value 794 $ 22.65 $ 10.29
Exercised (14) 7.85 (5) 2.86
Forfeited or cancelled (67) 12.66 -- --
-------- --------- -------- -----------
Balance at December 31, 1999 1,795 $ 14.30 299 $ 3.46
======== ========= ======== ===========
</TABLE>
* Includes 744 options repriced
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
The Company measures the compensation cost of its stock option plan
under the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", as permitted under Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". Under the provisions of APB No. 25, compensation cost is measured
based on the intrinsic value of the equity instrument awarded. Under the
provisions of SFAS No. 123, compensation cost is measured based on the fair
value of the equity instrument awarded.
Had compensation cost for the employee warrants and stock options been
determined consistent with SFAS No. 123, the Company's net earnings (loss) and
net earnings (loss) per share would approximate the following proforma amounts:
<TABLE>
<CAPTION>
1997 1998 1999
As Reported Proforma As Reported Proforma As Reported Proforma
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $ (4,658) $ (4,737) $ 13,427 $ 12,832 $ 23,809 $ 22,463
Earnings (loss) per share:
Basic (0.25) (0.25) 0.53 0.51 0.87 0.82
Diluted (0.25) (0.25) 0.52 0.50 0.84 0.79
</TABLE>
The Company estimated the fair value for both the stock options and the
warrants using the Black-Scholes model assuming no dividend yield in 1997, 1998
and 1999; volatility of 0%, 40% and 40% for 1997, 1998 and 1999, respectively,
an average risk-free interest rate of 6.0%, 5.0% and 6.5% for 1997, 1998 and
1999, respectively, an expected life of 18 months for the warrants and 5.8 and
5.1 years for the stock options in 1998 and 1999, respectively. The weighted
average remaining contractual life of warrants and stock options outstanding at
December 31, 1999 was 8 months and 9.1 years, respectively.
A summary of the range of exercise prices and weighted average
remaining lives for options and warrants outstanding and exercisable at December
31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Number of Remaining Average Number of Average
Exercise Options Contractual Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options granted at
fair market value $7.31 890 8.7 years $ 7.31 222 $ 7.31
9.50 6 8.8 years 9.50 1 9.50
11.25 - 15.38 157 8.7 years 12.87 45 12.89
16.50 - 16.50 145 9.3 years 16.50
18.38 - 22.75 69 9.5 years 19.16
23.13 - 25.75 164 9.7 years 24.15
26.13 - 27.69 357 10.0 years 26.15 5 27.69
--------- ------- ------ -------
7.31 - 27.69 1,788 9.1 years 14.32 273 8.61
Options granted at less than
fair market value 10.00 7 8.1 years 10.00 1 10.00
--------- ------- ------ -------
Total options outstanding at
December 31, 1999 $7.31 - $27.39 1,795 9.1 years $14.30 274 $ 8.62
========= ======== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Warrants Outstanding
--------------------------------------------------------------
Number of Weighted
Warrants Average Weighted
Range of Outstanding Remaining Average
Exercise and Contractual Exercise
Price Exercisable Life Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warrants granted at fair market value $2.86 264 7.1 months $ 2.86
Warrants granted at less than fair market value 2.86 10 10.4 months 2.86
10.00 25 12.0 months 10.00
--- ------
2.86 - 10.00 35 11.5 months 7.96
---
Total options warrants at December 31, 1999 $2.86 - $10.00 299 7.6 months $ 3.46
--- ------
</TABLE>
11. EARNINGS (LOSS) PER SHARE
Earnings (loss) per common and common equivalent share and are based on
net income (loss) divided by the weighted average shares outstanding during the
period. The weighted average shares outstanding used in the calculation has been
determined by giving retroactive effect to the merger of the predecessor limited
liability company into the Company, which occurred on December 31, 1997 (based
on the share conversion ratios utilized in the merger). Outstanding options and
warrants are included in the calculation of diluted earnings per common share to
the extent they are dilutive. Securities and Exchange Commission Staff
Accounting Bulletin No. 98 requires that equity instruments granted at nominal
amounts for periods prior to the filing of the registration statement be
included in the calculation of per share data as if outstanding for all periods
presented. Accordingly, the weighted average shares used in the calculation of
basic and diluted earnings (loss) per share includes two thousand, three hundred
and ten shares (two limited liability company units) granted in 1996 to
employees, as if such shares were outstanding for the entire period.
Following is the reconciliation of earnings (loss) per share for 1997,
1998 and 1999:
1997 1998 1999
- --------------------------------------------------------------------------------
Basic earnings (loss) per share:
Net earnings (loss) $ (4,658) $ 13,427 $ 23,809
Weighted average shares outstanding 18,653 25,295 27,431
--------------------------------
Basic earnings (loss) per share $ (0.25) $ 0.53 $ 0.87
================================
Diluted earnings (loss) per share:
Net earnings (loss) $ (4,658) $ 13,427 $ 23,809
================================
Weighted average shares outstanding 18,653 25,295 27,431
Dilutive effect of stock options -- 214 725
Dilutive effect of warrants -- 295 255
--------------------------------
Weighted average shares, adjusted 18,653 25,804 28,411
--------------------------------
Diluted earnings (loss) per share $ (0.25) $ 0.52 $ 0.84
--------------------------------
12. SUBSEQUENT EVENTS
On February 25, 2000, the Company announced it has executed a letter of
intent with affiliates of Bain Capital, Inc. (Bain) and Thomas H. Lee Partners,
L.P. (THL) to invest up to $300 million in US LEC. Under the letter of intent,
Bain and THL have each agreed to invest up to $150 million in convertible
preferred stock in US LEC, subject to definitive documentation and other
standard closing conditions and approvals. Bain and THL will each receive a seat
on US LEC's board of directors. The investment will be made in two tranches
yielding a 6% dividend and at a weighted average conversion price of
approximately $39. The first tranche of $200 million will carry a conversion
price of $35. During the first year after closing, the investors, at their
option, may invest up to an additional $100 million with a conversion price of
$46.50.
<PAGE>
US LEC - The Competitive Telephone Company
US LEC Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1997, 1998, and 1999
(In Thousands, Except Per Share Data)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's results of operations as
presented in the consolidated statements of operations by quarter for 1997,
1998, and 1999. Amounts below exclude per share data for periods prior to the
completion of the Company's initial public offering:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenue, Net $ 36,212 $ 43,553 $ 47,348 $ 48,067
Cost of Services 15,762 18,702 19,524 19,625
--------------------------------------------
Gross Margin 20,450 24,851 27,824 28,442
Selling, General and Administrative 9,666 11,806 13,707 13,196
Depreciation and Amortization 2,320 2,676 3,124 3,600
--------------------------------------------
Earnings from Operations 8,464 10,369 10,993 11,646
Interest Income (Expense), Net (35) (359) (621) (1,031)
--------------------------------------------
Earnings Before Income Taxes 8,429 10,010 10,372 10,615
Provision for Income Taxes 3,414 4,035 4,170 3,998
--------------------------------------------
Net Earnings $ 5,015 $ 5,975 $ 6,202 $ 6,617
============================================
Net Earnings per Share:
Basic $ .18 $ .22 $ .23 $ .24
============================================
Diluted $ .18 $ .21 $ .22 $ .23
============================================
Weighted Average Shares Outstanding:
Basic 27,422 27,427 27,428 27,447
============================================
Diluted 28,206 28,381 28,520 28,554
============================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------
<S> <C> <C> <C> <C>
March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
- ---------------------------------------------------------------------------------
Year ended December 31, 1998:
Revenue, Net $ 13,630 $ 18,348 $ 22,291 $ 30,447
Cost of Services 6,473 7,537 7,296 12,340
------------------------------------------
Gross Margin 7,157 10,811 14,995 18,107
Selling, General and Administrative 4,426 5,747 6,690 8,157
Depreciation and Amortization 442 925 1,547 2,027
------------------------------------------
Earnings from Operations 2,289 4,139 6,758 7,923
Interest Income (Expense), Net (90) 596 704 413
------------------------------------------
Earnings Before Income Taxes 2,199 4,735 7,462 8,336
Provision for Income Taxes 880 1,905 2,999 3,521
------------------------------------------
Net Earnings $ 1,319 $ 2,830 $ 4,463 $ 4,815
==========================================
Net Earnings per Share:
Basic $ .11 $ .16 $ .18
==============================
Diluted $ .11 $ .16 $ .17
==============================
Weighted Average Shares Outstanding:
Basic 25,548 27,420 27,420
==============================
Diluted 26,082 27,905 28,016
==============================
Quarter Ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
- --------------------------------------------------------------------------------
Year ended December 31, 1997:
Revenue $ 1 $ 229 $ 1,530 $ 4,698
Cost of Services 423 315 1,075 2,388
------------------------------------------
Gross Margin (loss) (422) (86) 455 2,310
Selling, General and Administrative 1,049 1,048 1,294 2,726
Depreciation and Amortization 14 88 125 216
------------------------------------------
Loss from Operations (1,485) (1,222) (964) (632)
Interest Expense, Net 67 108 102 78
------------------------------------------
Net Loss $(1,552) $(1,330) $(1,066) $ (710)
==========================================
</TABLE>
<PAGE>
BOARD OF DIRECTORS
- ------------------
Richard T. Aab David M. Flaum (1)(2)
Chairman of the Board President
US LEC Corp. Flaum Management
Company, Inc.
Tansukh V. Ganatra John W. Harris (1)(2)
Vice Chairman and Chief President and Chief
Executive Officer Executive Officer
US LEC Corp. Lincoln Harris, LLC.
Steven L. Schoonover (1)(2)
President and Chief
Executive Officer
CellXion, Inc.
(1) Member of Audit Committee
(2) Member of Compensation Committee
EXECUTIVE OFFICERS
- ------------------
Richard T. Aab
Chairman of the Board
Tansukh V. Ganatra
Vice Chairman and Chief
Executive Officer
Michael K. Robinson
Executive Vice President -
Chief Financial Officer
Aaron D. Cowell, Jr.
President
Robert D Ingram
Executive Vice President
Engineering and Chief
Technical Officer
<PAGE>
CORPORATE INFORMATION
- ---------------------
Form 10-K/Investor Contact
A copy of the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission, may be obtained from the Company at no
charge. Requests for the Annual Report on Form 10-K and other investor contacts
should be directed to Investor Relations at the Company's corporate office.
Common Stock and Dividend Information
The Company's common stock trades on The Nasdaq National Market under the
symbol CLEC. As of March 17, 2000, US LEC Corp. had approximately 5,300
beneficial holders of its common stock. Of that total, 127 were stockholders of
record. To date, the Company has not paid cash dividends on its common stock.
The Company currently intends to retain earnings to support operations and
finance expansion and therefore does not anticipate paying Common Stock cash
dividends in the foreseeable future.
The following table sets forth the high and low closing price information as
reported by Nasdaq during the period indicated since the Company's Class A
Common Stock began trading publicly on April 24, 1998.
Stock Price*
1998 High Low
---- ---- ---
First Quarter N/A N/A
Second Quarter $27.00 $15.00
Third Quarter $25.88 $ 7.31
Fourth Quarter $14.81 $ 9.50
1999 High Low
---- ---- ---
First Quarter $19.50 $13.38
Second Quarter $24.63 $16.50
Third Quarter $33.13 $22.75
Fourth Quarter $32.25 $23.50
*No public market for the stock prior to April 24, 1998
Annual Stockholders' Meeting
The annual meeting of stockholders will be held on Tuesday, May 9, 2000,
at 10:00 a.m. local time at the Charlotte Marriott City Center, 100 W. Trade
Street, Charlotte, NC, 28202.
Corporate Office
US LEC Corp.
Transamerica Square
401 North Tryon Street, Suite 1000
Charlotte, North Carolina 28202
704-319-1000
Internet Address
http://www.uslec.com
Registrar and Transfer Agent
First Union National Bank
Charlotte, North Carolina
Independent Auditors
Deloitte & Touche LLP
Charlotte, North Carolina
Legal Counsel
Moore & Van Allen, PLLC
Charlotte, North Carolina
Swidler Berlin Shereff Friedman, LLP
Washington, D.C.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
US LEC of North Carolina Inc. (North Carolina Corporation)
US LEC of Georgia Inc. (Delaware Corporation)
US LEC of Tennessee Inc. (Delaware Corporation)
US LEC of Florida Inc. (North Carolina Corporation)
US LEC of South Carolina Inc. (Delaware Corporation)
US LEC of Alabama Inc. (North Carolina Corporation)
US LEC of Maryland Inc. (North Carolina Corporation)
US LEC of Pennsylvania Inc. (North Carolina Corporation)
US LEC Communications Inc. (North Carolina Corporation)
US LEC of Virginia L.L.C. (Delaware Limited Liability Company)
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
US LEC CORP.
We consent to the incorporation by reference in Registration Statement No.
333-78075 and Registration Statement No. 333-61617 of US LEC Corp. and
subsidiaries on Form S-8 of our report dated February 29, 2000, which report
includes an emphasis of a matter paragraph as to a significant portion of the
Company's accounts receivable and revenues relating to reciprocal compensation
which is currently in dispute; included in and incorporated by reference in this
Annual Report on Form 10-K of US LEC Corp. and subsidiaries for the year ended
December 31, 1999.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 30, 2000
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